Over the next decade or two, one of the fiercest business battles will be for the billions of people joining the middle class in emerging markets—a group that will make up 30 percent of the global population by 2020. Yet many multinational companies are not prepared to tap into this new stream of revenue growth, even if they’re already active in emerging markets.
Simply put, their business models were not designed to reach the new middle. Many have imported their existing high-end products and services through standard distribution channels to target the most affluent tier of customers in the largest cities, such as Delhi, Shanghai, Rio de Janeiro, and Moscow. This strategy has proven successful in the past, but the top-tier segment is becoming saturated.
When it comes to capturing the middle in these countries, developed-world business models will fall short in most cases. Multinational companies will need to design and package their offerings differently, rethink their entire cost structure, and adapt their distribution systems if they are to win the middle profitably.
In many cases, multinationals are coming late to the game. The middle market is already being served by highly successful local companies that have ambitions to move beyond their home markets and dethrone the global leaders. For example, the lower cost base maintained by Infosys, headquartered in India, has allowed the company to compete worldwide with tech service giants such as IBM and Accenture. For Brazil’s Embraer, sharing manufacturing risks through aggressive outsourcing has allowed it to compete with the likes of Boeing and BAE Systems. Any multinational company that starts pursuing the middle in emerging markets thus will also be learning to defend its markets at home.