NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, January 4, 2011

The meltdown of the microfinance industry in Andhra Pradesh, as we have noted carries big risks not just for an industry designed to serve the poor but for the entire concept that the poor can be profitable customers.

That has been an emerging trend in management thinking about emerging markets in the last few years, in part because of the success of microfinance. But since these matters tend to be herd-driven, problems in one industry such as lending can quickly cool ardor in other industries for expanding in these markets.

Fortunately, though, there remains at least a robust industry in writing in august journals about the opportunities at what C.K. Prahalad called the “bottom of the pyramid” and others have variously called “the poor” (straightforward but rather predictable) or “the aspiring middle” (it’s optimistic-sounding but rather vague.)

The latest article in the genre is to be found in the January-February edition of the Harvard Business Review by three executives at Innosight, a management consulting and investment firm.

Their basic point: Most multinationals approach emerging markets, including India, in one of two ways. Either they slash costs and pump out low-end goods in high volume then are disappointed when they don’t clean up; or they sell high-end, low-volume goods that are available for the well-off the world over then puzzle over their tiny sales in what they keep being told are vast markets.