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HEC Paris Social Business, Enterprise & Poverty Certificate

Justina VOVERYTE June 2011

Project C: research

Are Bottom of the Pyramid strategies scalable?

Key words : Bottom of the pyramid, economies of scale Tutor : Bndicte FraivreTavignot

Justina Voveryte

Social Business, Enterprise & Poverty Certificate

Table des matires


Introduction ................................................................................................................................ 3 1. The Base of the Pyramid, a large but challenging market opportunity............................... 5 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 3. The Base of the Pyramid, a large market opportunity ................................................. 5 A market with basic but particular needs .................................................................... 6 The difficulty of entering BOP markets ...................................................................... 7 Heterogeneity of BOP markets .................................................................................... 9 Creating local embeddedness .................................................................................... 10 Towards BOP 2.0 ...................................................................................................... 12

Local embeddedness, key success factor for BOP strategies.............................................. 9

Scaling up BOP strategies ................................................................................................. 14 3.1. The challenges of scaling up BOP strategies: limited economies of scale and replication of local embeddedness ....................................................................................... 14 3.2. 3.3. Solutions to increasing scale: scaling out and relying on local entrepreneurship ..... 15 The role of innovation in scaling up: ICT and new technology ................................ 17

Conclusion ................................................................................................................................ 19 References ................................................................................................................................ 20 Academic papers .................................................................................................................. 20 Case studies .......................................................................................................................... 21 Websites ............................................................................................................................... 21

Justina Voveryte

Social Business, Enterprise & Poverty Certificate

Introduction
For the past decade, a new idea has become increasingly discussed, the concept of the Bottom of the Pyramid. The several billion individuals who constitute this segment of the world population have been placed in the center of new strategies for the private sector. The interdependence of business and society is mentioned frequently and the implication derived is that the private sector can help in the process of alleviating poverty. Government intervention, philanthropy and aid have been the main ways in attempting to alleviate poverty. However, an increasing number of academics and leaders from the corporate world believe in the possibility of alleviating poverty through the action of the private sector and especially multinational companies (MNCs) which have large resources. MNCs from developed countries are becoming increasingly interested in this fortune at the Bottom of the Pyramid as Prahalad (2004) has described it. The Bottom of the Pyramid represents new market opportunities for MNCs as well as the possibility of contributing to the alleviation of poverty. BOP strategies are therefore interesting for MNCs not only for their potential financial returns but also the social impact that they create by providing access to new products, services or even employment opportunities to low-income populations. Consequently, BOP strategies do not only present economic opportunities but also bring other benefits to the MNC such as motivation of human resources and increased brand image. However, this concept is novel and there is limited data and few best practices in designing and implementing BOP strategies. The BOP market is not only an opportunity for MNCs but also a challenge which may hold substantial learning and innovation for MNCs. Furthermore, BOP markets in developing countries are all the more difficult for Western MNCs to enter as the latter have limited knowledge of local needs and contexts. The cultural, administrative, geographic and economic (CAGE) distances between Western MNCs and BOP markets in developing countries are wide, which makes it challenging for Western MNCs to enter such markets. However, there is a growing number of initiatives in this category in recent years which proves that Western MNCs are interested in taking up the challenge in the hope of finding the fortune at the bottom of the pyramid of developing countries. Not only are BOP markets challenging opportunities, they also offer ultrathin margins. Therefore, a key necessity for MNCs to engage in such markets is the possibility of achieving large scale operations to make up for the low margins with high volumes. Scalability of BOP strategies is thus a major question for MNCs entering BOP markets.

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Social Business, Enterprise & Poverty Certificate

Therefore, how should Western MNCs enter BOP markets in developing countries and are these BOP strategies scalable? First, the BOP is a large market and the needs to be addressed are basic yet particular. Due to reasons of affordability, acceptability, availability and awareness, MNCs must develop new approaches to target BOP markets, approaches that are different from the traditional developed country markets of MNCs. Second, the BOP markets in developing countries are heterogeneous in terms of needs and contexts: regional, cross-national and local differences exist within such BOP markets. A one-size-fits-all strategy is not possible and thus locally embedded BOP strategies are recommended in order to address specific needs and overcome particular challenges at a local level. Finally, high fixed costs and local embeddedness create a barrier to scaling up BOP strategies. Hence, scaling up of such BOP strategies may be implemented through new approaches such as dissemination of locally adapted strategies from one community to another and through innovative B2B solutions such as relying on local entrepreneurship. Moreover, new technology and innovation may be key to reducing costs and increasing the efficiency of BOP strategies and thus contributing to the scalability of such initiatives.

Justina Voveryte

Social Business, Enterprise & Poverty Certificate

1. The Base of the Pyramid, a large but challenging market opportunity


1.1. The Base of the Pyramid, a large market opportunity

Since Prahalad and Hart (2002) exposed their theory, there has been a growing interest in the Base of the Pyramid concept and its implications. Their theory is based on the belief that there is a fortune at the bottom of the pyramid which is represented by the untapped market constituted by the 4 billion poor of the world. Prahalad and Hart brought up the idea that business can profit from this market while increasing the welfare of the poor through its action. This new idea of inclusive business, a business which is sustainable and which includes and benefits low-income communities, has been further developed and criticized by new research and initiatives. Substantial criticism has been battling the idea of the fortune at the BOP, attacking the vagueness of Prahalads approach in defining the upper limit to the BOP segment and consequently the real size of the market constituted by this population. While Prahalad (2004) includes all individuals who live with less than $1,500 per year in terms of purchasing power parity, others see this definition as vague and inadequate. For example, according to the $1,500 upper limit, 95% of Indias population would be part of the BOP. Therefore, other measures are used as well, such as $1.25 per day (in purchasing power parity rates) which defines extreme poverty according to the World Bank, or $2 per day (in purchasing power parity rates) which corresponds to moderate poverty. In 2001, the World Bank estimated the population living under $2 per day at 2.7 billion, whereas Prahalad (2004) estimates the BOP to be at 4 to 5 billion. The World Economic Forum report defines The Next Billions as the segment of the BOP (which the Forum quantifies as the 3.7 billion people living on roughly US$ 8 per day or less), made up of consumers, producers and entrepreneurs which the private sector can engage in its economic activity in the near future. Another point of disagreement is the market size made up by this BOP segment. Prahalads calculation of the BOP market size is of $13 trillion (in purchasing power parity rates). Based on the World Bank poverty headcount of with the 2.7 billion living on less than $2 per day and the World Bank average consumption of the poor estimate at $1.25 per day, Karnani (2006) estimates the market size of the BOP to be of $1.2 trillion in purchasing power parity terms and of only $0.3 trillion in market exchange rates. Whichever is the conclusion about the size of the BOP market, Prahalad and Hammond (2004) believe that the poor should be engaged in economic activity, as ignoring them will not improve their condition.

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Social Business, Enterprise & Poverty Certificate

Whichever the definition used, the Base of the Pyramid is constituted by a large portion of the world population which is excluded from the market. There is an undeniable economic opportunity for the private sector and especially large MNCs from developed countries.

1.2.

A market with basic but particular needs

The poor populations mostly seem to have basic needs such as access to food, shelter, etc. However basic these needs may seem, they vary highly from those in traditional markets of MNCs in developed countries and across countries and regions. Products and services that large MNCs provide in traditional markets are usually not suitable for Base of the Pyramid markets. This is due to the local conditions which make the provision of such products and services challenging. The price may not be the only issue as the use of such products and services is not adapted to the local conditions. Indeed, the infrastructure available is often different from that in developed country markets and may also vary in BOP markets across countries and regions. For instance, some BOP markets do not have access to electricity, therefore electricitypowered products and services are not applicable to such markets. For instance, in rural India electricity cuts are frequent and using a traditional fridge is not possible in such situations. Thus, Chotukool, the new fridge for the BOP, takes into account the conditions and needs of rural India by offering a small cooling appliance which can function on batteries in case of electricity cuts. Furthermore, products and services sold by MNCs in their traditional developed country markets may be too sophisticated for BOP markets. Such products or services may have features which are unnecessary for the BOP population. The design used in traditional developed country markets may not be adapted. For instance, Essilor, the world leader in ophthalmic lenses, defined a product and service offering for the rural BOP markets of India by using their traditional lenses. Their strategy consists in selling old technology lenses at a low price through vans travelling to rural villages. These refraction vans offer an eyesight testing service with a prescription for glasses that are made on the spot using Essilor lenses. Essilor therefore provides a customized service, prescribes glasses and offers a choice of frames for the glasses. However, 75% of refractive errors affecting people are cases of presbyopia, an issue that can be solved by wearing reading glasses. Therefore, the need for bifocal lenses, as such offered by Essilor, is limited to a small number of cases. Essilors offer may therefore be too sophisticated for BOP populations in rural India. This may account for the low conversion rate in their service from testing to buying the glasses. A growing recommendation

Justina Voveryte

Social Business, Enterprise & Poverty Certificate

for the design of products and services for BOP markets is therefore the KISS idea: keep it as simple as possible. Not only do BOP populations have specific needs, they may also be affected by irrational behaviors in consumption. Karnani (2009) believes that the poor are not always rational when it comes to economic decision-making. The poor might spend their income on unhealthy products such as alcohol and tobacco instead of purchasing more food for their families or education of their children. Thus, the assumptions of rational consumption may not be applicable to certain BOP populations. Consequently, existing paradigms that Western MNCs are accustomed to in their traditional developed country markets are not applicable and new and innovative approaches for the products and services offered to the BOP market should be defined to take into account the specific needs of BOP populations across countries and regions.

1.3.

The difficulty of entering BOP markets

Entering BOP markets presents particular challenges for Western MNCs. A key deterrent for private enterprise to enter BOP markets is linked to the various constraints that such markets present. The United Nations Development Program presents entry into BOP markets as difficult, risky and expensive due to lack of information, skilled labor, regulatory environment, infrastructure and access to financial services among other factors (UNDP, 2008). Such constraints are not as apparent in advanced economy markets or the formal markets in developing countries. In addition, affordability, acceptability, availability and awareness are among the main challenges that companies wishing to enter the BOP market are faced with. First, the BOP population has a limited disposable income to spend on new products and services. Therefore, in order to suit the low levels of income, companies have to create new affordability equations. Affordability for the BOP markets of products or services may be achieved through new pricing by offering a low price for low-income populations. For example, Veolia offers social connections to the water network to low-income households in Tangiers for half the price of the regular offer. Selling products in one-time use sachets may also make them more affordable for low-income populations. Other ideas include downgrading the quality and features of the product in order to reduce the price (ex. Essilor with its older technology bifocal lenses). Another key issue is the acceptability of the products and services offered by the MNC to the BOP population. The specific cultural, societal, political and religious context of a given BOP market 7

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Social Business, Enterprise & Poverty Certificate

makes certain products or services unacceptable for the local population. For instance, Grameen Veolia tried to sell clean water to the low-income population in Bangladesh. However, this population was not used to paying for water as they were accustomed to fetching (unfiltered) water for free. Therefore, Grameen Veolia was faced with cultural behavior which may seem unsual to Western MNCs. Companies therefore need to design culturally sensitive and locally specific approaches in order to make them acceptable for the target population. The BOP is a market which is difficult to access, at least for Western MNCs, which creates a challenge of availability of products and services for the BOP population. Most BOP markets have a lack of distribution channels in order to supply the population with the products and services. Moreover, a large portion of the BOP population lives in rural villages, cut off physically and financially from formal economic activity. Thus, MNCs have to figure out innovative distribution solutions adapted to the local context and which allow reaching a maximum number of people within the target market. For example, as the conventional distribution through supermarkets was not possible in rural Bangladesh, Grameen Danone designed a distribution model using Shokti Doi ladies who distribute yoghurts through a door-to-door approach in order to reach more isolated households. The BOP also requires raising awareness. The lack of education at the BOP creates another barrier for Western MNCs. For instance, in rural India a large portion of the poor population is not aware that they have bad eyesight, therefore they do not understand the need for glasses. Through its refraction vans, Essilor not only provides an eyesight testing service but also education on the need to correct eyesight problems. Moreover, raising awareness in BOP markets may be difficult as traditional marketing techniques cannot be used in such markets. Therefore, adapted marketing techniques should be designed in order to address the specific population. This is the case of Veolia in Tangiers. Veolia uses an innovative approach by basing its marketing on a popular karaoke star who advertises the services of Veolia in low-income markets. This unorthodox but locally adapted marketing seems to have been successful in expanding Veolias services in low-income markets. BOP markets therefore have particular needs that vary highly from those of traditional markets of Western MNCs and which may differ across countries and regions. BOP markets not only have specific needs, but addressing those needs also requires new approaches that Western MNCs may not be accustomed to.

Justina Voveryte

Social Business, Enterprise & Poverty Certificate

2. Local embeddedness, key success factor for BOP strategies


2.1. Heterogeneity of BOP markets

Not only is the BOP market a particular challenge for Western MNCs as compared to their traditional markets in developing countries, it is also a highly heterogeneous market with crossnational and context-specific differences. The UNDP report (2008) underlines the fact that there is a different level of difficulty of starting a business from one region to another. While it may take almost 80 days to start a business in Latin America, this duration is of only 30 days in South Asia (according to World Bank data). The costs of starting a business also vary widely from roughly 20% of GNP per capita in Europe and Central Asia to around 170% of GNP per capita in Sub-Saharan Africa. Furthermore, if none of the rural households have access to tap water in Udaipur, India, this percentage reaches 36% in Guatemala (Banerjee and Duflo, 2006). Differences can also be noticed in other infrastructure. Due to constraints and particular infrastructure, the conditions for creating a BOP initiative vary across geographical regions. Moreover, the composition of the BOP market varies across countries. While in Nigeria, the lower BOP segments dominate (BOP1000 and BOP500, which correspond to populations living with less than $1,000 per year and $500 per year in purchasing power parity, respectively), in Ukraine higher segments are predominant (BOP3000 and BOP2500) (Hammond, Kramer et al, 2007). Consumption patterns are also particular to each country. For instance, in Uganda, the yearly rural BOP household spending on ICT averages at $29 (in purchasing power parity terms) while the same figure for Mexico is $137 (Hammond, Kramer et al, 2007). Therefore, substantial differences exist in the conditions and contexts that BOP markets in developing countries offer across countries and regions. When defining a BOP strategy, a firm has to take into account these differences and provide a tailored solution. In his early work, Prahalad (2002) mentions that company approaches to BOP markets should be culturally sensitive . Writing about the possibility of using CSR to create competitive advantage, Porter and Kramer (2006) note the interdependence between business and society. According to the authors, firms have social impacts through their value chains and conversely social influences exist and impact the competitiveness of the firm. Such conclusions are relevant for BOP strategies and bring up the necessity of linking business to the target community, and therefore offering a locally customized approach. The Growing Inclusive Markets Initiative of the UNDP (2008) concludes that firms should respond to local conditions and overcome constraints in order to build inclusive market business

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Social Business, Enterprise & Poverty Certificate

models, the latter being business models engaging the poor as consumers, producers and entrepreneurs. The literature thus brings up the need for companies to adapt their strategies not only to countries but also to the different segments of a countrys market, and especially the various BOP segments. A country strategy is not enough to address the need of local responsiveness because the BOP segment of a given country follows different rules and logics from the top of the pyramid segment (London and Hart, 2004). One-size-fits-all strategies are bound to fail as local weaknesses are not dealt with. Firms should rather try to gain a deep understanding of the particular social context in order to achieve social embeddedness . Perrot (2009) also insists on the concept of social embeddedness as well as the need for firms to develop absorptive capacity in order to benefit from the knowledge of their unconventional partners. Hart and London (2005) urge firms targeting the BOP to develop what they call native capability , a notion of local embeddedness which allows firms to gain competitive advantage through deeper knowledge of the local context. The idea is to try to become more indigenous in order to better respond to local needs. This native capability is built up through two-way information flow, flying under the radar of central government and collaborating with unconventional partner. A transnational strategy should be overcome to reach this new level of social embeddedness . Western MNCs wishing to enter BOP markets in developing countries should therefore adapt to the regional, cross-national and local differences by designing locally embedded initiatives.

2.2.

Creating local embeddedness

Local embeddedness may be the solution to overcoming the variable and particular needs and constraints of BOP markets. In order to create locally embedded BOP strategies, it is firstly important to have a deep understanding of the specific local context. Robert Chambers (2007) suggests using participatory approaches to understand the diversity and characteristics of the poor. By participatory the author designates research approaches where local people participate in the research by expressing their own visions and perspectives. Participatory approaches entail listening to marginalized voices and learning from local skills and initiatives. Reversing the situation and learning from the poor reveals unexpected findings and disregarded aspects of poor populations. These valuable findings may be key to understanding the real needs of the poor populations and the ways of addressing those needs. Admittedly, participatory methods require more time and effort than traditional methods, but the insight they provide may be worthwhile. Business can therefore

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Social Business, Enterprise & Poverty Certificate

learn from this research approach, an alternative to an economist or anthropologist approach. Listening to the needs of the BOP population may help solve the issue of evaluating if there is demand and a market for a certain product. Furthermore, certain success factors are mentioned in the literature for the design of successful BOP strategies based on local adaptation. The first factor for the success of a BOP approach lies in the capacity of a firm to offer a unique and customized product, process or solution. This empowerment model (Wille and Barham, 2009) is based on the idea that products should be adapted to fit the needs and requirements of the BOP segment. This design with the poor in mind (Yunus, 2007) approach requires a bottom-of-the-pyramid-up design not only for products but also for corresponding business processes to respond to particular needs. London and Hart (2004) advise firms targeting the BOP to go beyond local responsiveness and co-invent solutions with local partners. Due to the particularity of the BOP segment, firms have to rethink and innovate to create life-enhancing offerings (Hammond, Kramer et al., 2007). A customized product would not only improve the success of a BOP approach in financial terms but also through an increased social impact. Moreover, most research and reports on BOP initiatives mention the need for collaboration with nontraditional and unconventional partners. In most cases, local NGOs, local entrepreneurs, development agencies and local governments can be considered for such partnerships. The idea behind this advice is mainly to make up for the lack of information, inadequate infrastructure and informality linked to BOP markets. Local partners such as NGOs provide knowledge on the market and understanding of the local context (London & Hart, 2004). The Growing Inclusive Markets Initiative of the UNDP insists on this partnership due to the benefits of combining resources and capabilities. This partnership model (Wille and Barham, 2009) where the firm enters into a joint venture with the BOP community provides complementarity for the firm and therefore allows the latter to operate in such uncertain conditions. Therefore, constructing a multi stakeholder solution (Perrot, 2009) is key to the success of a locally adapted BOP approach. Another success factor is the capacity of companies to leverage local infrastructure and the strengths and weaknesses that are provided by the local context. Karnani (2006) sees the possibility for the private sector to create efficient markets in the context of poor access to such markets. The Growing Inclusive Initiative of UNDP (2008) also insists on the necessity of seeing the BOP market constraints as opportunities that firms can invest in. Firms should also leverage the strengths of the poor to develop relationships and obtain local embeddedness. Leveraging the local context may increase the potential for economic success and an embedded approach may have a higher social impact on the target population. 11

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Social Business, Enterprise & Poverty Certificate

Overall, it seems that a successful BOP strategy is one that has an innovative approach in order to fit the particular conditions of the BOP market. This may include overhauling its supply chain to better adapt to the target population through new approaches to product or service development, new production methods (ex. low-cost production), new distribution methods (ex. Micro-distribution to reach the last mile), novel marketing methods (ex. Rural marketing), etc. Generally, firms which decide to target BOP markets should prepare before hand and undertake a process to achieve local embeddedness and successfully reach and impact the target market. This requires firms to acquire new capabilities (Perrot, 2009), reconfiguring its operations and adapting its products to fit the local context. However, these key success factors do not apply in the same way to all markets as the latter vary widely. For instance, in certain countries, the infrastructure and local context may be more challenging than in others. Moreover, in certain countries adequate unconventional partners may be easier to find than in other countries. Therefore, the recipe for a successful BOP strategy that may be applicable across different countries may not be as obvious as it may seem.

2.3.

Towards BOP 2.0

When considering local embeddeness, Simanis and Hart (2008) are more radical in their approach. They believe that ideas such as single-server sachet, partnership with NGOs and low-cost production have become the norm for BOP strategies. They also believe that trying to adapt an existing product or service by reformulating and repackaging will lead to a failure as the who le business of such products and services are unusual and inadequate for the local communities it is targeting. Simanis and Hart even use terms such as corporate imperialism to describe BOP strategies which are exogenous for the target communities. The authors search to revolutionize the BOP approach of companies: they define the idea of a new generation of BOP strategies, the BOP 2.0, which breaks away from the traditional BOP strategies or BOP 1.0. These strategies view the BOP population as a business partner instead of a consumer, they substitute listening to the population by creating a dialogue with the latter. They are built on shared commitment and pooling of capabilities. All in all, the BOP 2.0 is seen as a process of co-invention and co-creation through partnership with local communities. The key word is business co-venturing with local communities in order to embed the strategy within the local economy. As a result, such strategies are more culturally adequate and environmentally sustainable. To design such strategies, the authors suggest a threephase BOP protocol which allows the company to create a concept and a market, develop skills and knowledge, increase commitment, build partnerships, etc. which results in a more locally embedded

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Social Business, Enterprise & Poverty Certificate

BOP project. By aligning visions of all stakeholders, the BOP 2.0 creates a win-win-win solution for the company, the customers and the community. Consequently, it seems that to be successful, BOP strategies have to address the particularity of the BOP markets across geographies through a locally embedded approach. The large BOP market which is supposed to constitute a fortune for the private sector is therefore highly heterogeneous and must be addressed in a locally adequate way. Economies of scale may therefore seem limited in the BOP market.

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Social Business, Enterprise & Poverty Certificate

3. Scaling up BOP strategies


3.1. The challenges of scaling up BOP strategies: limited economies of scale and replication of local embeddedness

Creating new business models, designing resource intensive ways to reach the last mile or defining new marketing techniques result in high costs. Such approaches are unconventional for Western MNCs and thus their efficiency may be lower. In addition, conducting pilot projects may be necessary and may add to the costs. On the other hand, selling to the poor requires adapting to the affordability level of the target population and prices are low. Consequently, in most cases, BOP strategies offer ultrathin margins due to high costs and low prices. The fortune at the bottom of the pyramid (Prahalad, 2004) can thus be achieved through volumes in order to make up for the low margins. Therefore, scaling up is a key challenge for MNCs targeting the BOP. The first difficulty in scaling up BOP strategies is the difficulty to achieve economies of scale. Catering to isolated rural populations with low incomes implies high fixed costs. For instance, Essilors strategy of refraction trucks has limited economies of scale. Indeed, in order to reach more villages in rural India, Essilor needs to invest in new refraction vans and employ more workers for those vans. In addition, the business models of BOP strategies may not be adapted to achieve a large scale. For example, Grameen Danones production plant in Bogra was designed to produce yoghurt on a small scale. Even though the production plant has not reached its full production capacity as of 2009, the production is limited to the capacity of this plant. Thus, in order to scale up the initiative, Grameen Danone would need to invest in more capacity which requires building a new plant. Furthermore, if a BOP strategy is locally embedded, it is all the more difficult to replicate it and increase its scale. Scaling up a locally embedded BOP strategy may seem controversial. When a strategy is locally embedded it addresses particular needs of a population and it is designed to overcome locally existing challenges. The needs and conditions may vary widely from one area to another, and even more from one country to another. The locally adapted strategy then becomes less adequate in other regions and countries and its replication seems strenuous. Indeed, the needs of a population may vary, and a product or service may need to be redesigned in order to fit another BOP market. Hence, scaling up a locally embedded BOP strategy requires designing and implementing a locally embedded strategy in other geographies, thus building them from the ground up. Locally embedded BOP strategies also require partnering with unconventional partners; however these may vary from one place to another. Therefore, a successful BOP strategy may not be able to be replicated in a market where such partners are not present or new partners may need to be

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Social Business, Enterprise & Poverty Certificate

found. Furthermore, involving local stakeholders and obtaining a license to operate requires a localized approach in recreating commitment of the local communities. Consequently, replicating or scaling up a locally embedded BOP strategy may require to build it in another place from the ground up. For instance, Veolia Waters social connection initiative was implemented through a publicprivate partnership with the local authorities of Tangiers. Although this initiative was meant to be a collaboration between Veolia and the local authority, it took Veolia a substantial effort in order to negotiate and implement its social connection network. Hence, even if Veolia has been able to achieve certain results in Tangiers, if it wishes to implement its social connection network in another city in Morocco, the efforts and resources required will certainly be equivalent in a new initiative as in the Tangiers case. Thus, the economies of scale are limited and scaling up is comparable to starting from scratch in another place. BOP strategies of Western MNCs in developing countries thus have high costs and offer limited economies of scale. In addition, locally embedded BOP initiatives which tend to be more successful may be difficult to replicate and scale up. The question is therefore how to achieve the volume that pays off for the ultrathin margins in BOP markets.

3.2.

Solutions to increasing scale: scaling out and relying on local entrepreneurship

In their BOP protocol for BOP 2.0 strategies, Simanis and Hart (2008) suggest a novel concept. The authors believe that the tradeoff between locally embedded strategies and large scale strategies can be overcome by achieving a license to image and developing new business models. They suggest starting small and then scaling-out rather than scaling up the business ventures. To describe this process, a biological term is used to illustrate the extension of a venture from one community to another: they talk about an open pollination process through which the BOP strategy is propagated by business ambassadors to another community as a seed. More precisely, the process is to be implemented in three steps. First, the linking the Ecosystem step consists in diffusing the organizational culture and business guidelines from the existing parent project to a new community. The second step is to re-create the enterprise by extending the brand and adapting a business model to establish a network of interdependent business communities. The final step is reaching-out and consists in using business ambassadors to locally establish the project and create a project team. The authors admit that a clear methodology of this propagation process has yet to be defined. Scaling out, dissemination and propagation are thus terms that try to define a means of growing a locally embedded BOP strategy but they also reveal the existence of tangible limitations. 15

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Social Business, Enterprise & Poverty Certificate

To disseminate or replicate BOP strategies, a solution may be to foster and rely on local entrepreneurship. The BOP Protocol (Simanis and Hart, 2008) includes a phase of collective entrepreneurship development in the elaboration of a locally embedded BOP strategy. Searching for talent, finding local entrepreneurs and including them in the construction of a BOP initiative is a key step for creating a locally accepted and adapted approach. Relying on local entrepreneurs for growing a BOP initiative may be a tangible solution at the BOP as low-income populations have a higher rate of entrepreneurship due to the difficulty of finding a formal job (Banerjee and Duflo, 2006). Local entrepreneurs have a good knowledge of the local context and connections to networks. Such individuals are valuable insiders who may have the skills necessary for the extension of business co-venturing as required by the BOP protocol and they may extend the reach of BOP initiatives of Western MNCs in developing countries. For example, Coca Cola has developed a network of Manual Distribution Centers (MDCs) in over 25 countries including Ethiopia and Tanzania. MDCs are independent and low-cost manual operations which allow distributing Coca Cola products to areas where conventional distribution is inefficient due to poor infrastructure. More precisely, MDCs distribute products through vehicles such as pushcarts which can reach more remote and inaccessible areas for traditional Coca Cola trucks. The centers are independently owned and employ a large number of distributors creating entrepreneurship and employment opportunities for the BOP segment. Furthermore, it reduces distribution costs of the Coca Cola system as for such structures there is no need for a costly fleet of trucks. To date, there are over 3,000 MDCs which employ over 13,500 individuals and generate over $550 million in revenues for Coca Cola. In addition, this model has been proven to be highly replicable across countries. This type of franchising model may be a possibility for increasing the scale of a BOP strategy. However, Karnani (2006) is less convinced of the evidence of resilient and creative entrepreneurs as stated by Prahalad. He also rejects the role of MNCs in entering BOP markets because such markets offer limited economies of scale and they are characterized by geographical dispersion. He advocates the role of local small and medium enterprises (SMEs) in suggesting that such structures are better adapted to succeeding in BOP markets. Without rejecting the possibility for foreign MNCs to enter BOP markets in developing countries, Karnanis idea may bring an interesting idea for the replication and scaling up of BOP strategies of Western MNCs: as a first step in entering and expanding in BOP markets, Western MNCs could build linkages with local structures such as local SMEs. If local SMEs are better suited to cater to BOP markets, they may be a valuable partner for Western MNCs. Their knowledge and local networks could increase the possibility of scaling up the BOP initiative of the MNCs. Western MNCs could therefore rely on innovative B2B solutions for the expansion of their BOP strategies. 16

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Social Business, Enterprise & Poverty Certificate

Inclusive business models view the BOP not only as consumers but also employees and business partners. Consequently, by fostering local initiative, Western MNCs can replicate and scale up their locally embedded BOP strategies.

3.3.

The role of innovation in scaling up: ICT and new technology

Targeting BOP markets in developing countries for Western MNCs requires innovating. Innovation is not only necessary for the design of adequate products or services but also for the creation of new business models and ways of scaling up those models. In order to reduce fixed costs and create economies of scale MNCs are faced with opportunities of innovation and a license to imagine (Simanis and Hart, 2008). To increase efficiency of BOP strategies, MNCs can use new technology and especially new information and communication technology (ICT). Within his 12 principles for a successful BOP initiative, Prahalad (2004) includes the use of hybrid solutions which link new technology with existing infrastructure. Indeed, existing infrastructure may be poor compared to the traditional markets of Western MNCs, but it does not exclude the use of new technology. For instance, even though there may be a lack of paved roads in certain developing countries, the use of mobile phones is very frequent. Vodafone has used this approach of new technology in existing infrastructure with MPESA, a mobile banking service created in Kenya. It consists in using the mobile phone as a tool for money transfers and payments. On the one hand, the business model takes into account the existing infrastructure which lacks formal banking structures in more isolated and lower-income areas. On the other hand, it brings an innovative solution for money transfers accessible for the unbanked low-income populations by using new technology such as the mobile phone. MPESA is often stated as a highly successful BOP strategy. Since its creation in 2005 in Kenya, it has expanded to Tanzania, South Africa, Fiji and Afghanistan and it has reached over 18.5 million users. Another example is the Reuters Market Light initiative in India. In order to overcome information asymmetries in agriculture such as market prices and weather conditions, Reuters designed a service for farmers in India through which they receive up to date daily information via their mobile phones. By partnering with local retailers, Reuters is able to expand its services at a low cost to a large population using mobile technology. Therefore, it may seem that BOP strategies based on ICT may be easily scalable and replicable as the fixed costs are low and the existing infrastructure is adapted to such technology. Furthermore, new technology and especially ICT can reduce costs of BOP strategies and increase productivity. Information and communication technology allows cutting administrative and 17

Justina Voveryte

Social Business, Enterprise & Poverty Certificate

operational costs and it thus increases efficiency. Real time information and digitalized operations can allow expanding a project and increasing scale while maintaining costs at a low level. ICT thus limits the necessity of increased resources for an increased scale and therefore fosters possibilities of economies of scale. For example, Pfizer has tested its new SMS for Health program in Gambia which allows local players of the pharmaceutical supply chain to provide information on stocks and supplies to a central database which monitors the availability of drugs across the supply chain. The use of ICT therefore increases the efficiency of Pfizers operations while also increasing the healthcare services in Gambia at a low cost. In addition, the use of ICT can limit errors such as faulty administrative issues linked to human mistakes. For instance, Akula (2008) gives the example of a microcredit institution whose officers manually record transaction information of their customers. A loan officer may have a large number of clients who perform a large number of transactions each month. The loan officer must record the information in three separate documents: passbooks, collection sheets and back office ledgers. Human error cannot be excluded from such mechanisms and the execution may be faulty. Therefore, recording such transactions on a digitalized platform in one go may facilitate the work of loan officers and result in more accurate large scale operations. Therefore, new technology may be a response to reducing costs, increasing the efficiency and productivity within a BOP initiative. With innovative franchising and B2B models such as local entrepreneurship and the use of new technology, MNCs can design efficient and scalable BOP strategies.

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Justina Voveryte

Social Business, Enterprise & Poverty Certificate

Conclusion
The Bottom of the pyramid represents a large market with particular needs and challenges and MNCs have to develop new approaches in order to enter BOP markets. In addition, the heterogeneity of the Bottom of the pyramid across geographies and income levels make it difficult to develop one-size-fits-all strategies for the BOP. In order to succeed, BOP strategies seem to require local embeddedness. This local embeddedness, in addition to the high costs of entering BOP markets, makes it challenging to scale up and replicate BOP strategies. Yet, the fortune at the Bottom of the Pyramid seems to reside in the possibility of making profits through large volumes as the margins in such markets are low. Therefore, increasing the scale of BOP strategies is a major concern for MNCs entering such markets. In order to replicate and scale up locally embedded strategies, MNCs can use propagation processes which rely on local entrepreneurship. Franchising and B2B models including local entrepreneurs or local SMEs may be the solution to transferring and scaling up locally embedded BOP initiatives. Innovation is therefore paramount in designing new business models and partnerships. New technology can also help in reducing high fixed costs through increased productivity and efficiency and contribute to increasing the scale of a BOP strategy without proportionally increasing the fixed costs. Finally, Karnani (2006) criticized Prahalads idea of the fortune at the Bottom of the Pyramid as the large number of potential consumers within the low-income population. He advocated considering the poor as producers and employees rather than as consumers. In this way, poverty alleviation may be possible through the increased income of the poor. The idea therefore that to scale up and replicate BOP strategies MNCs could build linkages with local entrepreneurs and SMEs may reinforce Karnanis idea. Indeed such BOP strategies would view the BOP not only as consumers but also as potential employees and entrepreneurs which may be included in the supply chain of an MNC. Western MNCs could therefore reach the BOP population as consumers and include them as producers, employees and entrepreneurs within their supply chains and hence achieve the fortune at the Bottom of the Pyramid through scale.

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Justina Voveryte

Social Business, Enterprise & Poverty Certificate

References
Academic papers
Akula, Vikram (2008). Business Basics at the Base of the Pyramid, Harvard Business Review, June 2008 Banerjee, Abhijit V. and Esther Duflo (2006). The Economic Lives of the Poor, Abdul Latif Jameel Poverty Action Lab, Massachusetts Institute of Technology, Cambridge, Massachusetts Chambers, Robert (2007). Poverty Research: Methodologies, Mindsets and Multidimensionality, Institute for Development Studies, Working Paper 293 Hammond, Allen L. and William J. Kramer et al (2007). The Next 4 Billion: Market Size and Business Strategy at the Base of Pyramid , International Finance Corporation and World Resources Institute. Washington DC, USA Hart, Stuart L. and Ted London (2005). Developing Native Capability: What multinational corporations can learn from the base of the pyramid, Stanford Social Innovation Review, Summer 2005 Karnani, Aneel (2006). Fortune at the Bottom of the Pyramid : A Mirage How the private sector can help alleviate poverty , Ross School of Business Working Paper Series, Working Paper No. 1035 Karnani, Aneel (2009). Romanticizing the Poor, Stanford Social Innovation Review, Winter 2009 London, Ted and Stuart L. Hart (2004). Reinventing Strategies for Emerging Markets: Beyond the Transnational Model, Journal of International Business Studies (1-21, 2004) Perrot, Franois (2009). Corporate Strategies and the Development of Markets at the Base of the Pyramid, Working Paper Porter, Michael E. and Mark R. Kramer (2006). Strategy and Society: The Link between Competitive Advantage and Corporate Social Responsibility, Harvard Business Review, December 2006 Prahalad, C.K. and Stuart L. Hart (2002). The Fortune at the Bottom of the Pyramid , strategy+business issue 26, 1st quarter 2002, Booz Allen Hamilton Prahalad, C.K. (2004). The Fortune at the Bottom of the Pyramid : Eradicating Poverty through Profits. Wharton School Publishing Prahalad, C.K. and Allen L. Hammond (2004). Selling to the Poor , Foreign Policy Magazine, May 2004 Simanis, Erik and Stuart Hart (2008). The Base of the Pyramid Protocol: Towards Next Generation BOP Strategy, Cornell University United Nations Development Program (UNDP) (2008). Creating Value for All: Strategies for Doing Business with the Poor, July 2008, New York, USA

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Justina Voveryte

Social Business, Enterprise & Poverty Certificate

Wille, Edgar and Kevin Barham (2009). A Role for Business at the Bottom of the Pyramid, Ashridge Business School, January 2009 World Economic Forum (2009). The Next Billions : Unleashing Business Potential in Untapped Markets. January 2009, Geneva, Switzerland Yunus, Muhammad (2007). Credit the Poor: Poverty as Distant History, Harvard International Review, Fall 2007

Case studies
Karugu, Winifred & Mwenda, Triza. Vodafone and Safaricom Kenya: Extending the Range and Reliability of Financial Services to the Poor in Rural Kenya. GIM Case Study No. A039. New York: United Nations Development Programme, 2008 Nelson, Jane, Eriko Ishikawa and Alexis Geaneotes (2009). Developing Inclusive Business Models, A Review of Coca-Colas Manual Distribution Centers in Ethiopia and Tanzania, Harvard Kennedy School and International Finance Corporation HEC Paris, Social Business Enterprise & Poverty Chair: Ardoin, Dalsace & Garrette, Grameen Danone Food Limited, Creating a Social Business in Bangladesh, HEC Paris, Social Business Enterprise & Poverty Chair Garrette, Bernard (2009). Essilors Base of the Pyramid Strategy in India, HEC Paris, Social Business Enterprise & Poverty Chair Mnasc David, Veolia Water and low-income populations in poor and emerging countries, HEC Paris, Social Business Enterprise & Poverty Chair

Websites
World Bank Data: http://data.worldbank.org/ Chotukool: http://www.chotukool.in/ Grameen-Veolia: http://www.veoliawater.com/media/news/2009-06-24,Grameen-Veolia-Water-Goalmari.htm Pfizer SMS for Health Initiative: http://www.businesscalltoaction.org/members/2010/10/pfizer/

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