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Doing Business in Base of the Pyramid Markets - an interview with Ted London, Director of the Base of the Pyramid (BOP) Learning Laboratory, United States |
Ted London is Director of the Base of the Pyramid (BOP) Learning Laboratory, a consortium of companies, non-profit organizations, multilateral institutions and academics that explores the opportunities and challenges associated with entering base of the pyramid markets. The BOP Lab is a joint program of University of North Carolina Kenan-Flagler Business School and Cornell University. He is also Adjunct Assistant Professor of Entrepreneurship at UNC, and teaches strategic and international management and sustainable enterprise.
Professor London's research focuses on strategic change and growth. In particular, he is interested in how firms build capabilities to implement new strategies. His most recent article, published in the Journal of International Business, challenges and extends conventional thinking about business strategies for emerging markets. He has received awards for both his research and his teaching.
Professor London worked for more than a decade in the private and not-for-profit sectors in Asia, Africa and the United States. In Asia, he was General Manager for an Indonesian joint venture operated by McCormick Spices and Director of a multi-country initiative that linked income generation and environmental protection for Conservation International. In Africa, he co-managed a regional business development program in Malawi. In the U.S. Ted has served as Executive Director of a non-profit providing advisory services to small and medium businesses, as a General Motors design engineer, and as a senior business valuation consultant for Deloitte & Touche.
He is finishing his PhD in strategic management from UNC Kenan-Flagler and, upon completion, will be a post-doctoral scholar. He received his MBA from Claremont Graduate University's Peter Drucker Graduate Management Center and his BS in mechanical engineering from Leigh University.
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Can you describe the work of the Learning Lab? |
The learning lab was founded in 2000 with the idea to better understand what business models and technology
innovation might look like for companies and non-profits and other organizations interested in serving the
Base of the Pyramid (BOP). The real genesis of the Lab was the original
"Fortune at the Bottom of the Pyramid” article" written by C.K. Prahalad and Stuart Hart.
At that time I don’t think the article had been published yet, but a draft had been widely circulated. There was increasing interest in
its ideas by a lot of folks within multinationals and other organizations. They thought the BOP was a really interesting opportunity but they
didn't really know how to explore this market. The Lab was founded around the idea of creating a space to bring together some of the leading thinkers
and to generate and share knowledge. That is why we call it a Learning Lab, and that's what we've been doing for the past 4 years or so.
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| Prahalad and Hart’s pyramid modeled annual per capita income based on purchasing power parity (ppp) in U.S. dollars.
Your focus is the base of the pyramid - the population with annual ppp of $1500 or less?
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That’s right. In a fairly simplistic way, the world can be divided into a global pyramid.
The top part of the pyramid - about 800 million people or so - is wealthy, mainly in developed countries but also in the developing world.
When MNCs go overseas, they typically look for customers that are the most familiar. As a result, in the developing world, they tend to target the wealthy.
There's been increasing interest in reaching into the second tier of the pyramid which you could call the emerging middle class, maybe 1.5 billion people.
These are people that are beginning to get some wealth but are still in the middle class in these developing countries.
What they have not targeted is the 4 billion plus people in the base of the socio-economic pyramid.
The Lab focuses on what it takes for an organization to profitably, or at least in a self-sustaining way, serve this market in a manner that is environmentally
sensitive and culturally appropriate. This latter component is crucial, as we really believe the models that are going to work in BOP markets need to not only
be economically viable but also need to address for social and environmental performance.
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| If this line of thinking constitutes a more inclusive capitalism, what would be the key features of this new approach?
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There's several ways to tackle that and one is to begin to think about the idea that the poor are currently very poorly served.
They tend to pay a premium for services that are offered to people in the same general geographic location who are wealthier.
There was a very interesting article by C.K. Prahalad and Al Hammond in the Harvard Business Review
(“Serving the World’s Poor, Profitably”)
that highlighted the premium that the poor pay for basic services. If the poor are poorly served and there are ways to serve them better, that's going to create benefits to the poor.
Beyond that is the idea that to do it requires participation of multiple stakeholders, and that gets to the idea of inclusive capitalism.
This is not about riding in solo thinking you can do it all yourself; there's increasing recognition that to serve this new market requires partnerships
not only with other companies but also with local communities, non-profit organizations - entities that corporations just aren't used to dealing with,
but when they do deal with them it creates a much more inclusive and interesting business model.
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| This idea of partnership and mutual value creation sounds great in theory; what actual progress has been made in terms of successful collaborations?
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I would be leery of putting any one example forward as having figured it out completely but we are seeing an increasing number of companies
and non-profits and other entities beginning to explore these types of models. You can look at the attendees at the recent WRI-sponsored
conference in San Francisco (“Eradicating Poverty Through Profit” (http://povertyprofit.wri.org/), where lots of different examples were put
forward and many of them have achieved significant success. You heard from HP and Dupont and P&G – they are certainly among the U.S. MNC
leaders in terms of thinking about these kinds of issues.
However, it's clearly not exclusive to corporations. We're also beginning to see a lot of non-profits beginning to create models that are
economically viable. In the non-profit world, they can't just solely rely on donations which are hard to secure and hard to replenish.
Some are thinking about business opportunities at the BOP that may not be highly profitable but at the very least are economically self-sustaining
and replicable. If it is replicable, then the impact of a non profit’s work can be extended significantly.
The examples I gave of you of P&G, HP and Dupont are U.S. multinationals, but you could make a pretty solid argument that some of the most interesting
work is being done by multinationals emerging from developing countries. Certainly CK Prahalad in his plenary session had 2 or 3 Indian MNCs that are
doing some really interesting work at the BOP. We shouldn’t think of this as a developed world phenomenon with developed world companies and non-profits
being the ones leading the charge here. The reason we focus on these in the BOP Lab is because we're based in the developed world and that’s who we have the most contact with. But our network continues to grow and we have partnerships with emerging BOP labs in Latin America, Asia, and Africa, as well as Europe. So again, it's not just about the developed world companies and non-profits going into the developing world. The idea of a collaborative partnership and inclusive capitalism is very different; it's much more about all different types of partners and organizations participating, and different organizations taking leadership roles.
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Should target outcomes of MNC investments in the BOP always include job creation, government revenue, infrastructure development,
capacity building, technology transfer, some combination of those, or is there some other set of characteristics that are emerging as best practices? |
With MNCs, we're seeing a variety of investments. The investment itself can have all kinds of different criteria around it. You can imagine
if you're going to partner with, for example, a non-profit, you can't simply have only financial performance goals or you're not going to
get non-profits interested in working with you. You've got to think more broadly around societal performance goals that often include social
and environmental performance. When you can begin to incorporate those into your investment, that's when you get a broader group of partners
coalescing around the initiative. What that looks like exactly varies in each situation.
But one thing that's becoming increasingly clear is that companies can't simply think about making investments in which they capture and retain
all the benefits solely inside the boundaries of the firm. The traditional thinking of multinational expansion is make investments with the goal
of protecting them. That's often around intellectual property, patents, copyright, and investment in people within firm boundaries - whatever is
invested in can't escape. That model makes less sense in BOP environments where intellectual property and the like are often not part of the
local culture and business environment. It may be much more about making investments that are outside the boundaries of the firm, and competitive
advantage may be more around convening power, partnership, first mover advantage, and more intangible relationship-oriented assets as opposed to
technical or physical assets that are protected within the boundaries of the firm.
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| What features in BOP communities attract MNC investment, and which characteristics preclude investment? |
| They may not be country level requirements; they may be community or regional requirements. Clearly some
countries are going to be extraordinarily difficult to work in, such as Iraq. Some investors might draw a boundary around countries
that are unsafe to operate in. But Malawi, Indonesia, Thailand, and Botswana, for example, those could all be successful countries
for the BOP depending to some degree on the local context. You might argue - and this is subject to future discovery - “is a country's
population going to be too small at some point to generate interest from multinationals?” I think it could be, but that doesn't mean BOP
initiatives couldn't happen; it may just not be of sufficient size to attract the interest of a large developed-county multinational.
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| Some have expressed concern that MNCs will primarily be interested in targeting the BOP as consumers,
and not in helping increase locally generated products and services from locally owned businesses. How many BOP initiatives are
consumer products oriented? Can those initiatives achieve some of the outcomes you have described in terms of greater partnership and inclusive capitalism?
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One of the things we have to stay away from is "either or". 'Multinational initiatives', or 'local initiatives', or 'non-profit initiatives' are all viable.
All types can have a positive influence, and all models can have a negative influence. I don't think we should expect that every venture,
be it corporate or non-profit, is going to be perfect. There are likely going to be some negative outcomes, but we believe the models that
will be most successful will incorporate societal performance metrics as a core element of a successful business. One of the ways you could argue an MNC producing a
consumer good might be doing good is based on what we discussed earlier regarding the poverty premium that local people have to pay. The poor pay much more for banking,
electricity, water and health care than the rich do. Having other companies enter and be competitive in these areas - if it is consumer products that provides
nutriThe requested resource (/editor/default/) is not availabletional benefits, for example - then perhaps there are some real positives to having consumer products enter these markets.
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Your lab is working on the creation of a code of conduct and set of principles for businesses targeting the BOP;
can you outline this and tell us how communities in the BOP are responding to it?
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This idea of a BOP protocol emerged out of the Lab because of an interest by our members, corporations and others, in understanding the process of how
you begin to really understand the BOP and how you begin to think about developing mutually beneficial relationships in these markets.
The protocol has a life of its own outside of the BOP Lab. It's run out of Cornell University, and headed up by Stuart Hart, who is at Cornell,
and Eric Simanis, who is at the University of North Carolina. We had a great meeting with a variety of different stakeholders in October of this year (2004)
in which a first draft of the protocol was developed. This was presented at the WRI conference.
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Does the code vet regulatory frameworks? How should core commitments to environmental protection and corporate social responsibility be made a visible
part of companies that invest in the BOP? To what extent should companies incorporate the views of local people and the local business perspective going in?
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Broadly speaking, in term of institutional regulations, I don’t think the model is to wait for government regulation to occur so that investors can feel it’s
a more western business environment and therefore it can successfully enter it as a multinational. Regulations are important but if you wait for them to come
you could be waiting a long time because even if they're on the books they may not be enforced.
In terms of environmental and social performance, I think it’s much more effective if these are implicitly baked into the business model. So it’s not an add-on
or something that's layered on, which would be viewed as more of a cost. A much more powerful model is one that says “for us to actually run this business and
build these partnerships we need to build environmental and social performance so these are a core part of our business model.”
As for outside views, this is one of the most crucial aspects of a successful BOP venture; that is, beginning to actually hear those outside voices.
This has to happen. What is really interesting and exciting is learning how to build the capability to find, hear, and understand what those non-traditional
outside voices are willing to share. Those views have to be built into the business model.
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Ted London, thanks very much!
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