The Bottom of the Pyramid (BoP)

The Bottom of the Pyramid (BoP):

What do multinational corporations (MNCs) have to do to be successful

in the BoP markets?

Bachelor Thesis Organization & Strategy

Topic: Entrepreneurship

Sub topic: Starting new enterprises in the bottom

of the pyramid (BoP) markets.

Study Program: Premaster Strategic Management

Academic Year: 2009-2010

Author: Sander Cox

ANR: 434349

Supervisor: Dr. Ir. J.S. Small

Number of words: 7.701

Tilburg University, FEB

June 11 2010

Bachelor Thesis Entrepreneurship – Sander Cox Friday, 11 June 2010

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“The train is not left yet but he is getting ready to move, when he is moving the train is

unstoppable”

Professor C. K. Prahalad vision about the Bottom of the Pyramid.


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Management summary

Reaching people and Small and Local Entrepreneurs (SLEs) at the Bottom of the Pyramid

(BoP) markets is an interesting opportunity for multinational corporations (MNCs). These

markets are still unexplored by most of the MNCs. However, two third of all the people in

the world live in BoP markets. Therefore it is very interesting for MNCs to serve these people

because it could be an opportunity to expand and increase profits. The main question of this

thesis is; What do MNCs have to do to be successful in the BoP markets? This thesis

combines recent literature to answer this question. Without empirical data from the BoP

markets but with historical data it can be concluded that MNCs can be successful. Therefore

MNCs need to invest in the three pronged investment and cooperate with SLEs. The most

important fact is that the managers of the MNCs must have a positive attitude with regard

to doing business in the BoP markets.


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Index Chapter 1. Introduction ............................................................................................ 5

1.1. Problem Indication................................................................................................... 5 1.2. Problem statement .................................................................................................. 5

1.3. Research Questions.................................................................................................. 6

1.4. Relevance ................................................................................................................. 6

1.5. Research Design and data collection ....................................................................... 6

1.6. Structure of the thesis.............................................................................................. 6

Chapter 2. What are relevant characteristics of BoP markets and how do they differ

from ToP markets?........................................................................................................... 7

2.1. The World Economic Pyramid.................................................................................. 7

2.2. The BoP model ......................................................................................................... 8 2.3. How many people are there at the BoP markets exactly? ...................................... 8

2.4. The people of the BoP markets................................................................................ 9

2.5. The global differences between the ToP Markets and the BoP Markets, at what

point are the MNCs no longer successful?............................................................................ 9

2.6. Conclusion.............................................................................................................. 10

Chapter 3. How and why can SLEs survive in BoP markets?................................... 11

3.1. The informal economy........................................................................................... 11

3.2. The problems of SLEs in the BoP markets.............................................................. 12

3.3. How can SLEs solve these problems? .................................................................... 12

3.4. Conclusion.............................................................................................................. 13 Chapter 4. How and why are MNCs successful in ToP markets?................................ 15

4.1. The three pronged investment .............................................................................. 15

4.2. The role of innovation........................................................................................... 15

4.3. Economic geography.............................................................................................. 16

4.4. The economic environment of the ToP and MoP markets.................................... 17

4.5. Competitive advantage.......................................................................................... 17

4.6. Conclusion.............................................................................................................. 18

Chapter 5. Why would MNCs enter the BoP markets and how can they enter the BoP

markets? .............................................................................................................. 19

5.1. Why would MNCs enter the BoP markets? ........................................................... 19 5.2. What are the challenges for MNCs in the BoP markets?....................................... 20

5.3. Conclusion.............................................................................................................. 23

Chapter 6. Conclusion & Recommendations. ........................................................... 24

6.1. Conclusion.............................................................................................................. 24

6.2. Discussion and limitations...................................................................................... 25

6.3. Academic and practical recommendations ........................................................... 26

References .............................................................................................................. 27


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Chapter 1. Introduction

1.1. Problem Indication

My interest for the subject, enterprises in Bottom of Pyramid (BoP) markets, was developed

when I watched two documentaries, two and a half years ago. These were respectively

titled; ‘The latest market’1 and ‘The egg of the Soto’2. The central question of these

documentaries can be illustrated by the question; How can we make people in the BoP

markets more consumable? In the first documentary, ‘The latest market’, Professor C.K.

Prahalad discussed the possibilities of multinational corporations (MNCs) to make people

more consumable (Prahalad, 2002 & 2004; Prahalad & Hammond, 2002; Prahalad & Hart

2002; Prahalad & Lieberthal, 2003). In the second documentary, ‘The egg of the Soto’,

economist Hernando de Soto discussed property rights for people. Using these property

rights, people could start new enterprises for themselves (De Soto, 2000).

Both C.K. Prahalad and Hernando De Soto want to achieve the best for the local people.

However, Hernando De Soto discusses how local people can start a firm, while Prahalad

discusses how MNCs can make money in BoP markets. Following these documentaries I

started questioning myself what do MNCs need to do to be successful in the BoP markets? It

is evident that the BoP markets are totally different than the ToP markets. 65% of the

world’s population (4 billion people) earns less than $ 1.500 each per year. So the individual

income is low, but the aggregate buying power as a group is quite large (Prahalad &

Hammond, 2002). This requires a totally different selling proposition to be successful in the

BoP markets.

1.2. Problem statement

Too many MNCs are not interested in participating in the BoP markets. They assume that

people with such low incomes have little to spend on goods and services. However, because

BoP markets are in the earliest stages of economic development, revenue growth for MNCs

entering them can be extremely rapid (Prahalad & Hammond, 2002). This thesis investigates

what these companies should do to be successful in the BoP markets. This could be an

opportunity for revenue growth for the MNCs.

1 Tegenlicht, June 2007 (Dutch documentary) Website: tegenlicht.vpro.nl/afleveringen/2006-2007/de-

laatste-markt.html 2 Tegenlicht, June 2007 (Dutch documentary) Website: tegenlicht.vpro.nl/afleveringen/2006-2007/het-

ei-van-de-soto.html


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The main topic of this thesis is “What do MNCs have to do to be successful in the BoP

markets?”

1.3. Research Questions

The research questions help to answer the main question stated above:

� What are relevant characteristics of BoP markets and how do they differ from ToP

markets?

� How and why can small and local entrepreneurs (SLEs) survive in BoP markets?

� How and why are MNCs successful in ToP markets?

� Why would MNCs enter BoP markets and how can they enter BoP markets?

1.4. Relevance

This thesis combines recent literature to make recommendations and give advice on what

MNCs can do to be successful in BoP markets. For MNCs this thesis provides insights into

what they can do before entering BoP markets.

1.5. Research Design and data collection

This thesis is a descriptive, literature review study. The use of secondary sources is the tool

to answer the research problem.

1.6. Structure of the thesis

Chapter two discusses the relevant characteristics of the BoP and how they differ from the

ToP markets. This chapter discusses the economic pyramid and defines at what point MNCs

are no longer successful in this pyramid (from top to the bottom of the pyramid). Insights in

these differences in the pyramid are required to answer the problem statement in chapter 3

and 4. Chapter 3 discusses how and why SLEs can survive in BoP markets. Chapter 4 explains

how and why MNCs are successful in ToP markets. Based on the foregoing chapters, chapter

5 discusses why MNCs would enter the BoP markets and how they can enter the BoP

markets. The conclusion presents the answer on the main question. This final chapter also

contains a discussion and recommendations for future academic research.


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Chapter 2. What are relevant characteristics of BoP

markets and how do they differ from ToP

markets?

2.1. The World Economic Pyramid

The term BoP is coined by Prahalad and Hart (2002). The World Economic Pyramid according

to them is illustrated in figure 1. The pyramid is separated in three parts, the upper part –

which are the ToP markets, the second part – Middle of the Pyramid (MoP) markets and the

lower part – which are the BoP markets.

Figure 1: The World Economic Pyramid, source: Prahald & Hart, 2002, p. 2

The ToP markets (Tier 1) are the Western markets. In these ToP markets the standard of

living is high. The annual income per capita is more than 20.000 U.S. Dollars, so the people in

the ToP markets do have money to consume. The MoP markets represent the poor

consumers in developed nations and the rising middle classes in developing countries.

Almost every MNC operates in these markets and uses Western-Based marketing principles

to be profitable (Prahalad & Hart, 2002). At the BoP there are four billion people who earn

less than $1.500 a year. Almost all people live in rural areas, urban slums and shantytowns.

They have little or no formal education and they are hard to reach (Prahalad & Hart, 2002).

These people usually do not have assets on paper. In essence, their belongings, like their

homes, are worthless and so legally not owned by them. Most of the businesses, like farms

and small outlets, are also illegal (De Soto, 2000). Therefore the people in the BoP markets

operate most of the time in the informal economy (Debrah, 2007).


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2.2. The BoP model

To catch the many untapped people in the BoP markets, the BoP model is developed. The

BoP model assumes that market based solutions, private enterprise, and advanced

technologies can increase the well-being of the poor and concurrently increase the profits of

the MNCs (Prahalad & Hart, 2002). When the people in the BoP markets can be reached,

there are a lot of people that become consumers and together they have billions of dollars

to spend (Prahalad & Hammond, 2002). This is a win-win opportunitie in which the well

being of the poor will be increased as well as the profits of the MNCs (Prahalad, 2004). Thus,

MNCs need to start thinking about a marketplace with all six billion people, the whole

pyramid (Prahalad & Dearlove, 2009). The BoP model accordingly assumes that the world’s

poor are willing to pay for high-quality services using advanced technologies (London & Hart,

2005; Hart, 2005). The BoP model indicates that if the poor are treated as consumers, this

will lead to positive outcomes through the generation of opportunity and of wealth (Hart,

2005). “Strong versions of BoP assume that businesses, whether MNCs or rural micro-

entrepreneurs, can act in their own self-interest to improve the lives of the poor” (Prahalad

& Hammond, 2002, p. 5).

2.3. How many people are there at the BoP markets exactly?

As we have seen, the BoP markets are the largest, but poorest group in the world. This is

two third of the world’s population (Hart & London, 2005). Roughly one-sixth of humanity,

which is one billion people, have a per capita income less than $1 per day (Prahalad & Hart,

2002). In 2004 Prahalad used in the book The Fortune at the Bottom of the Pyramid:

Eradicating Poverty Through Profit, $2 per day as the bottom line of the pyramid. With this

amount of income there are 5 billion people in the BoP markets. Many researchers question

the vague estimates of the size of the BoP markets (Crabtree, 2006; 2007; Karnani, 2006;

Laudrum, 2007). They state that Prahalad and Hart (2002) use 4 billion people with per

capita income below $ 1.500 per year, while Prahalad and Hammond (2002) assert there are

4 billion people with per capita income below $2.000 per year. The World Bank estimated in

2001 there are 2.7 billion people earning less than $2 per day, while Sala-I-Martin estimated

in 2002 there are 600 million people with incomes below $2 per day (as cited in Karnani,

2006). Karnani (2006) argues that the exact number will be somewhere in the middle

between the numbers of the World Bank and Sala-I-Martin. However, the aim of this thesis

is not to discuss the number. As proposed in paragraph 2.1, numbers of $ 1.500 annual per

capita income and a market size of 4 billion people will be used. $1.500 is the minimum

income considered necessary to sustain a decent life (Prahalad & Hammond, 2002) and 4


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billion people is the most consistent number in the literature (Prahalad & Hammond, 2002;

Prahalad & Hart, 2002; Hart & London, 2005; Rajagopal, 2009; Webb, Kistruck, Ireland &

Ketchen, 2009).

2.4. The people of the BoP markets

The people in the BoP markets pay higher prices for products compared with other

consumers living in the developing countries (Webb, et al., 2010). These people are hard to

reach, because they live in rural areas, urban slums and shantytowns (Prahalad & Hammond,

2002; Prahalad 2004). Another problem is that these people have little or no formal

education (Prahalad & Hart, 2002). Looking at the poor people in these regions we see a lot

of activity, so they work. In every village there are people selling products on markets (De

Soto, 2000). At these markets these people spend some money on food and other supplies,

especially to survive. People at the BoP markets are very creative in earning some money.

“You cannot walk through a Middle Eastern market, hike up to a Latin American village, or

climb into a taxicab in Moscow without someone trying to make a deal with you“(De Soto,

2000, p. 4). Therefore these people at the BoP markets are very creative, trying to make

profit out of practically nothing. But Karnani (2006) argues that not all of these people have

the same creativity, opportunity and buying power. Karnani argues that there is a big

difference between people who consume less than $1 per day and people who consume

more than five times as much. These people have nothing to spend so they can never afford

expensive products (Karnani, 2006).

2.5. The global differences between the ToP Markets and the BoP Markets,

at what point are the MNCs no longer successful?

As already discussed in paragraph 2.1 there are many people in the BoP markets and they

are very poor. The upper and the middle part of the pyramid as shown in figure 1, is totally

different compared with BoP markets. In ToP markets there are a small number of people

and they earn far more than the people in the BoP markets. But at what point are the MNCs

no longer successful? They are successful in the ToP markets. But the most of the MNCs

have not yet explored the BoP markets, because they are not yet active in these regions

(Rajagopal, 2009). Philips is entering the BoP markets in India. Kris Ramachandran, CEO

Philips India, discusses in a documentary the opportunities and reasons why they try to

enter these markets. He argues that you cannot only serve a small consumer group and still

grow. So they are exploring and entering the market to create a new group of consumers.

Philips expects that in India there is a whole new class of 50 to 100 million consumers


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entering the consumer class3. According to Rajagopal (2009) the marketing principles in the

ToP and MoP markets are generally driven by push factors, such as brand equity and brand

personality. While the BoP markets are generally driven by pull factors, based on products

with long-run advantage (Rajagopal, 2009). This because people in the upper parts of the

pyramid are brand sensitive, while the people in the BoP markets are price sensitive

(Rajagopal, 2009).

2.6. Conclusion

In this chapter the relevant characteristics of the BoP markets are explained, and how do

they differ from the ToP markets? BoP markets are the poor regions all over the world.

There are four billion people in the BoP markets, earning less than $ 1.500. They live in rural

areas, urban slums and shantytowns. They have little or no formal education and they are

hard to reach (Prahalad & Hart, 2002), with no assets on paper (De Soto, 2000). The BoP

model is developed to create win–win opportunities for MNCs, SLEs and the people at the

BoP markets. To catch these many untapped people in the BoP markets, MNCs need to

understand the differences between the ToP and MoP markets and the BoP markets. To be

profitable MNCs need to change their marketing principles (Rajagopal, 2009), as a result of

these differences. Figure 2 shows the biggest differences between ToP & MoP markets and

BoP markets.

ToP & MoP Markets BoP markets

Small group of people Largest group of people

High income Low income

Areas good to reach Areas difficult to reach

Good education Little or no formal education

Formal economy Informal economy

Marketing principles driven by push factors Marketing principles driven by pull factors

Figure 2: Differences between ToP & MoP and BoP markets

3 Tegenlicht, June 2007 (Dutch documentary) Website: tegenlicht.vpro.nl/afleveringen/2006-2007/de-

laatste-markt.html


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Chapter 3. How and why can SLEs survive in BoP

markets?

As described in the previous chapter there is a great deal of activity in the BoP markets.

People need to work to have a small amount of money to spend on food and other supplies

to survive. There are a lot of SLEs and many different local markets. This chapter discusses

the SLEs in the BoP markets.

3.1. The informal economy

De Soto demonstrates in his book, The Mystery of Capital: Why Capitalism Triumps in the

West and Fails Everywhere Else (2000), that commercial credit is central to building a market

economy. The vast majority of the people in the BoP markets cannot start a legal business of

their own in a short time. These businesses operate in the ‘informal’ or extralegal economy.

This term “informal economy” was first mentioned by Hart (1970 & 1973) who studied the

income earning strategies of city people in Ghana. “The informal sector is a result of an

oversupply of labour and a low demand for unskilled or semi-skilled workers, because

developing economies are unable to assimilate all of the available labour force” (Debrah,

2007, p. 1068). Weiss (1987) concludes that this is the reason that less fortunate people find

alternative ways of earning money and circumvent the inadequacies of the state. Debrah

(2007) states there are two types of characteristics of the informal sector. There are

proponents of marginalist and structuralist characterizations of the informal sector. The

marginalist argues that the informal sector is a peripheral to economic development. The

informal sector is almost nothing more than traditional activities and offered workers and

entrepreneurs nothing more than survival (Meagher, 1995) and there is not a potential for

independent growth (Castells & Portes, 1989). “Proponents of the structuralist perspective

see the informal sector as a reservoir of indigenous entrepreneurial dynamism that has the

potential to generate employment and power growth” (Debrah, 2007, p. 1067). The

structuralists assert that the informal sector is more capable of conquering economic

fluctuations. In periods of structural changes, recessions or high influence of governments

the informal sector is a valuable economic endeavor (De Soto, 2000; Debrah, 2007). One of

the structuralists is De Soto (2000), he argues that the informal sector has a lot of SLEs that

should be encouraged because it’s the engine of economic growth for developing countries.

Some scholars have argued that there is not a real difference between margnialists and

structuralists (Meagher, 1995). The main critique is that the informal economic activity is


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always associated with marginal behavior and survival strategies of the poor (Debrah, 2007).

The difference between marginalists and structuralists is not central in this thesis, but the

economic performance of the informal economy is important, because almost all firms

operate in the informal sector, and there are only a small number of SLEs who operate

legitimately (De Soto, 2000; Hart & London, 2005).

3.2. The problems of SLEs in the BoP markets.

As stated in the previous chapter the reason that businesses are illegal is the governance (De

Soto, 2000), and because the businesses are illegal, they do not have access to credit. When

they have access to credit they pay often interest rates of up to 20 percent per day (Prahalad

2004). Meanwhile the income of these people is below $2 per day. Most of this money goes

to the necessities of life. So there is very little money left over to invest in their business.

This is the reason that they cannot expand, because they cannot afford an asset of $100

(Prahalad & Hart, 2002). So, without assets they have not access to economies of scale.

Another problem in these markets is distance. The vast majority of the people in the BoP

markets live in rural areas or shantytowns. These people cannot easily reach the whole

market, because the transportation costs are high and transportation costs a lot of time (De

Soto, 2000). Another problem is space capacity. These SLEs do not have big warehouses,

they may have, if they are lucky, a small room or a piece of land to store or fabricate

products. With these limitations and without these tools it is very difficult to run a small

business (De Soto, 2000). The last two problems is a result of the fact that SLEs operate in

the informal economy, because they can not afford vans or warehouses.

3.3. How can SLEs solve these problems?

Because of the oversupply of labour and a low demand for unskilled or semi-skilled workers,

people often do not have a legal job (Debrah, 2007). So these people need something to do

to earn some money. An example,

to earn some money people

mounted cell phones chargers on a

wooden plate. People with a low

battery can charge for a small

amount of money his or her cell

phone (Chipchase, 2009)4. Photo 1

4 This entrepreneur mounted on a wooden plate lights to show that the mobile chargers are working.

Photo 1: Mobile chargers, source: Chipchase, 2009, p. 14


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illustrates this creative manner of doing business in the BoP markets and basically anywhere

in the BoP markets this picture could be made. This example illustrates the creativity of

these people, but it also agrees with Prahalad (2004), that these people are potential

consumers for western products. Doing such business is illegal, and according to De Soto

(2000) all these SLEs are most of the time illegal. An example that he gave of a creative way

to solve the legal problem is to travel with small boxes. Before SLEs go to a market every

member of the family gets a box. When the whole family arrives at the market and they

unpack their boxes they have a bigger volume. Why do they do this? Why so many people?

The answer is simple according to De Soto (2000), to avoid the government, because they

are illegal. And when you travel with small boxes it is not illegal. So, in these markets most of

the families have a small enterprise or cooperate with some other families together.

Furthermore, in the BoP markets the state does not pay any benefits. Thus when these

people do not work, their income will be zero (De Soto, 2000). Therefore, whole families

work together to earn some money (Webb, et al., 2010).

The SLEs can get loans, like microfinance, from nonprofit microfinance institutions (Prahalad

& Hammond, 2002), and from profit organizations (Hart & London, 2005). According to

Karnani (2006) is microfinance the best example of helping the poor. Microfinance can help

to get access to the formal economy (Khawari, 2004). With the benefit of the microfinance

the SLEs can circumvent their capital problem and start a small enterprise for their own.

Bennett (2010) concludes that without the informal sector the formal can never be reached,

so the informal sector is a stepping stone to the formal economy. The SLEs need to start

firstly in the informal sector and when they believe that they can make more profit in the

formal economy, they can switch every moment and vice versa (Bennett, 2010). Operating in

the formal economy the SLEs have more possibilities to invest in expanding their business.

3.4. Conclusion

The biggest problem for SLEs in the BoP markets is that they operate in the informal

economy. Therefore they do not have access to capital and they can not sell products legally.

Their income is so low, that the entrepreneurs can not afford expensive tools to expand

their business. But the informal economy could be the stepping stone to the formal

economy (Bennett, 2010). This gives the SLEs the opportunity to expand their businesses.

Figure 3 gives an overview of this chapter, and shows how SLEs solve the problem of being

active in the informal economy.


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SLEs are operating in: Problem: Solution SLEs:

Innovative power

Informal economy No access to capital Microfinance

Stepping stone to formal economy

Figure 3: Solutions for the problem of the informal economy


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Chapter 4. How and why are MNCs successful in ToP

markets?

This chapter of the thesis describes how and why MNCs are successful. The first item, the

three pronged investment, only explains how MNCs can be successful and do not explain

why MNCs are successful. This chapter also looks at the influences on why MNCs are

successful.

4.1. The three pronged investment

Teece (1993) explained the three pronged investment of Chandler (1990). Chandler (as cited

in Teece, 1993) described in his work; scale and scope: the dynamics of industrial capitalism,

the development and evolution of MNCs and comparing the data of different industries in

different countries to give an overall judgment of how and why some MNCs are successful.

The three pronged investment are three essential steps that top management must taken to

be successful. The first step is to invest in cost advantages of scale and scope. Invest in

economies of scale implies producing the same product type efficient. Economies of scope

refer to efficiencies primarily associated with demand-side changes, and the capabilities to

produce different products with the same tools. The second step is to invest in product-

specific marketing, distribution, and purchasing networks. In other words; retain and

develop good buyer – supplier relations. The last step is to invest in recruiting and organizing

of the managers which are needed to supervise and coordinate the MNCs. MNCs need good

(senior) mangers for organizing the operations and pointing out the MNC’s strategic future.

According to Chandler “the entrepreneurs first to perform these three critical steps

‘acquired powerful competitive advantages’ – what defines as first-mover advantages

associated with learning and incumbency effects. Latecomers had to make larger

investments to compete, and they also had to deal with the added risk flowing form the

competitive strengths and moves of the incumbents” (Teece, 1993, p. 201).

4.2. The role of innovation

Schumpeter (as cited in Rickard, 2006) introduces in his book Capitalism, Socialism and

Democracy the classic trilogy of technological change. The trilogy consists; invention,

innovation and diffusion. Invention is the first prototype of a new product, innovation is the

process to transform this into a marketable product, and diffusion is the spread of the new

product. A successful innovation gains profits and thus advantage over its rivals, because the

firm enjoys a first-mover advantage (Teece, 1993). According to Rickard (2006) Schumpeter


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and Porter in 1985 both argue that the incentive of innovation comes from competition on

rivalry in the classic sense. Technological change is a dynamic process with winners and

losers. MNCs have a high concentration of sources of innovation but this does not mean that

only firms with market power are the drivers of technological progress (Rickard, 2006). First

mover advantage can be reached by innovation and the longer the period of the advantage,

the longer the MNC enjoys the benefits of its advantage. So, MNCs are often winners

because they are strong in innovation.

4.3. Economic geography

“In the literature there are two important observations related to location and firm

performance. First, activities agglomerate at certain places, leading to patterns of national

and regional specialization. Second, the growth and performance are considerable

influenced by the conditions of the region or nation. Resources and conditions close to the

MNC seem to be important” (Chandler, Hagström & Sölvell, 2003, p. 440). According to

Chandler et al. (2003) the agglomeration theory was developed in 1890 by Marshall and

evolved over time through many scholars, like Hoover in 1948, Porter in 1990, and Enright in

1997. The agglomeration theory has three sets of empirical observations;

1. “a large proportion of total world output of goods is produced in a limited number

of highly concentrated regions,

2. firms in particular industries, or firms which are technologically or otherwise related,

tend to collocate and form spatial clusters,

3. both these phenomena tend to be persistent over time” (Chandleret al., 2003, p.

441).

The Marshallian theory suggests that regions over time perform better, but according to

Potter and Watts (2010) none of the observations are beneficial for firms in a certain region.

Thereby agglomeration theory is pure regional, with buyer-supplier relationships in the near

neighborhood. An advantage of these regions is economies of scale and scope (Chandler, et

al., 2003). But the disadvantages are a lack of flexibility, innovation and bargaining power

(Potter & Watts, 2010). Globalization has neutralized many traditional regional competitive

advantages. Reduced trade barriers in the last decades, simple knowledge such as standard

materials, components, products and machinery moves relatively easily and at low cost, and

also top management can easily be moved to new regions (Chandleret al, 2003). This is the

reason that MNCs have the opportunity to invest in other regions and not only in their home

country. In addition to this statement, MNCs can relatively easily produce products in low

cost countries. The advantage of doing this is a low selling price for the ToP or MoP markets,


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so MNCs can compete with rivals with low market prices and still have enough margins to be

profitable. But not all countries have the same opportunities. Some countries are likely to be

poor, if it is inaccessible, prone to disease, or has extreme climate, and fragile soils (Sachs,

2005). This is also an argument why some poor regions can grow and why others regions

remain very poor. For MNCs those regions are not interesting to invest in.

4.4. The economic environment of the ToP and MoP markets

ToP and BoP consumer behavior is generally driven by push factors including brand equity,

brand personality, and brand endorsements (Rajagopal, 2009). Brand equity is the value

consumers assign to a brand above and beyond the functional characteristics of the product.

The outcomes of brand equity include increased market share, decreased consumer price

sensitivity, and enhanced marketing efficiency (Keller, 1993). Brand personality is a set of

human characteristics that become associated with a brand. Brand endorsements are also a

tool to personify brands (Hawkins, Mothersbaugh & Best, 2007). These push factors are

most of the time non functional characteristics of a product. But MNCs strive to reach the

lowest consumer segments (most of the time MoP markets) by generating social impact and

financial viability that provide optimal value for money to consumers (Rajagopal, 2009). In

ToP and MoP markets the consumer is the ultimate target of rivals competing with each

other (Rajagopal, 2009). This intensive competition from rivals of MNCs can decrease market

share in the ToP and MoP markets, but the intensive competition also create price wars,

reducing profit margins and limiting the market growth of MNCs (Dubey & Patel, 2004).

4.5. Competitive advantage

Corporations in the ToP and MoP markets are thus constantly searching for new changes to

compete with rivals for market share. Internationalization and deregulation have also

increased competitive pressure within most sectors. To be competitive MNCs developed

over time key resources and capabilities. This is also known as the resource-based view of

the firm (Mahoney & Pandian, 1992). Resources are the productive assets of the MNC and

the capabilities are what the MNC can do. Organization capability is the essence of superior

performance but it is important how long that advantage can be sustained. It is important

that the resources and capabilities are durable and there is a danger of imitation. Imitation

can be a problem when resources and capabilities are transferable and replicable. However,

Grant (2008) argues that, well used resources and capabilities leads to sustainable

competitive advantage.


18

4.6. Conclusion

In summary the literature argues that the reason why MNCs are over the long term

successful is that they invest in the three pronged investment approach developed by

Chandler. It has been argued that MNCs who made the three pronged investment are over

the long term successful compared with other corporations who didn’t make the three

pronged investment. The three pronged investment explain how MNCs can be successful,

but it does not explain why MNCs are successful. Second, innovation is possibly the way to

success and MNCs have a high concentration of sources for innovation. Moreover economic

geography is important, and the agglomeration theory is a way to determine why some

regions are more successful. An advantage of economic geography is that MNCs can produce

their products cheaply in low-cost countries. Forth, the economic environment of ToP and

MoP markets is based on rivalry between corporations. For all of the competitors the

consumer is the ultimate target. Finally, to be successful in the ToP markets MNCs need to

develop resources and capabilities. Well used resources and capabilities leads to sustainable

competitive advantage.


19

Chapter 5. Why would MNCs enter the BoP markets and

how can they enter the BoP markets?

This chapter outlines why MNCs would enter the BoP markets. In the previous chapters the

BoP markets environment is described and how and why these people survive. Chapter four

described how and why MNCs are successful. Chapter five outlines what the possible

reasons can be for MNCs to enter the BoP markets.

5.1. Why would MNCs enter the BoP markets?

What could be the reason to invest in the BoP markets for MNCs? This question is obvious

when we look at the pyramid (figure 1). In the ToP markets there live 75 - 100 million

people, in the MoP there live 1.500 - 1.750 million people, put these two together and we

have a market, say two billion people. So there are still four billion untapped consumers in

the world. If a MNC reach even a small part of this market, it could make enormous profits

(Prahalad & Hart, 2002; Prahalad & Hammond, 2002). Besides, the ToP markets are not

growing very fast, usually between one and five percent (Hart & London; 2005). If BoP

markets could be reached they could have high growth rates, because there are a lot of

potential consumers and they have collectively billions of dollars to spend (Prahalad &

Hammond, 2002). This is a big opportunity for the MNCs. MNCs can also increasing the well-

being of the poor while increasing their own profits, thus is a win–win opportunity for both

the people and the MNCs (Prahalad, 2005). MNCs need thus to start thinking about a

marketplace with all six billion people, the whole pyramid (Prahalad & Dearlove, 2009).

Kuriyan, Ray & Toyama (2008) and Karnani (2006) critique the BoP model and the above

statements. Kuriyan et al., (2008) showed with a case study of the Akshaya project that

there is now evidence that there is a fortune for MNCs at the BoP markets. The study

showed that even though the poor were treated as customers, they are not the primary

customers. The main consumers are those in the middle class, because they can afford to

pay for the products. This argument can be overruled because the people in the BoP have

nothing to spend per capita but their buying power as a group is quite large (Prahalad &

Hammond, 2002).

Moreover, the intensive competition in ToP and MoP markets could motivate MNCs to

consider positioning brands in the sub-urban and rural segments (Dubey & Patel, 2004).

Another argument is capital, De Soto (2000) estimated that there are trillions of

unregistered assets that belong to the people in the BoP markets, which operate in the


20

informal economy, and therefore remain invisible (Hart & London, 2005). The assets of the

poor can become available on the market, which leads to an enormous capital injection.

Finally BoP markets are hotbeds of commercial and technological experimentation (Prahalad

& Hammond, 2002). Prahalad (2004) argues that the BoP is a forum for innovation for MNCs.

MNCs can experiment in what is the right approach to make money in the BoP, but it also

helps in the MoP and ToP markets.

5.2. What are the challenges for MNCs in the BoP markets?

Search and select good SLEs

MNCs need to search for SLEs. This is very difficult, because these entrepreneurs are not

visible for MNCs because they operate in the informal economy and therefore it is very

difficult for MNCs to find local entrepreneurs and cooperate with them (Hart & London,

2005). It is important to get related with trustable entrepreneurs (London & Hart, 2004).

Corruption is a massive problem in the BoP markets. Most of the governments in the BoP

markets are corrupt. Investing in these countries is thus very risky (Hart & London, 2005).

When corruption can be avoided, building strong relationships based on trust with SLEs is

another big challenge. To avoid high transaction costs, MNCs need to cooperate for a long

time with SLEs (Meyer, Estrin, Bhaumik & Peng, 2008). When MNCs have selected SLEs to

cooperate with, it is very important that there is mutual trust and so creating embeddedness

in the BoP markets (Hart & London, 2005). Embeddedness is important and gives an

advantage above competitors because it takes a lot of time to create embeddedness (Uzzi,

1997). Gulati (1998) argues that MNCs with structural embeddedness can create bigger

social networks. With these networks MNCs can share more information with SLEs and can

develop sustainable relationships in the BoP markets. According to Prahalad (2004) it is

important for MNCs to invest in relationships by providing training, education and farm

inputs. Thereby familial, ethnic and religious culture is a part of trust in a relationship. MNCs

need to create insights before entering in these cultures to build strong relationships with

SLEs (London & Hart, 2004). So, to create trust and to be fully embedded with the local

partners, it is important that MNCs build a system of governance from the bottom up, which

is also necessary for avoiding corruption (Hart & London, 2005).

Cooperating with SLEs

In the BoP markets MNCs operate in the formal economy and can help the people with

legalizing their assets. The benefits for the MNCs are that they can cooperate with these

local entrepreneurs in the formal economy. For SLEs and local people it takes months to


21

legalize their assets, but for ‘richer’ people or MNCs it is done in a day (De Soto, 2000). So,

MNCs do not face with this problem and they can help with legalizing assets of SLEs.

Creating a functioning distribution system

Another challenge is creating a functioning distribution system and social network. MNCs

need to get their products where the people of the BoP live. These regions are difficult to

reach for MNCs because they are far away from the developed world. Strategies must focus

on personal brand relationships, with local institutions being retailers or distributors

(Cruickshank, 2009). Hereby local knowledge is important. Selecting good partners is

important because these partners know the urban markets. New local information could be

given by these partners and so could MNCs create a social network. And the bigger the social

network, the bigger the performance of the corporations in the network (Gulati, 1998).

MNCs must developed strategies to reach the people in the rural areas. Social networks

could be the key to creating a functioning distribution system.

New marketing approach

A big challenge is, MNCs should target the vast untapped rural markets in developing

countries with low-cost services and appropriate business models (Prahalad, 2004;

Rajagopal, 2009). Outdated assumptions of the ToP markets are not useful for the BoP

markets. The people in the BoP markets have almost nothing to consume, most of the time

less than $2 dollars per day. MNCs that want to sell products to the poor cannot sell the

same product for the same price as they do in the ToP markets. The MNCs can take over a

frequently used slogan in Asia “same same but different”, what means seems similar but

different in some ways. The price of the products must be very low otherwise these people

cannot consume the products. MNCs could sell products in small units at lower price points

(Rajagopal, 2009). But critiques argue that the smaller the packaging, the higher the costs

per unit (Laudrum, 2007). Another marketing strategy of selling to the poor can be selling to

consumer communities (Rajagopal, 2009; Cruickshank, 2009). Every member of the group

invests in the product and the group buys the product. Brand promotions are important for

creating brand loyalty. Strong brands are doing well in the ToP markets because these

brands have a high impact on ToP markets consumers (Rajagopal, 2009). When penetrating

in the BoP markets, people are largely influenced by the consumption needs, promotions,

lifestyle and societal indicators that affect consumer behavior in relation to purchasing

featured brands of upstream markets (Rajagopal, 2009). Some scholars question if MNCs

serving a need to the people in the BoP markets or creating a need where none previously

existed (Laudrum, 2007; Karnani, 2006). Akula (2008) argues that MNCs must focus on a


22

profit-oriented approach in order to access commercial advantage. The profit-oriented

approach is needed because the people in the BoP need products that give a direct

advantage. The profit-oriented approach also leads to brand loyalty and eventually help, the

brand to be mass produced (Akula, 2008). MNCs could capture market share by offering

higher quality goods at lower prices while maintaining attractive margins (Prahalad &

Hammond, 2002). MNCs need thus to positioning global brands in the BoP markets but with

different conditions, such as a lower product price. Brand umbrellas are one possible

solution, the premium brands for the ToP markets and discount brands for the BoP markets

(Wood, Pitta & Franzak, 2008). This is a totally new selling proposition for MNCs. According

to Rajagopal (2009) MNCs can do three things to be successful. MNCs need to increasing

their sales volumes and augmenting consumer value. The MNCs needs to be socially and

culturally embedded. Finally the brands must be co-created and positioned by the influence

of ToP market brands

Selecting the right target market

Research found that the poor are not the primary customers of ICT kiosks. The main

consumers are those in the middle class, who can afford to pay for relevant applications on

an ongoing basis (Kuriyan et al., 2008). These findings confirm Karnani (2006), who indicates

that the profit margins are modest when targeting the BOP compared to the middle class

and there are none examples that support that MNCs can make a fortune by selling to the

poor. But despite of the examples that there is not a fortune in the BoP markets, it is wise

for MNCs to look for new markets. ToP and MoP markets characterized by intensive

competition, which not only decreased brand share, but has also created price wars,

reducing profit margins and limiting the market growth of firms. Entering the BoP markets

can also be surprisingly cheap because many of them live in big cities and will be even more

in the years to come (Prahalad & Hammond, 2002). This is a good motivation of MNCs to

consider enter in the urban slums or shantytowns, which are still unexplored. Succeeding in

these BoP markets requires MNCs thus to think creatively (Prahalad & Hammond, 2002) and

success in these markets could open the doors for the rural areas in the BoP markets.

Changing “old” structures

Ultimately Prahalad (2005) states that entrepreneurship on a massive scale is the key to be

successful in the BoP markets. Therefore MNCs must change two important things. First,

change their own functioning and second change the functioning of developing countries.

Changing both functioning systems is a task for the senior managers in the top of the MNCs

(Prahalad, 2005). The mindset of these mangers must be changed to create support in the


23

organization of the MNC to operate in the BoP markets. These managers need the

inspiration to implement the new social movement (Bird, 1988). So the BoP markets can

become a part of of the MNCs core business. According to Prahalad and Hammond (2002) it

is wise to send young managers spend a couple of formative years in BoP markets, which

would open their eyes to alternative way, of doing business there.

5.3. Conclusion

Despite the arguments that there is not a fortune at the BoP (Kuriyan et al., 2008; Karnani,

2006), MNCs need to consider entering the BoP markets. Entering these markets MNCs can

experience great success (Dubey & Patel, 2004). MNCs must change some aspects of doing

business because the BoP markets are different from ToP markets. But the main challenge of

the MNCs is to invest in managers with the capabilities to change the organization and the

general culture of the MNC, because the MNCs must focus on the BoP markets in stead of

the ToP markets. The best conclusion gives Prahalad (2005), and that is that

entrepreneurship on a massive scale is the key to over win the challenges in the BoP

markets.


24

Chapter 6. Conclusion & Recommendations.

The last chapter provides the answer to the main question. The main question as stated in

chapter 1 is “What do MNCs have to do to be successful in the BoP markets? The research

questions provide sufficient insights in this topic, so this literature review study answers the

main question. The conclusion, discussion and recommendations are presented in this

chapter.

6.1. Conclusion

There are several aspects which can be helpful for MNCs to be successful. But before

pointing out what MNCs could do a short overview of the reasons why MNCs should invest

in the BoP markets is presented. First, there are a lot of potential consumers in the BoP

markets with a lot of unregistered assets. Second, the ToP and MoP markets are influenced

by intensive competition. Finally, the BoP markets are hotbeds for innovation and

technological experimentation.

To be successful in the BoP markets MNCs need to invest in the same aspects as they

already do in the ToP and MoP markets. Therefore investing in the three pronged

investment is necessary to be successful in the BoP markets. Investing in economies of scale

and scope are important for MNCs because they can capture market share by offering higher

quality goods at lower prices while maintaining attractive margins. Furthermore it is

important for MNCs to sell slightly different products to the BoP consumers, both selling

smaller units as different brands. The investment in marketing, distribution and purchasing

networks is a point of discussion as well. Namely, BoP markets need a totally new marketing

approach (Prahalad & Hammond, 2002), this is because MNCs need to change their selling

proposition from push to pull factors (Rajagopal, 2009). The BoP markets are still

unexplored, so MNCs need to invest in relationships with local distributors. First they need

to search and select the right partners to cooperate with. These partners give information

and enhance sales revenue. Using these partners MNCs can setup a new functioning

distribution system and social network. Investment in good managers is of major

importance. Good managers can change the mindset of the organization. They must

demonstrate their entrepreneurial skills to make this step forward. Figure 4 illustrates the

above statements.


25

The three pronged investment

Economies of Marketing, Distribution Managers

scale and scope and Purchasing Networks

* More production caused * New marketing approach * Change mindset of the

by more people (from push to pull) managers working for the MNCs

* Different selling units * Search and Selecting the right partners * Invest in junior managers for creating

* Different brands * Creating a functioning distribution sustainable interest in the BoP markets

system / network

Figure 4: The three pronged investment focused on the BoP markets

Second, MNCs need to innovate from the BoP up and should not follow the traditional

practice of serving the BoP markets by making minor changes. SLEs can survive in the BoP

markets because of their creativity. MNCs should analyze this creativity and should translate

it to their own business operations. MNCs need to cooperate, help and finance the SLEs in

advancing their own success. MNCs must help SLEs by legalize their assets and connect the

SLEs to each other. If MNCs can legalize the firm and the assets of SLEs, their assets become

available on the market which results in an enormous capital injection. Legalizing their assets

gives SLEs the opportunity to invest in their own firm. When SLEs are legal, MNCs can invest

in them by providing micro finance. Connecting the SLEs with MNCs creates social and

purchasing networks which involves bigger markets with more interaction with each other.

Together they have the power to innovate and create a total new selling proposition for the

BoP markets. Some challenges are difficult to beat, but they can be beaten. But in almost all

cases, MNCs need to cooperate with the governments of the countries and with the SLEs.

Therefore MNCs need good (senior) managers which are prepared to invest in these

markets. So, in the end, entering the BoP markets will be determined primarily by one

factor; the willingness of MNCs to enter and invest in the BoP markets (Prahalad &

Hammond, 2002).

6.2. Discussion and limitations

This thesis is a literature review study, which implies that there is no empirical evidence

coming from this study. Therefore the conclusions are based on recent literature. A

limitation of this study was that there is not yet real evidence in combining the literature.

Literature which contains BoP market information is most of the time very recent and is

based on assumptions which are not yet proven. This does not apply with regard to how and

why MNCs are successful. This literature contains a lot of historical data and therefore is the

basis for the conclusions. The new assumptions are connected to the historical data. This

model can be the basis for further research.


26

6.3. Academic and practical recommendations

Research on BoP markets is becoming more and more popular. In the beginning of this

millennium Professor C.K. Prahalad was one of the first who mentioned that there is a

fortune at the bottom of the pyramid for MNCs. Last April Prahalad is past away, but in the

last decennium several scholars tried to find evidence to verify Prahalads statement. This

evidence is not found yet and therefore it can be said that this study is based on

assumptions. Further research must focus on empirical data. Especially on how MNCs can

use the three pronged investment and how they can help SLEs. Scholars must cooperate

with MNCs who are already active or want to invest in the BoP markets. Cooperation with

each other can give enormous insights in this field. It is wise for MNCs to start small projects

with young managers which are willing to invest in the BoP markets. Scholars can use the

outcomes of the projects to find the missing evidence. If the outcomes are positive, the

MNCs enjoy first mover advantages above their competitors.


27

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Documents

The Bottom of the Pyramid (BoP)