Building boundary capabilities at the base of the pyramid
| DOI | https://doi.org/10.1108/JEPP-02-2013-0007 |
| Pages | 111-133 |
| Date | 13 April 2015 |
| Published date | 13 April 2015 |
| Author | Stephen Mezias,Mohamad Fakhreddin |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Building boundary capabilities at
the base of the pyramid
Stephen Mezias and Mohamad Fakhreddin
INSEAD, Abu Dhabi, UAE
Abstract
Purpose –Over the last 15 years, articles about the base of the pyramid (BOP) have begun to appear
in scholarly business journals. Although attention was driven initially by claims that corporations
could earn a fortune selling to these consumers, it became clear that this is difficult. The paper aims to
discuss these issues.
Design/methodology/approach –To move beyond this difficulty, the authors emphasize the
iterative boundary capabilities built by local, for profit enterprises as the key to creating markets at
the BOP.
Findings –The authors argue that the evolution of the business models to permit firms to earn profits
and have positive social impact requires building iterative boundary capabilities and support this
claim by reviewing two cases of community based non-profits.
Research limitations/implications –Future research should demonstrate that the process the
authors observed in these two cases applies in other contexts. Scaling social impact will require
sharing knowledge about iterative boundary capabilities and developing best practices that can help
effective allocation of patient capital to share best practice and guide public policy.
Practical implications –Social entrepreneurs can conceptualize their own enterprises in terms of
iterative boundary capabilities. Social investors can use the framework to assess and advise
enterprises in which they may or have invested. Policy makers can enact laws and other legal actions
to facilitate the formation of iterative boundary capabilities.
Social implications –The authors see the framework as part of a broader move toward business
models that pursue both positive social impact and profits.
Originality/value –The authors link a structuring approach with an institutional perspective to
enhance business models that pursue profit and create positive social impact in BOP communities.
Keywords Developing countries, Social entrepreneurship, Informal institutions, Local knowledge
Paper type Research paper
Introduction
More than 15 years ago, Prahalad and Liberthal (1998, p. 109) chided large firms from
the developed world for targeting only very wealthy customers in fast growing
emerging markets. The result, they argued, was that multinationals were missing an
opportunity to “[…] reach much larger markets further down the socioeconomic
pyramid.”Prahalad and Hart (2002, p. 4) took the argument a step further, claiming
that global corporations could earn a “fortune”selling to the world’s poorest people.
To highlight the opportunity, the authors arranged the world’s population in a pyramid
by income, with the four billion who earned less than US$1,500 per year at the bottom;
thus, this segment has come to be known within the business literature as the base of the
pyramid (BOP) (Prahalad and Hammond, 2002; Prahalad and Hart, 2002; Hammond et al.,
2007). These claims have catalyzed considerable attention from business scholars; indeed,
after excluding books, chapters, and teaching cases, a recent review of the BOP concept in
business publications for the period from 2000 to 2009 found over 100 articles (Kolk et al.,
2013). Even more striking than the extent to which the BOP concept has gained traction
among business scholars is the fact that many of the attempts by large corporations to
engage with the BOP segment have failed. Karamchandani et al. (2011, p. 107) summarized
Journal of Entrepreneurship and
Public Policy
Vol. 4 No. 1, 2015
pp. 111-133
©Emerald Group Publis hing Limited
2045-2101
DOI 10.1108/JEPP-02-2013-0007
Received 5 February 2013
Revised 16 December 2013
30 January 2014
Accepted 4 February 2014
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
111
Building
boundary
capabilities
this checkered history as follows: “Despite the extentof the markets and thevolume of the
hype, few multinational firms have built sizable businesses serving people who survive on
just a few dollars a day. Companies sense that profits in this market are elusive, and the
evidence backs them up.”This is not an isolated contrarian view; Simanis (2012, p. 120),
a participant in multiple corporate BOP ventures, offered a similarly dim prognosis:
“Stories of well-meaning commercial ventures that couldn’t make sustainable profits are
all too common in low-income markets.”
This failure of large corporations to grow their businesses by engaging with the
BOP has not changed the reality that emerging markets are increasingly important to
the global economy. 2013 marks the fifth year during which there has been little or
negative growth in the developed economies; by contrast, emerging markets broadly
have continued to grow even during the worst periods of the “global”recession.
Slowing growth in the so-called BRIC countries (Brazil, Russia, India, and China) has
garnered much attention, but this does little to change the overall forecast for growth in
emerging markets, as the trend is hardly limited to four countries. Recent empirical
work suggested that growth through 2050 would be considerably faster in many
emerging economies than in the developed world (Hawksworth and Cookson, 2008, p. 3).
For example, between 2000 and 2005, six of the world’s ten fastest-growing economies
were in sub-Saharan Africa; projections suggest that growth in Africa will outpace
Asia through 2016 (The Economist, 2011). Atsmon et al. (2012, p. 1) cast prospects for
emerging economies in a particularly positive light: “By 2025, annual consumption
in emerging markets will reach $30 trillion –the biggest growth opportunity in the
history of capitalism.”Clearly, enthusiasm for the growth potential of emerging
markets is well founded; nonetheless, an important aspect of this growth hasreceived
little attention. Much of the current growth in emerging markets originates from
increases in the purchasing power of new middle class consumers, but continued
growth will require the economic integration of billions of very low-income people
living in urban slums and rural villages (Hammond et al., 2007).
While the record of large corporations to accomplish this integration may not be
a particular cause for optimism, the BOP literature has provided some important lessons.
As Kolk et al. (2013, p. 16) observed, recent business scholarship focussed on the BOP
has recognized “[…] a more complex relationship between profitability and poverty
alleviation than originally thought.”Of course, many of the original articles admitted
this complexity even as they espoused optimism that may have contributed to
underestimation of the challenges. For example, the early pieces by Prahalad and
colleagues (Prahalad and Liberthal, 1998; Prahalad and Hart, 2002) argued that
engaging with the BOP would not be business as usual; they advocated considerable
adjustment of the strategies, design, processes, and mindsets. For the most part, these
strategies failed as well, despite their explicit assumption that BOP market entry was
complex. Simanis (2011, p. 104) summarized the continuing difficulties: “[…] time and
time again, there has been a strange disconnect: Low-income consumers have shown
little interest in companies’basic-needs products. This happens even when companies
send anthropologists and R&D teams into slums and villages to create pro ducts and
business models tailored to local conditions.”
After the fact, it seems rather obvious that a major characteristic of the BOP may be
relevant to this continued failure of attempts by multinational firms to enter BOP
markets. The vast majority of economic activity in these locations is informal and
non-monetized; there is no market to enter! To be clear, this is not a claim that there are
no transactions or that value is not assessed and created by exchange; our claim is
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