Creating mutual value: Lessons learned from ventures serving base of the pyramid producers☆
Introduction
Over the past several years, the concept of designing economically viable ventures to serve the base of the pyramid (BoP) has gained considerable prominence (Prahalad and Hart, 2002, Prahalad, 2004). More for-profit and non-governmental organizations (NGOs) are developing ventures that serve BoP producers and consumers, and development agencies are increasingly supporting these efforts (Commission on the Private Sector and Development, 2004, Gardetti, 2007, Hammond et al., 2007, London et al., 2007, Growing Inclusive Markets Initiative, 2008). Furthermore, an increasing number of authors across a variety of disciplines are addressing this topic (Rangan et al., 2007, Rosa and Viswanathan, 2007, Kandachar and Halme, 2008, Viswanathan et al., 2008a).
Driving this interest is the view that pursuing business ventures designed to serve the BoP offers new insights on both market opportunities and poverty alleviation (Prahalad and Hammond, 2002, Hart, 2005). In theory, ventures targeting this socio-economic segment operate under the proposition of mutual value creation, which suggests that creating more value for the BoP creates more value for the venture (London, 2008). Although presenting a new and intriguing perspective on the relationship between venture performance and poverty alleviation, this view of mutual value creation still remains a proposition in need of deeper assessment (London, 2009).
Furthermore, although the BoP have unmet needs as both consumers and producers, the focus has been on the former (Hammond and Prahalad, 2004, Karnani, 2007, Viswanathan et al., 2009). To date, most of the related discourse has centered on how business ventures can create the new capabilities and business models to serve new markets (London and Hart, 2004, Hart, 2005). Although valuable, this work has yet to address the specific constraints that BoP producers face and approaches used by ventures to address these challenges.
The goal of this study is to narrow the gap in understanding of the constraints faced by BoP producers and the strategies that ventures use to address these constraints. In particular, the purpose is to explore how business ventures serving BoP producers can generate mutual value. This work moves the BoP domain from a primary focus on “consumers and capabilities” to incorporating a greater understanding of “producers and constraints.” In doing so, the study will contribute to a more holistic appreciation of the various roles that market-based ventures can play in serving the needs of the BoP (Growing Inclusive Markets Initiative, 2008).
This paper begins with a review of the BoP literature, including the need for a greater assessment of the proposition of mutual value creation and an increasing focus on producers at the BoP. Next, the discussion focuses on the methodology used to assess business ventures serving BoP producers. The following sections discuss the findings from this analysis, including creating a framework that categorizes the constraints faced by BoP producers and identifying the strategies that ventures employ in alleviating these constraints. The last section of the paper summarizes the lessons learned from this study and offers direction for future research that will further improve understanding of the opportunities for business ventures to create mutual value with BoP producers.
Section snippets
Mutual value creation
Since its initial articulation in 2002 (Prahalad and Hammond, 2002, Prahalad and Hart, 2002), interest in BoP literature continues to gain momentum. At its core, literature on business ventures serving the BoP socio-economic segment relies on the proposition of mutual value creation. These ventures are expected to generate acceptable economic returns to their investors and provide valued societal returns to the local community in which they operate (Hart and Milstein, 2003, London and Hart, 2004
Importance of BoP producers
While the BoP socio-economic segment is viewed as both a market to sell goods to and producers to potentially source goods from, most of the research conducted to date in the BoP domain focuses on the market opportunity perspective (Hammond and Prahalad, 2004, Hammond et al., 2007). This research advises organizations on the importance of developing new capabilities that emphasizes “social embeddedness” or the ability to understand, leverage, and build on the local social infrastructure present
Study design
The goal was to better understand the constraints faced by BoP producers and the strategies used by BoP ventures to overcome them. Additionally, the study contributes to the assessment of the proposition of mutual value creation, which is a central tenet of BoP literature. Instead of viewing the BoP as consumers for whom ventures must acquire new capabilities to effectively serve, this study considers how organizations can create mutual value by addressing the barriers that BoP producers face
Sample selection
In this research undertaking, a detailed understanding of the potential population was developed by using several overlapping steps. The first phase of research began with a search by four researchers of ventures serving BoP producers. To provide a framework to the search, the BoP was defined as the socio-economic segment that lives primarily in the informal sector. Furthermore, ventures that straddled the formal and informal economies were targeted. These ventures purchased goods from BoP
Methodology
The sixty-four ventures were first analyzed to determine the general types of constraints faced by BoP producers. This was an iterative data analysis process conducted by the research team. For this stage, the secondary data collected was primarily used. In this assessment, the goal was to review the design of the ventures to gain a deep understanding of the local constraints that their specific business models sought to address. The information on the ventures was sufficiently rich enough to
Constraints faced by bop producers
Based on the analysis of these sixty-four ventures, the root causes of challenges faced by the BoP producers were traced to six constraints. These constraints limit the ability of the BoP producers in value creation as well as value capture. Constraints on value creation, referred to as productivity constraints, relate to a producer's ability to access affordable and high-quality raw material, financial, and production resources. On the other hand, constraints on value capture, called
Venture types
A further assessment of the data focused on whether these sixty-four ventures varied by type, particularly with regard to the products sourced from BoP producers. The analysis identified an important difference: while some ventures sourced products that were currently being produced locally, others encouraged BoP producers to develop new offerings (see Fig. 2).
Additional analysis indicated a key difference within ventures that sourced existing products. A number of these ventures focused on
Venture strategies to address constraints
The categorization described above was used as a basis to select a sub-set of ventures for in-depth assessment. The goal for this analysis was to identify specific strategies employed by ventures to overcome the constraints faced by BoP producers and explore how they varied across the sourcing of different types of products.
Arts/crafts and agriculture together comprised over 95% of the ventures surveyed, with agriculture ventures consisting of nearly 50% of that total. Given the critical role
Conclusion
The BoP literature has gained popularity by suggesting a synergistic connection between business strategy and poverty alleviation. This relationship centers on the proposition of mutual value creation; that by employing business strategies that alleviate local poverty, a venture will also generate greater economic returns. An in-depth analysis of ventures serving BoP producers is performed in order to assess this proposition.
Studying BoP producers offers a second opportunity to contribute to
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The authors would like to thank CARE Enterprise Partners for its support for this project and Erica Allen for her research assistance. They would also like to thank two anonymous reviewers and Special Editor Madhu Viswanathan for their helpful comments on drafts of this work.