Management of cross-sector collaboration in BOP-markets

This chapter outlines the research question and focus of this study. The importance and significance of this work is demonstrated by introducing the reader to the research context and identifying the research gap. The structure of this study is specified in Section 1.2 and illustrated in Figure 1.

Research question and focus:

Poverty is one of the biggest problems of our times. World leaders realize that poverty is the underlying cause for terrorism, forced migration and other social and environmental problems perceptible to developing as well as developed countries. Although the goal of poverty reduction is recognized as a high priority on political agendas and receives enumerable funds from aid organizations, traditional models of development have proven inadequate and often counter-productive. In response, academia, politicians and the business world itself proposed that the private sector should play a more active role in solving this problem. By stimulating commerce and development in low-income markets, multinational corporations (MNCs) can radically improve the lives of the poor while making a profit.

In particular, two main reasons are stated for explaining why MNCs should enter markets at the base of the socio-economic pyramid (BOP). First, while developed world markets are becoming increasingly saturated, low-income markets in emerging economies present a largely underserved market opportunity accounting for four billion people living on less than US$2 a day, totaling US$13 trillion in purchasing power parity. Secondly, emerging markets are the best incubator for disruptive innovations. Consequently, BOP-markets could determine the winners and losers in many industries and herald the rise of new commercial giants. In conjunction, these factors make the BOP a very attractive investment opportunity for corporations.

Furthermore, there are some very important push factors for the engagement of firms at the BOP. Consumers’ and employees’ expectations of companies to meet social goals are more important than ever. In 2006, McKinsey Quarterly surveyed 4,238 global business executives in 16 countries and 4,063 consumers in 7 countries. They reported that, although the sociopolitical concerns of executives and consumers diverge, 84 percent of the executives agreed that corporations should become more engaged in social activities. In 2007, Hill and Knowleton’s „Corporate Reputation Watch” surveyed 527 MBA students from business schools in the USA, Europe and Asia. They reported that 58 percent of students think that corporate social responsibility plays a very important role when considering where to work after completing their MBA. Interestingly, a recent study from IBM in 2008 surveyed 250 business leaders globally and reported that 68 percent see corporate social responsibility as a growth opportunity rather than just a regulatory compliance or philanthropic effort.

Although these surveys show that the BOP is increasingly becoming a strategic imperative for companies, low-income markets still possess some unique challenges. First, the purchasing power of BOP-customers is severely limited by income constraints, which creates major hurdles in designing products and managing costs. Second, companies must overcome imperialistic mindsets to understand that traditional management strategies are insufficient due to the unique social, cultural and institutional characteristics of BOP-markets. Finally, critics of the BOP point out that poor people should not only be viewed as consumers, but as producers as well in order to generate income for the poor. This means, consequently, that companies will have to radically redesign their supply chains. In summary, the unique BOP-context requires that companies develop new capabilities and resources, while at the same time adapting existing ones to the challenging environment.

MNCs are thought to be best positioned for facing these particular challenges at the BOP and, at the same time, fighting poverty, because of their global resource bases, superior technology and operational efficiencies of size and scale. Nevertheless, recent research emphasizes the need for MNCs to partner with non-traditional, local BOP-stakeholders in order to acquire and develop new capabilities and business models. Moreover, cross-sector partnerships – alliances between two or more organizations with fundamentally different governance structures and missions – were identified to be a central success factor in BOP-markets. Indeed, in a recent study from Weiser et al. (2006), two-thirds of the case studies involved companies working in partnerships with non-profit organizations (NPOs).

Although cross-sector partnerships have been around for the better part of a decade, research on this topic has been limited to corporate social responsibility without any particular focus on profitability. Cross-sector collaborations (CSCs) in BOP-markets differ fundamentally from corporate social responsibility initiatives on the point that the autonomous partners engage in an interactive process, using shared rules, norms and structures to coordinate decisions and actions related to a common strategic objective. Considering the historic adversarial relationship, cultural gap and different measurements of success between these diverse partners, CSCs present a major organizational puzzle, and are thus especially difficult to form and implement. Although an empirical study has not yet been conducted evaluating the success rate of CSCs, one could assume from the high failure rate of intra-sector alliances (10-70 percent) that a deeper understanding of CSCs is very crucial. Managers planning to successfully create alliances with NPOs must rely on strategic criteria in order to understand what types of collaborations work best in certain situations, how to leverage a firm’s existing competencies with the resources of its partner and how to develop new capabilities needed for making cross-sector collaborations work.

Given the importance and complexity of CSCs, it is surprising that little of the previous research on BOP strategies has directly examined the organizational structure of these partnerships. One exception is the research by Seelos/Mair (2007) on business models and market creation in low-income markets, and their description of two business models for reducing managerial complexity. Yet, this article presents just two examples of how business models can be structured across partner organizations and fails to give a comprehensive explanation of the organizational processes leading to the successful creation of cross-sector alliances. Another shortcoming of this study is that both case studies are located in Bangladesh, a relatively well-researched BOP market. The study does not provide a mutually exclusive and collectively exhaustive typology of business models for BOP-markets.

In order to address this research gap it is necessary to ask the following research question: How do cross-sector collaborations in BOP-markets emerge and become embedded in organizations? The scope of this paper will be particularly confined to how the different resources of MNCs and NPOs can be configured in order to create sustainable win-win solutions. For this purpose, patterns in four existing cases of cross-sector collaborations from three BOP-markets worldwide will be examined. To analyze these cases, this study uses the Resource-based-View (RBV) as a theoretical foundation and applies insights from literature on strategic alliances. The aim is to advance the understanding of cross-sector collaborations and thereby give managers a comprehensive framework to jointly create financial and social value in BOP-markets.

Chapter 4.1, Case study description:

This section describes the four case studies classified in the formerly outlined categories. In each category, a brief outline of the specific BOP-problem is given to inform the reader of the BOP-market context.

Category one: Fighting the ‘Killer in Kitchen’:

This category consists of two case studies, those looking at the MNCs Shell and British Petroleum (BP) and their partnerships with NPOs in India and the USA to develop sustainable solutions for indoor air pollution (IAP).

More than half the world’s population still uses open fires or inefficient stoves for heating and cooking. The smoke they give off is a lethal source of indoor air pollution that causes 1.6 million deaths each year – one person every 20 seconds – and some two billion more are at risk. It kills more people than malaria and is the fourth largest health threat to women and children (in the world’s poorest countries) after water-borne diseases and poor sanitation, malnutrition and HIV/AIDS. In October 2004, the World Health Organization (WHO) and the United Nations Development Programme (UNDP) labeled IAP the ‘Killer in Kitchen’. IAP is also part of a well-known poverty chain (the poor, not able to afford cleaner commercial fuels, must spend many hard hours collecting „free” biomass fuel), whose indirect costs on time and health are enormous. Cleaner fuels such as electricity and gas have not reached remote developing markets because of high equipment and distribution costs. However, IAP as an issue has failed to attract much donor funding compared to other poverty/health/environmental problems.

Moreover, there are some additional market barriers that make finding a solution to this problem even more difficult. IAP affects mainly women who have little or no status in developing country societies, and are therefore used to tolerating all kinds of hardship without complaint. These women are often ignorant of the health risks posed by inefficient stoves. Furthermore, consumers in rural areas and villages use a multitude of fuel types, most of them without cost. Another challenge is the high distribution costs of new fuels and equipment in rural areas. The combined effect of these market limitations is that there is often a very poor customer-value proposition for new solutions. Consequently, demand is low and marketing costs are high.

To tackle IAP, the Shell Foundation, an independent charitable organization based in London, developed a 5-year strategy in 2002 called ‘Breathing Space’. Breathing Space’s approach is to identify, test and then ideally diffuse ‘market-based’ schemes for solving the IAP-Problem. The strategy is divided into four stages: the Research and Development (R&D), pilot, scale up and growth stages. In the R&D stage, the Shell Foundation carried out a systematic review of the only large-scale household energy programs in the world: the National Improved Chulha Programme in India and the National Improved Stove Programme in China. Additionally, the Foundation conducted a stakeholder consultation and a typical donor „Request for Proposals” (RFP), asking for potentially commercializable and scaleable ways of tackling IAP. The RFP attracted about 140 proposals, primarily from NPOs, of which most addressed the IAP issue but failed to understand what the Foundation meant by commercializable and scaleable solutions to IAP.

The next stage set up pilot projects with some NPO partners in eight developing countries to systematically explore different market-based IAP solutions. These included the development and sale of cleaner stoves, cleaner fuels, use of consumer finance on a micro-credit model, consumer education and reducing costs through mass production and distribution, etc. Only those pilot projects which met all the criteria of a Sustainability Checklist developed prior to, advanced to scale-up stage. In September 2007, the foundation announced a five-year partnership with Envirofit International, a US-based NPO, to introduce the first market-based model for clean-burning wood stove technology to the developing world.

The Shell Foundation provides Envirofit with investment and organizational support to form an independent global entity. In turn, Envirofit International designs, develops, markets and distributes cleanly cooking stoves that are engineered to emit significantly less toxic emissions and use less fuel. This year, the partners plan to distribute 10 million stoves, focusing first on India, Brazil, Kenya and Uganda. Shell sees the start up costs as sunk costs for the market development of industry cook stoves and focuses on higher returns on investments in the growth stage by selling fuel to the newly developed market.

British Petroleum took a different approach to develop fuel-efficient stoves for poor consumers in rural India. Right from the start, BP partnered with three NPOs to jointly conduct market research and finally set up a joint business vehicle in 2005. BP’s non-profit partners are Covenant Centre of Development (a social enterprise), IDPMS (Indo-Dutch Project Management Society, which deals with social justice and gender equality), and Swayam Shikshan Prayog (which offers microfinance and other business development services for the poor). They perform various functions across the value chain together.

Category two: Village phone ladies worldwide:

The two cases in this category provide extremely rich and valuable evidence, because they describe the collaboration of the NPO Grameen Bank with two telecommunication companies on different continents. In 1997, the Grameen Bank partnered with Telenor, a Norwegian telecommunication company, in Bangladesh, the NPO’s home market. In 2003, Grameen partnered again, this time with MTN Group Limited in Africa, the home market of MTN. Thus, the investigation of both cases concerning the same NPO provides more than just „a snapshot in time”, it makes a comparison of different business models of the same organization in different regions and at different periods in time.

The Grameen Bank, founded in 1976 by Professor Muhammad Yunus, for which he was awarded the 2006 Nobel Prize, provides microfinance to millions of poor in villages across Bangladesh and has set up a number of other enterprises to create economic opportunities for the poor. In 1997, Prof. Yunus met with the CEO of Telenor and they decided to form the joint venture Grameen Phone. Telenor owns 62% of Grameen Phone, while Grameen Bank owns the other 38% through a separate organization called Grameen Telecom. Grameen Telecom was set up as the administrative interface for the already existing Grameen Bank. Grameen Phone focuses on middle-class customers in cities and is operated by experienced Telenor managers with the strategic objective of maximizing financial returns. Grameen Telecom’s strategic objective is to create jobs for microentrepreneurs in rural areas, so called „village phone ladies”.

Village phone services allow people to develop their own businesses and provide a direct income opportunity for poor people. They also facilitate repatriation payments and save costly and lengthy trips, for example, to the workplace or legal matters. However, for the phone ladies especially, the social benefits well exceed even the financial reward. Telecommunication also enriches their social lives, as „even the richest person in the village has to come to [the phone lady] to make a phone call”.

Three years after the establishment of the joint venture, in 2000, Grameen Phone became profitable and now has a market share of 60%. Grameen Telecom created more than 250,000 village phone-jobs and provides more than 10% of the revenue of Grameen Phone. However, since late 2006, the Grameen Bank has been in dispute with Telenor over the existing equity structure, of which Telenor possesses 62%.

Grameen expanded to Uganda in 2003 and to Rwanda in 2006. In both countries, Grameen Foundation USA entered into a joint venture with MTN Group Limited, in which both partners have an equity stake of 50%. The joint venture is named Village Phone Uganda and Village Phone Rwanda, respectively, and represents the first replication of Grameen’s village phone concept outside Bangladesh. Both African joint ventures have recorded impressive growth rates and exceeded all expectations. However, the joint ventures of Grameen in Bangladesh and Africa differ in some very important points.