June 18

Manuel Bueno

PhD Thesis Takes the Pulse of Base of the Pyramid Businesses

Last October 2008 Stuart Hart visited Erasmus University in Rotterdam as a committee member of the PhD defense of Martin Klein from the Erasmus School of Economics at Erasmus University.

Martin has now founded ‘Business for Development’, a BoP business development company focused on stimulating founding new BoP businesses in partnership with other organizations. Unfortunately his webpage does not have much information yet, but parts of his doctoral thesis can be freely downloaded. It is indeed an important document to take into account; while summarizing what we know about starting and developing businesses at the BoP, it also develops this body of knowledge from the perspective of both BoP practitioners and academics.

Martin’s thesis examines the most common postulates of what it means to work at the BoP level thanks to an extensive survey of 143 BoP firms working in 105 countries, and prods into what exactly are the challenges and opportunities that these firms encounter. In this line and among other findings, he shows that there are several issues which are constant along the lifetime of a BoP business, such as external corporate governance and challenges related to developing a strong market position. Other issues were perceived to be relevant at some points in the growth cycle of the business, but not in others. For example, the struggle to remain profitable or finding ways to keep on growing only became important concerns after some other operational milestones had been passed.

Martin also develops a management support model for developing profitable pro-poor business models by incorporating additional variables to the business model. These variables provide criteria for the development of profitable pro-poor business models and may be a factor in explaining why some firms succeed at the BoP while others fail.

Furthermore and not surprisingly, many of the challenges and opportunities found by these firms are very much context-specific. Thus a firm has to be willing to adapt as much as possible to the local conditions in order to thrive. Here, Martin makes clear that often BoP businesses are often asked to be contrasting things. For example, on the one hand, BoP businesses have to become highly specialized and embedded within the local markets, while also having to remain flexible to gain scale and exploit other local markets.

Martin here finds that robustness has a larger effect on financial performance than does flexibility. He also finds that social value creation improves financial performance whereas adopting environmentally friendly practices does not seem to have such a positive effect. As a result, he suggests that maybe additional incentives and monitoring mechanisms are needed at for BoP ventures until it pays off financially to be environmentally friendly.

In my opinion, Martin also sheds light into some interesting tensions that underlie surviving in these markets. For example, if a firm is highly specialized to the local market, then what learning is most relevant and applicable to other BoP businesses? Martin argues that this is a false dychotomy. BoP businesses have indeed much to learn from each other, not less thanks to the soft skills acquired in their management. He vouches in favor of finding ways to stimulate more connections among businesses to avoid “reinventing the wheel” and to share insights and lessons learned.

Another important tension is the clash between formal and informal economies. BoP businesses belong to the formal economy, but the local markets in which they are embedded are most often highly informal. To build the reciprocity and trust required to succeed in these markets, BoP businesses should tap into the entrepreneurship and customer knowledge that underlies informal economies. At the same time, working in the formal market facilitates cooperation and enables growth by reducing market imperfection and transaction costs. Still, finding the ideal middle ground is not an easy task.

Martin finishes off by pointing out areas of future analysis. Previous research has shown that NGOs may be particularly valuable partners for BoP businesses, but it remains unclear how exactly or in which cases they may be particularly relevant. Moreover, a full assessment on the long-term contribution of BoP initiatives to poverty alleviation is yet to be done.