8. Developing Native Capability

If MNCs are to thrive in the twenty-first century, they must broaden their base and share their gains more widely, they must play a central role in narrowing the gap between rich and poor, and they must incubate and commercialize the disruptive technologies of tomorrow that leapfrog us toward a more sustainable world. These objectives cannot be achieved if companies produce only so-called “global products” for consumption primarily by rich consumers. They must come to understand and nurture local markets and cultures, leverage local solutions, and generate wealth at the lowest points on the pyramid. Producing in rather than extracting wealth from these communities will be the guiding principle. The objective is indigenous enterprise, co-creating technologies, products, and services to meet local needs and building local businesses from the bottom up.

To do this, MNCs must combine their advanced technology and global reach with deep local understanding. Although technology is important, strategies for the base of the pyramid cannot be realized without engaging local people. Indeed, efforts led by MNCs or development agencies trying to “solve” the problems of the poor or impose technological solutions have generally failed. For MNCs, the best approach is to marry their global best practices with newfound local knowledge and understanding gleaned from widening the corporate bandwidth.

But whether an MNC enters the BOP directly or collaborates with an NGO or entrepreneur from the base, the development principles remain the same: New business models must not be disruptive to the cultures and lifestyles of local people. An effective combination of local and global knowledge is needed, not a replication of the Western system. This combination requires the development of a new, native capability to complement competencies in global efficiency, national responsiveness, and learning transfer that most MNCs possess. As organic agriculture pioneer Wes Jackson says, we must figure out how, once again, to become native to this place.¹

Expanding Our Concept of the Global Economy

To date, our tendency has been to take a very narrow view of what constitutes “the economy.” We have framed the global economy, especially in the rich countries of the First World, as consisting exclusively of wage labor within firms that produce goods and services. We have focused almost exclusively on a narrow range of macroeconomic indicators, such as GDP per capita, thereby failing to take into account myriad other forms of economic activity that are critically important to people around the world. Not surprisingly, then, when we attempt to impose this model of global capitalism on the rest of the world, we encounter significant resistance precisely because we have failed to appreciate how the majority of people in the world currently live.

Scholars such as J. K. Gibson-Graham have pointed out, for example, that the formal money economy represents only the tip of the iceberg of economic activity in the world (see Exhibit 8.1). Beneath the formal, private sector–based economy lies not only the public sector (schools, governments, agencies) and the informal economy (barter, self-provisioning, moonlighting, household production), as we have seen, but also myriad other arrangements and activities, such as producer cooperatives, communal enterprises, not-for-profit organizations, volunteering, gift giving, and what Hazel Henderson calls the love economy: work performed without pay by hundreds of millions of mothers, fathers, aunts, uncles, and grandparents in raising their families.²

Exhibit 8.1. The Global Economy Expanded

Source: Adapted from a slide first created by Ted London.

When we add all of these activities together, they total many times what we record in our official GNP numbers in measuring the health of the economy. Our narrow measure is one reason, of course, why so-called developing countries look so anemic when it comes to economic growth and success: The majority of actual economic activity is taking place beneath the surface, in the public-sector, informal, and love economies. That is not to say that these economic activities are always efficiently accomplished, equitably distributed, or environmentally sustainable. Indeed, as we have seen, there are literally billions of people at the base of the economic pyramid whose needs are still being poorly met or who are actively exploited by extractive local producers, warlords, or despots.

The opportunity, therefore, is to expand our concept of both the economy and capitalism. Neither is a monolithic idea. Markets are ubiquitous throughout the world, from street vendors in the Third World to the New York Stock Exchange. A more inclusive form of capitalism can catalyze and spawn a range of economic activities and practices, even in those sectors that are currently considered noncapitalist (the informal sector, cooperatives, and family-based enterprise).

Capitalism, in other words, need not be hegemonic: Through the strategies they create, companies can expand the scope of the global economy beyond its current focus on the production of commodity goods for the wealthy in the formal economy. Similarly, the global financial system can expand its horizons beyond its current preoccupation with the free movement of capital, which has served primarily the interests of the wealthy while destabilizing foreign currencies and further impoverishing the poor, to become a truly effective tool in spreading opportunity and fighting poverty.

As businesspeople, we must now awaken to these possibilities. By creating a more inclusive form of enterprise, one that is based in the local context and built from the bottom up, we can combine the best of both worlds—the resources and technological capacity of the formal economy, and the indigenous knowledge, human face, and cultural understanding of the informal sector and love economy. This is fundamentally different from the idea of corporate social responsibility, which relies on mere philanthropy to compensate for the damage done by conventional (alien) business strategies; instead, I am proposing that companies develop a new sense of intimacy with and embeddedness in the world so that they might better understand the real problems that need to be solved for the majority of humanity.³ The profit motive, seen through this lens, then serves to accelerate the pace of positive change by solving problems and creating new wealth, not by extracting resources from the many only to give them to the few.

As we saw in the last chapter, widening the corporate bandwidth through radical transactiveness is an important first step in the development of native capability, the skills and competencies needed for firms to become thoroughly embedded in the local context. Not surprisingly, becoming indigenous requires firms to bridge the formal and informal economies because development at the base of the economic pyramid does not follow traditional patterns found in the developed world. As my colleague Ted London at the University of North Carolina suggests, this means focusing on what is positive in the BOP, not just what is negative (corruption) or missing (Western-style institutions). The successful distributed energy and microloan ventures discussed in previous chapters, for example, show that small-scale, decentralized initiatives are well matched to the conditions in low-income markets. Indeed, they meet those markets’ conditions better than the developed-world mantra of centralization of control and economies of scale, which require rule of law and well-functioning central institutions from the outset.

There is much to be learned from analyzing the strategies and practices of actual ventures—for-profit as well as not-for-profit—focused on the BOP. As Ted London and I found in our study of BOP-based ventures, successfully serving the base of the pyramid appears to require a completely different strategic approach.⁴ In the sections that follow, I describe some of the critical skills and practices underpinning native capability that have emerged from our ongoing study of BOP ventures during the past four years.

Engage First, Design Second

As we saw in Chapter 5, “The Great Leap Downward,” when Cemex issued its “Declaration of Ignorance” regarding the use of its cement products by low-income customers in Mexico, it gave a group of managers the challenge of living in the shantytowns for six months, to develop a better understanding of the constraints and problems faced by do-it-yourself homebuilders. There was one additional requirement: that they not think about cement at all during their time in the shantytowns. This prohibition, as it turned out, was a critically important one. Freed of the burden of the short-term commercial agenda, the Cemex managers were able to win the trust of the local people, which ultimately led to new and unanticipated insights into how the company might better serve their needs. It also yielded a key insight about how to become indigenous: Local engagement should always precede product or service development. The Patrimonio Hoy program, with its wonderful embeddedness in the local shantytown environment, would never have happened if the project teams’ primary objective had been to simply sell more cement.

When it comes to entering the BOP, then, large corporations must resist the temptation to behave like the proverbial child with a hammer, to whom everything begins to look like a nail. Pushing the company’s existing products and solutions onto shantytown dwellers and rural villagers may indeed produce incremental sales in the near term, but will almost certainly fail in the long run because the solutions remain alien; witness Nike’s failed attempt to introduce an athletic footwear product in the BOP. Hewlett-Packard, on the other hand, clearly acknowledged the importance of engagement before design by establishing its Living Laboratory in Kuppam, India, set up as a listening post to better understand and identify how information technology might be used to benefit those at the base of the pyramid. Indeed, through extended engagement, HP has identified several potential new services and business models that it would have otherwise never seen. After living in Kuppum for an extended period, for example, it became evident to HP staff that there was an unmet need for secure storage of important documents. This led to the launch of a new business (Surakshita Dakhalalu), a service which provides for the digital scanning and storage of important documents for a charge of about 40 cents per entry.

A precommercial period of engagement is thus essential to do the deep listening required to develop empathetic understanding. Building trust also enables managers to engage in two-way learning with local people. The poor may, in fact, help them to see the shortcomings in their own company—and perhaps even their way of life. As journalist Tom Friedman noted in his book The Lexus and the Olive Tree, people everywhere need the material wealth and sustenance supplied through work, trade, and the market as symbolized by the Lexus. However, people also need the olive tree—the sense of belonging, community, connection to nature, and larger purpose that comes from family, tribe, tradition, religion, and other nonmaterial sources.⁵

Today the top of the pyramid, particularly in the U.S., has more than succeeded in supplying the Lexus for its people; in fact, obesity and overconsumption have become increasingly common, suggesting that, as a culture, we have overshot the mark on this dimension. However, the olive tree has, for some time, been in retreat at the top of the pyramid: Career mobility, urbanization, and the automobile culture have served to undermine family, erode communities, and dampen a sense of belonging to place. Religious fundamentalism may be seen, at least in part, as a compensatory response to the progressive loss of the olive tree in modern society.

The situation is exactly the opposite at the base of the pyramid: While lacking in the Lexus dimension, Third World communities still earn their livelihoods in ways consistent with the preservation of their cultures and of their natural environments. The olive tree continues to thrive, despite threats from resource extraction, environmental degradation, and cultural disruption. It is here that those of us at the top of the pyramid can rediscover community and the wisdom of indigenous systems of agriculture, industry, shelter, water, and medicine if we allow ourselves to look.

In northern Nigeria, for example, a local teacher, Mohammed Bah Abba, was motivated by his interest in indigenous African technology to seek a practical, local solution to the problems of food spoilage, which causes disease and loss of income for thousands in the area.⁶ Northern Nigeria is an impoverished region where people in rural communities eke out a living from subsistence farming. With no electricity and, therefore, no refrigeration, perishable foods spoil within days. Bah Abba’s extremely simple and inexpensive earthenware pot-in-pot cooling device is starting to revolutionize lives in this semidesert area. This technology, which draws upon the ancient art of pottery and employs local pot makers, requires no external energy supply to preserve fruit, vegetables, and other perishables in hot, arid climates. The innovative cooling system consists of two earthenware pots of different diameters, one placed inside the other. The space between the two pots is filled with wet sand. The water contained in the sand between the two pots evaporates toward the outer surface of the larger pot, where drier outside air is circulating. The evaporation process causes a drop in temperature of several degrees, cooling the inner container, destroying harmful microorganisms, and preserving perishable foods. Bah Abba launched an enterprise using more than 500 local potters as producers to make them available to the rural poor. By 2004, he was producing tens of thousands of pots annually with a retail price of about $1, and the enterprise had grown to encompass three additional countries in Africa, including Chad, Cameroon, and Niger.

Through engagement, then, we can awaken to new possibilities. In the process, we may discover the potential for new products and services—not to mention new ways of living—that could never have been envisioned before. For decades, Peace Corps volunteers have learned this lesson firsthand. When they first join, most young volunteers expect that they will be applying “advanced” knowledge from the rich countries to “help” the poor. Upon completion of their assignment, however, most freely admit that they learned more from the poor whom they were supposed to be helping, than the poor did from them.

For corporations, it may be difficult to truly engage because of the baggage associated with the existing commercial agenda—the tyranny of the current core competencies. For example, although focused on engagement, and an ecosystem approach to identifying needs and leverage points, HP still built its Kuppam i-community primarily around IT; similarly, Cemex sent its managers into Mexico’s shantytowns to learn about poor homebuilders, even if they were also instructed to forget about cement sales, at least for a while. The mindset associated with the current business still blinds managers to new possibilities.

One way to overcome such biases is to put together consortia to do the engagement work. Including representatives from different industries might make it possible to cross-fertilize ideas and for each industry to stimulate the others. A consortium that included a wider diversity of industries might have been able to see that, despite their best intentions, Cemex’s preoccupation with cement blinded it to the potential for leveraging more sustainable building methods as part of its offering. Furthermore, the presence of a microfinance expert might have been able to see that, in addition to creating a mechanism for paying for building materials, the Patrimonio Hoy program might incorporate a service to help shantytown dwellers gain legal title to the houses they build. Engagement thus opens up the possibility of identifying real needs from the point of view of the local people themselves. It also helps to focus and direct the technology and product development required to become truly native to a place.

Coinvent Custom Solutions

Companies interested in developing responsive technologies and products at the base of the pyramid can learn much from fields such as rural sociology, applied anthropology, and empathy-based design. Indeed, techniques such as participatory rural appraisal, rapid assessment processes, and quick ethnography open up valuable ways to hear the true voices of marginalized populations and begin the processes of understanding, mutual learning, and the creation of responsive strategies.⁷ All these techniques stress the importance of codeveloping custom solutions to problems through two-way information flow. Rather than imposing pre-existing solutions from above, the emphasis is on working with local partners to codesign every aspect of the product or service, including its delivery.

In our study of BOP ventures, Ted London and I discovered that successful initiatives—those that became embedded in the local community—maximized the functionality of the product or service in terms that were important to local users. This often meant allowing the product and business model to coevolve. As one of our respondents indicated, successful initiatives require “everybody who touches it to make money.”⁸ Poorly performing ventures, on the other hand, tended to view the value proposition in terms of the product itself and often completed the development process at a geographically distant location, such as the corporate R&D center, before the business model was designed.

WorldSpace Corporation, for example, was created to provide direct satellite delivery of digital audio communications and multimedia services to the underserved emerging markets of the world, including Africa, the Middle East, Asia, and Latin America. The WorldSpace satellite network, which was launched in the late 1990s, consisted of three geostationary satellites capable of delivering more than 40 channels of crystal clear audio and multimedia programming directly to portable receivers, enabled with a proprietary chip. To recoup the cost of the satellite infrastructure, WorldSpace priced receivers in the $250–$500 range. Ultimately, it expected this unique global service to transmit quality information, education, and entertainment programming to a service area that included five billion people.⁹

Founder Noah Samara’s original vision was to use direct audio broadcast via satellite to stop the spread of AIDS in Africa, but that horizon quickly expanded. In addition to spreading knowledge to make people healthier, better educated, and more aware of the precious environment in which they live, WorldSpace was also seen as a vehicle for bringing the poor the best music and literature of their native cultures, along with those from the great cultures of faraway lands.

Although the technology development associated with the WorldSpace venture was impressive, the company ultimately failed to secure a critical mass of users. Receiver price was clearly a roadblock to widespread adoption. However, even more significant was the company’s inability to provide programming that users found useful or compelling. Because it relied on the central generation of content to be broadcast to large areas in the developing world, the company was unable to accommodate the varying tastes and priorities of local users. The centralized nature of the business model virtually prevented the kind of codevelopment and coevolution that is crucial to success. Despite its best intentions, WorldSpace was an alien technology, unable by its nature to develop a local face.

Contrast this with the approach taken by rural IT provider N-Logue.¹⁰ Employing a specially designed wireless local loop (WLL) technology developed by the Indian Institute of Technology in Madras, N-Logue was able to offer village-based communication services through a coinvention strategy. The business model consists of three levels of interdependent networks. At the corporate level, N-Logue facilitates the relationships among the wide range of organizations (equipment vendors, NGOs, content providers, and government) that enable and support the entire system. At the next level, N-Logue maintains a regional network of franchised Local Service Partners (LSPs) who work in tandem with the corporation to set up Access Center nodes to which individual kiosk operators are connected. At the lowest level, local microentrepreneurs are recruited by the LSPs to establish village-level kiosk franchises that provide Internet and Voice over IP telephone access to the local population.

The kiosks essentially function as combination rural Internet cafes and pay phone booths. While N-Logue provides kiosk owners with training, support, and technical assistance, and LSPs provide some general content platforms that they might adopt, the local microfranchisees themselves are responsible for deciding upon the actual product and service offerings and marketing strategies they will use. These have included not only access to specific content, based on the local needs of villagers, but also computer training classes, CD-ROM movie viewing, and other specially tailored services. Allowing kiosk operators to develop their own business strategies has resulted in locally appropriate solutions and new offerings that are difficult to develop within a centralized business structure.

As the N-Logue example makes clear, the context-specific nature of the base of the pyramid dictates that companies adopt a participatory approach to product and service development, in concert with local users. Coinventing custom solutions thus extends far beyond the idea of being locally responsive (adapting pre-existing solutions to local conditions), which pervades most of the thinking about global strategy in MNCs. To develop native capability, then, companies must learn how to coinvent and coevolve products and services so that they are appropriately embedded in the local ecosystem and culture from the start.

Experiment with Low-Cost Probes

To facilitate the development of native capability, multiple low-cost experiments appear vastly superior to a single, large-scale market probe. Small-scale experimentation offers the potential for rapid and continuous learning, as well as for modular scale-up if the experiment proves successful. Low-cost probes also make it easy to shut down failed projects before they become expensive burdens on the company. Such initiatives must be evaluated for funding using a separate set of criteria and metrics, however, because they will almost never meet the short-term revenue and profitability targets associated with projects designed to expand existing businesses.

In this regard, it is beneficial to use a real-options approach rather than rely exclusively on the more conventional discounted cash flow logic to evaluate these projects.¹¹ Real-options analysis brings the logic of the private equity market into the firm, with an expected payoff in the time frame of five to seven years rather than the excessively short-term logic associated with conventional capital budgeting or excessively long-term logic associated with traditional R&D.¹² It effectively segments the project into several affordable chunks so that the decision to move forward can be made iteratively, after the completion of each stage, rather then through an “all-or-nothing” decision at the start of the project.

Without the flexibility afforded by real-options analysis, there will be the inevitable tendency to convert BOP experiments into philanthropy. This pitfall should be avoided at all cost because experience shows that giving away technology rarely succeeds in solving the problem.¹³ The fact that it is often easier to convert BOP initiatives into corporate donations than it is to make the case for running them as viable business experiments shows how inflexible most MNCs are when it comes to project evaluation and capital budgeting. The solution is to broaden the analytical lens for investment rather than taking the easy way out through the corporate foundation.

P&G, for example, has struggled to make the business case for its nutritional beverage drink, Nutristar, and its point-of-use water purification technology, PuR—both new products targeted at the BOP. Both have gone through multiple rounds of small-scale market experimentation. Each stage has produced important information about how best to adapt the business model for successful commercialization. Unfortunately, multiple rounds of market probes do not stack up very well using discounted cash flow analysis as the measuring stick. The champions for each of these projects are now under intense pressure to turn them over, at least in part, to the philanthropic arm of the company. As George Carpenter, vice president for Sustainability at P&G, noted, however, philanthropy is a trap: Giving away such new technologies can never be financially sustainable because the scale of the problem far exceeds the corporate foundation’s ability to address it.¹⁴

Creating a separate pool of investment capital to fund such low-cost probes, along with a separate organizational entity to house them, is one way to address this challenge. Without this early protection, the logic of short-term performance in today’s business will almost certainly guarantee failure.¹⁵ Nike’s failed attempt to commercialize the World Shoe through its current production and marketing infrastructure makes this point only too clearly. Indeed, as Clay Christensen and Michael Raynor point out in their new book The Innovator’s Solution, with disruptive new ventures, it is important to be impatient for profit, but patient for growth because it takes time for such ventures to reach the point of being scaleable.¹⁶

When it comes to the base of the pyramid, Christensen and Raynor’s observation may be even more important because evidence suggests that when the point of scale-up is reached, growth can proceed at an explosive rate. For example, C. K. Prahalad shows that the time frame for new technology and product diffusion, which may take 10–15 years to play out in the developed market, is being collapsed into a short period of perhaps 3–5 years in the BOP.¹⁷ The implication for MNCs is clear: Don’t give up on BOP ventures if they appear to be stalled after a few years; they may be just reaching the point that they are ready to take off—and when they do, be prepared for a rapid ascent!

Fly Under the Radar

World Water Corporation was founded in 1984 in response to a perceived vacuum in private business activity supplying water and power in developing countries.¹⁸ With help from a team of Princeton University engineers, the company developed its first patented product in 1992, a solar thermal power system. Since then, it has added proprietary photovoltaic technology, most notably the AquaSafe solar powered water pump. This technology can pump 10 times the volume of any other solar water pump in the world—more than 2,000 gallons of water per minute from rivers and other surface water. The technology can also be used to pump ground water up to 1,000 feet deep, to bring up clean water from wells. Given that water shortages are expected to be a major problem in the twenty-first century, the company was confident that its powerful solar water systems would find a big market worldwide. Based upon this optimistic projection, the company went public in 1997.

By 2000, World Water Corporation had established operations in 17 developing countries. Typically, the company worked through the central government to sign long-term agreements to serve as consultant and contractor for water and energy programs, with a focus on rural areas. For example, World Water signed an agreement to become master consultant and contractor for all water and energy programs for the newly elected government in Somalia in 2000. The company had signed similar agreements in Pakistan and the Philippines, working with the leadership of both countries. The pilot phase of the Somalia project was worth $2.5 million and was planned to cover 25 communities.

To ensure that these very poor countries actually pay for their equipment and services, the company deals only in hard currency; it also seeks to collect down payments of 10–15 percent at the start of each project. World Water also teams up with American banks and international financial institutions where possible to help the countries pay for the projects.

Unfortunately, despite World Water’s best efforts, the unstable and corrupt nature of its clients’ governments has put the viability of the company at serious risk. The highly visible nature of the agreements makes the scale and scope of the agreement—and the potential profit for World Water—readily apparent to a broad range of bureaucrats, government officials, and others who might benefit from either derailing the project or currying favor before it is allowed to move forward.

As a result of these problems, the company’s international business prospects have soured considerably. Over the past few years, in fact, it has sought to increase its presence in the U.S. market, particularly California, where a combination of water scarcity and electric power interruptions make World Water’s product attractive. World Water’s stock price did not budge, despite the heady projections for growth in 2000: It was still trading at about 30 cents per share in August 2004.

Contrast this experience with the one described in Chapter 6, “Reaching the Base of the Pyramid,” for ApproTEC, the Kenya-based venture focused on technology and microenterprise development for the rural poor in East Africa. ApproTEC also focused on water pumping in the Third World but took a very different approach, both technologically and in terms of business model. As we have seen, ApproTEC’s Moneymaker Microirrigation Pump is manually operated by small farmers and was codesigned with them to ensure product acceptance. At less than $100, the pump was directly affordable by the end consumer, meaning that ApproTEC could launch its business on a small-scale basis and allow it to grow organically over time. It bypassed the need to deal with the central governments of Kenya and Tanzania, thereby avoiding the complexity and corruption that World Water exposed itself to.

In short, ApproTEC, like most other successful ventures in the BOP that we have been able to identify, flew under the radar of corruption, thereby avoiding all the problems that go along with having to deal with difficult—and changeable—central regimes. By constructing a business model that went directly to the user and building it up from a local base of support, ApproTEC was able to engender trust and gain experience with the user community. This helps to avoid the corruption trap of bribes and “speed money” associated with weak central governments or failed states. Avoiding dependence on central institutions—national governments, corrupt regimes, and central infrastructure planning—thus appears to be a critical aspect of native capability. In the final analysis, while both ApproTEC and World Water sought to help the rural poor gain better access to clean water, the former was able to become indigenous while the latter remained alien.

It is ironic that large corporations are willing to invest in massive—and often risky—projects while eschewing the smaller-scale, bottom-up approach described earlier. The belief that it is necessary to start big to get big is pervasive and may prove to be one of the most vexing challenges when it comes to serving the poor. Enron, for example, invested more than $2 billion in its Dabhol energy project in India, only to see the investment go up in smoke when corruption, changing political winds, and unacceptably high electricity prices turned stakeholders against the project. This aborted project also cost the American taxpayers more than $700 million in foregone loan guarantees by the Overseas Private Investment Corporation. What might have happened if even a fraction of this money had been invested in small-scale experiments in distributed energy generation?

Work with Nontraditional Partners

Ventures that face challenging new environments usually need to turn to partner organizations for missing resources and expertise. Indeed, governments often require MNCs to have a local corporate partner to ensure market access in emerging economies. Tarun Khanna and his associates, for example, have shown that partnering with the large business conglomerates in the developing world—the chaebols, grupos, and business houses—helps MNCs fill the institutional void by ensuring property rights, capital availability, and political support.¹⁹

When entering the base of the pyramid, however, firms may need to dramatically expand the potential field of alliance partners because the large national players familiar with the ways of global capitalism seldom serve the rural poor or shantytown dwellers in their own countries. Indeed, in our analysis of BOP ventures, Ted London and I found that successful strategies (such as ApproTEC’s) rely heavily on nontraditional partners, including nonprofit organizations, community groups, and local (even village-level) governments. Unsuccessful strategies (such as World Water’s), on the other hand, tend to rely on traditional partners, such as national governments and large local companies. Not surprisingly, these traditional partners are as far removed from low-income markets in terms of knowledge and experience as the firms trying to launch the venture.

One BOP venture in Kenya, Honey Care Africa, created a particularly interesting three-way partnership with the private sector, the development sector, and the local community. Honey Care was established to make beekeeping accessible to poor farmers and to create a domestic source of high-quality honey for Kenya. The company has achieved success by doubling the income of many poor farmers, providing high-quality honey for the Kenyan market, and creating economic, social, and environmental value for local communities. Today Honey Care is the largest producer of high-quality honey in East Africa.²⁰

Traditionally, Kenyan communities used log hives, baskets, or clay pots for beekeeping. Unfortunately, although they were cheap to set up, these crude techniques produced small volumes of poor-quality honey. Honey Care thus based its business model on making advanced (yet context-appropriate) beekeeping equipment available to these small farmers. They procure this equipment from a third-party producer and sell it to a development-sector partner, which, in turn, works with local microcredit institutions to provide financing for small farmers to purchase the equipment. The company guarantees a steady income for the farmers by committing to purchase all their honey production, ensuring a loyal source of supply. Honey Care then sells the honey to distributors and retailers for sale to end consumers. The company has established a virtuous circle by creating a collaborative model that enables it to better understand and leverage the local social context. By working with nontraditional partners who were embedded in the local scene, it has been able to become indigenous while leveraging its core competencies in equipment procurement and marketing.

As another example, Bata, a leading retailer of shoes with operations throughout the developing world, has entered into an innovative partnership with the NGO Care in Bangladesh to gain access to rural areas in the country where their products have yet to penetrate.²¹ Bata’s products are well-suited to the BOP; indeed, they have developed a line of low-cost ($2-$5) yet high-quality shoes and sandals. Care, which has been in Bangladesh for more than 50 years, has invested extensively in entrepreneurial training for rural women. Indeed, Care has trained in excess of 80,000 poor rural women throughout the country to run micro-enterprises, which include small grocery stores, handicraft production and retailing, commercial dairy operations, and bicycle rental businesses. By partnering with Care, Bata gains access to this network of rural microentrepreneurs interested in expanding their businesses to include shoe sales. In exchange, the rural women gain visibility and credibility as business people because few in the rural areas have any direct affiliation with a multinational brand. If the Bangladesh experiment is successful, the model could be spread to many other countries throughout the developing world.

Working with nontraditional partners thus means going far beyond the typical focus on customers and suppliers. By including civil society, community groups, and local players, firms are better able to understand and leverage existing strengths in the environment rather than trying to change that environment to resemble the Western way. Nontraditional partners provide intelligence on the local context, local legitimacy, and access to needed resources, none of which is available to MNCs attempting to go it alone.²²

Build Social, Not Legal, Contracts

Despite the advantages of working with nontraditional partners, MNCs have tended to ally themselves with the small number of entities in the developing world that understand the current global capitalist system, value their existing products, and respect intellectual property. Not surprisingly, local partners have most often been large domestic firms, central governments, or state-owned enterprises, whose primary business experience is centered on the urban elite in the developing world. As my colleague Ted London likes to point out, however, reaching the base of the pyramid requires entry strategies that move past preoccupation with Western-style rule of law and intellectual property protection because these do not exist in the base of the pyramid.²³

As anyone who has traveled extensively in the developing world knows, counterfeit products and knock-offs abound, whether we are talking about Rolex watches, Nike running shoes, CDs and videos, computer software, or prescription drugs. Given the high cost structure and fat margins associated with most products for the top of the pyramid, companies depend on intellectual property protection—patents, trademarks, and copyrights—to guarantee their franchise. Viewed from this perspective, the Third World appears hostile to MNCs, a place where value will be hijacked rather than added. However, when we look from the perspective of those at the base of the pyramid, we begin to see other commercial models.

In the informal sectors, relationships are primarily grounded in social, not legal, contracts, and the organizations with the most expertise in serving these populations—local government and civil society—have a strong social orientation. As the experience of the Grameen Bank clearly demonstrates, successfully operating in this space requires a capability to understand and appreciate the benefits of the existing social infrastructure, not complain about its lack of Western-style institutions. Grameen’s lending model, for example, entails no legally enforceable instruments whatsoever. Because there is no collateral, legal papers would be useless. If a borrower defaults, the bank staff works with her to restructure the debt or plan an alternative repayment schedule. The entire business model is based upon social capital and trust.

Although Nike’s World Shoe venture was a commercial failure, it did, at the very least, demonstrate that the best way to deal with the counterfeit problem is not by using legal remedies against Third World countries, but rather by attempting to create products that poor people can actually afford. This requires a very different strategy, cost structure, and business model. Rather than cajoling its existing contract manufacturers in Asia to produce the low-end World Shoes (there was little incentive do so because they were rewarded based on contribution margin), what if Nike had chosen to partner with the counterfeiters instead? Indeed, counterfeit producers possessed exactly what Nike lacked—production capacity—as well as distribution capabilities to reach precisely the low-income markets that Nike was trying to capture. Nike could have provided a dramatically improved shoe design (with the real Nike Swoosh) and also transferred its social and environmental practices to the counterfeit producers, a potential win-win for both parties, not to mention the workers, customers, and the environment. The result might have been a business model that competes based on social capital, quality, and value for money rather than trademark and legal protection.

Perhaps the pharmaceutical industry could also benefit by focusing on social rather than purely legal contracts. At present, the search for new drugs is focused almost entirely on the (often cosmetic) afflictions of the rich while overlooking the fatal illnesses of the poor. Indeed, medicines against tropical diseases like malaria, sleeping sickness, and tuberculosis make up a miniscule 1 percent of new drug patents. Lack of patent protection (and inability to pay) are usually cited as the reasons for this disproportionate figure. The reality, however, is that ignorance is to blame: Few people in pharmaceutical companies really know anything about either the challenges or the opportunities in the Third World.

Drug companies defend their current, lucrative markets in places such as the United States by agreeing—sometimes under duress—to run either tiered pricing programs (as with AIDS drugs) or drug-donation programs (as with Merck and river blindness treatment). Neither approach is financially sustainable: Any effort to seriously address the public health crisis that rages in the Third World through drug give-aways would bankrupt the industry. But what if the drug companies began with some real engagement, perhaps through low-cost probes, to develop commercial businesses in poor communities selling drugs that have already gone off patent (for example, pain relievers are sorely needed but are often unavailable). Such an initiative would work wonders for the industry’s tarnished image around the world and would also build a direct relationship with the people most in need. Through this experience, the firms might also be able to identify some new and creative ways to address the public health problems of the world’s poor—and make money doing it. Indeed, Western drug companies ignore this space at their peril: The Indian pharmaceutical industry, for example, has already learned, out of necessity, how to deliver drugs coming off patent in the U.S. at a fraction of the cost charged by the established drug companies.²⁴

Neville Williams, founder of SELCO, the largest supplier of solar electric home systems in India, argues that the key to success in the BOP is trust, not technology.²⁵ SELCO has built a reputation among the poor by making solar electricity affordable (through a network of participating banks) and reliable (through the creation of solar service centers). Because the poor are frequently exploited by predatory lenders and unscrupulous vendors, SELCO’s reputation for fair dealing, dependability, and continuing care has become the key to its growth (about 30 percent per year). Indeed, Williams believes that trust and social capital form the real basis for sustainable competitive advantage at the base of the pyramid: Once poor customers come to trust you, they are disinclined to leave because most have experienced only poor service, unscrupulous vendors, or blatant exploitation. As Shell and other MNCs begin to enter the solar electric home system business, they are realizing that the business model is more important than the technology. There is a reason why many in India now refer to solar home electric systems generically as “SELCOs.” The reason is trust—and trust cannot be copied.

Moving Beyond the Transnational Model

The current transnational model emphasizes global efficiency (world-scale production and global supply chains), national responsiveness (modifying products and operations to suit country differences), and worldwide learning (sharing experience across units within the firm) as the crucial capabilities for a successful multinational corporation.²⁶ As Ted London’s work and our joint analysis of BOP ventures has shown, however, these conventional capabilities are clearly inadequate. In fact, at times, reliance on these in the context of the BOP can actually be damaging.²⁷

For MNCs to flourish in the twenty-first century, it appears that they must acquire a new capability—a native capability—to complement their existing skills. Native capability requires that MNCs expand their conception of the global economy to include the varied economic activities that occur outside of the formal, wage-based economy. They must embrace the informal, barter, household, and love economies, and tailor their business models to enhance the way people currently live. Creating sustainable livelihoods means strengthening local communities and restoring the environment, not extracting resources and forcing people to move in the pursuit of factory jobs. Spanning these worlds provides the basis for developing the climate needed for business to thrive by building respect for agreements, transaction transparency, and mutual trust. Indeed, MNCs, in partnership with local entrepreneurs, NGOs, and local governments, can help build a system of governance from the ground up rather than waiting for corrupt central governments to reform.

Native capability means learning to engage extensively with the local people on their terms in a true spirit of mutuality. It means working on bottom-up coinvention of more sustainable ways of living. It means experimenting with small-scale, low-cost probes and flying under the radar to work directly with local communities, rather than seeking to cut deals with corrupt central regimes or national champion firms. It means working with nontraditional partners—civil society, communities, and town and village governments—where the real knowledge about local conditions resides. And it means building the business model around social rather than legal contracts because trust and social capital are the lingua franca in the BOP.

Native capability enables the corporation to become truly embedded—part of the local landscape rather than an alien force that imposes its will from the outside. Embeddedness takes time to develop and cannot be quickly duplicated by competitors. Competitive advantage is then based upon deep understanding of and integration with the local environment. Companies earn it by creating a web of trusted connections with a diversity of organizations and building on the available social infrastructure. Rather than looking to overcome limitations in the environment—such as a lack of central institutions and rule of law—native capability emphasizes the crafting of strategies that build on existing conditions and resources.

Unlike the conventional transnational model, which focuses on transferring proprietary resources from within the firm, native capability assumes that the critical knowledge for success lies beyond the firm’s boundaries. MNCs, not their local partners, are the ones that must do the unlearning. Given that, competitive advantage is premised less on protecting existing proprietary technology or intellectual property, and more on developing trust and social capital. Generic principles and learnings from specific settings, however, can and must be transferred and applied in other BOP contexts; that is how the capability is fostered and spread. The time has come for MNCs to move beyond the traditional conception of transnational success. And developing native capability is one of the keys to creating a truly sustainable global enterprise.

Notes

¹ Wes Jackson, Becoming Native to This Place (New York: Counterpoint, 1994).

² J. K. Gibson-Graham, The End of Capitalism (As We Knew It) (Oxford: Blackwell Publishers, 1996); J. K. Gibson-Graham, “A Diverse Economy: Rethinking Economy and Economic Representation,” working paper; and Hazel Henderson, Beyond Globalization (West Hartford, CT: Kumarian Press, 1999).

³ My thanks to Ted London for letting me borrow the wonderful concept of “social embeddedness” from our joint work together. I should also acknowledge the work of Mark Granovetter who first articulated the phrase: “Economic action and social structure: The problem of embeddedness.” American Journal of Sociology, 91(3) (1985): 481–510.

⁴ This exploratory study, which has been conducted through the Base of the Pyramid Learning Laboratory over the past four years, involved on-going interviews with dozens of MNC managers, 24 original BOP venture case studies, and analysis of archival materials. For details, see Ted London and Stuart Hart, “Reinventing Strategies for Emerging Markets: Beyond the Transnational Model,” Journal of International Business Studies, 35 (2004): 350–370.

⁵ Thomas Friedman, The Lexus and the Olive Tree (New York: Anchor Books, 2000).

⁶ See “Nigerian Wins Prize for Developing Clay Pot Cooler,” www.mclglobal.com/History/Sep2000/29i2000/29i0t.html. I thank Erik Simanis at UNC for drawing it to my attention.

⁷ Robert Chambers, Whose Reality Counts: Putting the First Last (London: ITDG Publishing, 1997); James Beebe, Rapid Assessment Process: An Introduction (New York: Altamira Press, 2001); and W. Penn Handwerker, Quick Ethnography (New York: Altamira Press, 2001).

⁸ Ted London and Stuart Hart, “Reinventing Strategies.”

⁹ See World Space Corporation Frequently Asked Questions, www.worldspace.com.

¹⁰ For a more complete description of N-Logue, see Joy Howard, Charis Simms, and Erik Simanis, Sustainable Deployment for Rural Connectivity: The N-Logue Model (Washington, D.C.: World Resources Institute, 2001).

¹¹ See M. Amran and N. Kulatilaka, Real Options (Boston: Harvard Business School Press, 1999); and M. Milstein and T. Alessandri, “New Tools for New Times: Using Real Options to Identify Value in Strategies for Sustainable Development” (paper presented at the Academy of Management Annual Meeting, Toronto, Ontario, 2000).

¹² Richard Foster and Sarah Kaplan, Creative Destruction (New York: Doubleday, 2001).

¹³ The experience with the appropriate technology movement and foreign aid programs over the past 40 years leaves little doubt that giving technologies to the poor fosters neither the pride of ownership nor the personal stake needed to ensure continued utilization.

¹⁴ George Carpenter, presentation at the Sustainable Enterprise Academy, York University, Toronto, Canada, April 2004.

¹⁵ See Clayton Christensen, The Innovator’s Dilemma (Boston: Harvard Business School Press, 1998).

¹⁶ Clayton Christenson and Michael Raynor, The Innovator’s Solution (Cambridge, MA: Harvard Business School Press, 2003).

¹⁷ C. K. Prahalad, The Fortune at the Bottom of the Pyramid (University of Pennsylvania: Prentice Hall, 2005).

¹⁸ See www.worldwater.com/company_history.htlm.

¹⁹ See, for example, Tarun Khanna and Krisna Palepu, “Why Focused Strategies May Be Wrong for Emerging Markets,” Harvard Business Review July–August (1997): 41–51.

²⁰ See “IFC-Backed Kenyan SME Project Wins Sustainable Development Prize,” 7 January (2003), http://web.worldbank.org.

²¹ My thanks to Jesse Moore of Care Canada for this example, which he presented at the Base of the Pyramid Learning Laboratory in September 2004.

²² Dennis Rondinelli and Ted London, “How Corporations and Environmental Groups Cooperate: Assessing Cross-Sector Alliances and Collaborations,” Academy of Management Executive 17(1) (2003): 61–76.

²³ See Ted London and Stuart Hart, “Reinventing Strategies.”

²⁴ C. K. Prahalad, The Fortune at the Bottom of the Pyramid.

²⁵ Neville Williams, personal communication, April 2004.

²⁶ See, for example, Chris Bartlett and Sumatra Ghoshal, Managing Across Borders (Boston: Harvard Business School Press, 1989); and C. K. Prahalad and Yves Doz, The Multinational Mission (New York: Free Press, 1987).

²⁷ Ted London makes this case most persuasively in his Ph.D. dissertation: How Capabilities Are Created: A Process Study of New Market Entry (draft) (Chapel Hill, NC: University of North Carolina, 2004).