6 reasons companies fail to reach the bottom of the pyramid

An initiative in Mexico aimed at encouraging large companies to engage with the bottom of the pyramid yielded disappointing results. Photo: Global Tribe, (CC BY-NC 2.0)

It is no secret that, when it comes to commercial ventures at the base of the pyramid, our greatest hopes and expectations have been placed on the potential of multinational corporations to mitigate poverty.

Early studies on the BoP relied on the premise that large companies, with their financial muscle, distribution channels, technological know-how and managerial sophistication, are best positioned to meet the challenge of serving the poor. This assumption continues to guide the efforts of multilateral agencies, NGOs and development organizations that work on market-oriented solutions to poverty.

In practice, however, large companies have been less than fully enthusiastic when given the chance to engage the low-income segment commercially.

  

Large companies, large disappointment

Consider a program called “Developing New Market Opportunities for the Base of the Pyramid,” launched in 2006 by the Inter American Development Bank’s Multilateral Investment Fund and the Mexican Business Council’s Private Sector Study Commission for Sustainable Development to drive Mexico’s large companies to develop inclusive business ventures.

It had all the makings of success: a large population of under-served consumers, a growing economy and local companies with the research and development capacity to make innovation happen. After 186 awareness sessions, 65 general workshops and 13 focused workshops – and in spite of generous offers of financial support to participating companies – not a single project came to life.

Faced with this disappointing reality, program organizers adjusted their offering to target small-to-medium enterprises and NGOs, in addition to large companies. Originally viewed as the program’s starring actors, large companies were now on the margins. Even after the initiative was revised, only about a third of all proposals came from large companies, and only half of those were actually executed.

What explains this mismatch of expectations and reality?

Through my research inside large companies, I have identified six internal barriers that prevent large companies from executing BoP strategies.

Disconnect with middle-management

Due to their profound business implications, BoP-oriented initiatives generally cannot be executed by just a group of committed individuals –they usually require a substantial mobilization across the organization. To be effective, coalitions for change must unfold both horizontally (linking functional areas within and across organizations) and top-down (linking organizational leadership with middle management).

This is a tall order for any organization, but is particularly challenging for large organizations with substantial sunk costs embedded in their status quo, which generates a built-in aversion to change.

Coordination among company levels only becomes viable when the new initiative fits in with the organization’s values, processes and routines. The experiences surveyed often revealed a disconnect between upper organizational levels, which push the initiative, and middle management, which is expected to execute it.

Promotora Ambiental S.A.B. (PASA) was one of the few large companies in the sample that remained committed to their BoP initiative. PASA’s initiative blended in naturally with the company’s routines, processes and organizational culture. As PASA’s operations manager put it, the initiative “fitted in naturally with what I did. The project hinged on picking up containers, and that’s what I do at my job. One more container made no difference at all.”

At another multinational, which decided to reach out to the BoP segment following a mandate from its controlling shareholder, middle management began to voice discontent a year-and-a-half into the project, when it became clear the BoP venture was not a success in business terms.

The company had developed a new line of business with an ad-hoc distribution model that largely relied on a cross-sector partnership with a grassroots leader. In the view of middle management, the company provided all kinds of benefits and grants to the social leader, with no accountability for results. Managers’ objections were brushed aside with the explanation that these deviations were understandable on account of the “social work” being done.

The fact that the company’s “social project” had different values and norms than other company projects began to undermine middle management’s support, building a gap between top management’s perceptions and those of the people in charge of executing the initiative.

Management rotations and the loss of a ‘champion’

The business concept and market intelligence supporting a BoP venture are often developed by ad-hoc teams, which develop empathy for their target audiences. But when that data flows to the rest of the organization, or there is a change in leadership, the project comes to be assessed differently. The path from research to pilot, and from pilot to full execution, may run into these “discontinuity spots” several times –and it only takes one of them to kill even the most brilliant idea.

For some companies in the research sample, leadership changes (and the agenda shifts associated with those changes) proved fatal for BoP initiatives. At one of the companies, the marketing development chief officer and BoP project head was promoted to general manager of another company in the group. One interviewee said of the change: “It became harder to secure internal buy-in when the project’s champion was no longer around.”

Of course, all organizations have some level of staff turnover, but large companies that have professional-development plans often decree that managers rotate every few years. The result is that that large companies may have a particularly hard time sustaining innovative BoP ventures.

Opportunity costs of capital and time

Opportunities are not assessed in a void, and the notion of “opportunity cost” means a business will only choose a project if it creates more benefits than the best foregone alternative. A perfectly profitable business proposal may be overlooked if a company has access to even better choices.

Large company executives are pressured to identify lines of business with relevant bottom-line impact; their career development and financial rewards depend on making the numbers. One interviewee said, “The sales manager hated the project and kept telling me, ‘What do I care about the base of the pyramid? … I don’t care what the CEO says; this project is in the red, and my bottom line is taking a massive hit.’”

In contrast, the operations manager at PASA, the company cited earlier that successfully executed its BoP project, said, “It was easy to see that this initiative would benefit our business. It had a direct impact on the metrics used to assess my performance at the end of the year.”

Opportunity costs also apply to managers’ time. Every hour large company executives spend on a low-margin or uncertain project is an hour not invested in developed markets they already know how to profitably service.

As one multinational’s marketing development head noted, “Time is the most costly resource in this corporation, where you put in long hours, your reputation is at stake, and $200,000 is just the fee charged by your lawyer for reviewing the agreement.”

This organizational context creates strong pressures to speed things up and get tangible results quickly – a result that may not be possible with a new and innovative BoP initiative.

Paternalism

Traditionally, the poor in Latin America have been largely viewed as people needing assistance from the government, civil society organizations, and corporate foundations in order to survive. In short, they tended to be seen as passive objects of charity, rather than active economic subjects.

This attitude is not only still prevalent among private-sector actors but also among members of the BoP communities themselves. The population targeted by inclusive business ventures “is very used to grant- and gift-based philanthropy,” according to Carlos Ludlow, USEM’s corporate social responsibility vice president. “Engaging these groups in a company’s value chain calls for a preparation process that may prove highly complex.”

Fundar, an NGO that participated in this pro- gram, reports being hurdled by an ecosystem built on“assistentialism” in their inclusive businesses: “a substantial number of outside (public and private) agents whose intervention offerings are intended to reproduce clientelistic relations, fostering the charity culture.

A zero-sum relationship

The concept of inclusive business assumes that some market-based initiatives can yield synergies between the financial value created for companies and the social value built for communities.

Some interviews revealed that some percentage of those actually executing BoP ventures perceive the relationship between social and economic value as a zero-sum. To them, imbuing a company’s business strategy with a social dimension feels artificial and forced. As an interviewee put it, “Our foundation is already supporting these communities. Why should we engage in that?”

This dissociated approach may lead to a false choice between one path or the other. An interviewee argued, “The worst that can happen is for the BoP notion to be associated with philanthropy and social responsibility. It should be a much more detached concept. Ideally, companies should view it shamelessly as an opportunity to make money with the poor.”

Risk aversion

Earlier research on disruptive innovation has established that organizations with significant investments in their status quo tend to resist change and risk taking. That basic pattern seems to hold true at large companies experimenting with BoP ventures.

As one multinational’s marketing development head said, “This company has no appetite for risk. If the president has to choose between earning an additional 10 percent or doubling our business with a 50 percent failure risk, he will consistently lean towards the first choice.”

Similarly, a sales and strategic planning department’s project leader reported that her company retraced its steps on its BoP project because the segment was riddled with uncertainty. She said, “They couldn’t risk venturing into an area with no information available.”

Conclusions

This research suggests that creating adhoc terms, values, processes or routines for BoP ventures may build a gap between the “BoP team” and the rest of the organization. Separating the inclusive business from the assets and capabilities that make an organization successful in its core business will turn the inclusive business venture into a cost unit used to enhance the organizations’ reputation but yielding no attractive returns.

Other barriers uncovered stem from the very structure of large companies and are unlikely to disappear. It may be best to just acknowledge and adjust to them. Our analysis suggests that large companies will find it more feasible to incorporate low-income groups in established markets, where companies can quickly turn them into suppliers and consumers. It makes more sense to leave the development of new customers in innovative industries, with disruptive technologies, processes and structures, to other organizations that are more flexible and risk-acceptant.

This column was adapted from the article “There is a fortune at the BoP: Why aren’t large corporations grabbing it?,” published in the INCAE Business Review. Read the full article here.

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About the author

  • Ezequiel reficco

    Ezequiel Reficco

    Ezequiel Reficco, PhD, is a professor of strategy at the Universidad de Los Andes School of Management in Colombia. His research and consulting is focused on social entrepreneurship and on inclusive business models that target the base of the pyramid.