Base of the Pyramid Markets in Affluent Countries

Innovation and challenges to sustainability

Stefan Gold, Marlen Gabriele Arnold, Judy N. Muthuri, Ximena Rueda, Stefan Gold, Marlen Gabriele Arnold, Judy N. Muthuri, Ximena Rueda

• Publisher: Routledge
• Year: 2021
• ISBN:
  9780429752223
• Edition: 1
• Topic: Économie
• Subtopic: Conditions économiques

The Frugal Innovation and Bottom of the Pyramid Markets series comprises four volumes, covering theoretical perspectives, themes and various aspects of interest across four key geographical regions where BOP markets are located - South America, Asia, Africa and more engineered countries. BOP always addresses the poorest people or socioeconomic order or groups within a country, society, region or continent, t hus, this series contributes a profound understanding of BOP markets across the most important geographical areas around the world and presents valuable insights on how the private sector can work together with other stakeholders to develop and operationalize economically viable business models in BOP markets, all the while contributing to sustainable development. Private actors such as multinationals, SMEs and entrepreneurs have a critical role to play in achieving the Sustainable Development Goals agenda as laid down by United Nations in September 2015. Yet, BOP markets face unique challenges and the private sector alone cannot orchestrate sustainable value creation activities.

Each volume presents several theoretical strands that highlight the diverse approaches and solutions to developing BOP markets further. Frugal, reverse and inclusive innovations can foster (sustainable) development and provide new business models and value streams that other countries can also benefit from. A variety of stylistic elements, such as research work, interviews and roundtable discussions, offer a wide and vivid impression of ongoing challenges and fruitful solutions.

Part I

BOP markets

1 The Base of the Pyramid markets in affluent countries

Opportunities and challenges

Stefan Gold Wolfgang Bichler-Riedl

Introduction: Economic development in affluent countries and BOP

With globalisation, average income has been increasing steadily for developed nations with the exception of the global financial crisis of 2008. This is shown in Figure 1.1 for OECD countries. Other indicators monitoring differing forms of wealth also illustrate that the industrialised world provides opportunities and financial possibilities. For example, gross domestic products (GDPs) have been rising continuously, except during the financial crisis (OECD, 2019a), and graduation rates for upper, secondary education has been steadily growing within the OECD region towards an average of 86% in 2017 (OECD, 2018).

Figure 1.1 Development of GDPs in OECD countries.

Source: OECD (2019a).

However, not every individual partakes in this development in the same manner. For years, the percentage of income of the richest parts of society has been increasing – especially since the 1960s – which has been decoupled from the general GDP growth (Andrews et al., 2010). Several more instances of inequality are prevalent and often stir hot debates in contemporary societies; for example, precarious working conditions have been rising across developed countries (Kalleberg, 2009), or increasing income inequality leaves workers, who are fully dependent on their salaries, persistently decoupled from decent economic situations (Möller, 2016). These developments ultimately result in a stratum of the population that has been called ‘precarity’, which consists of people living in uncertainty and instability (Campbell and Price, 2016). However, at least most OECD nations have implemented some sort of a welfare state protecting their citizens from worst deprivation (Bergh et al., 2016).

Since developing nations on the one hand face more severe forms of poverty, and on the other hand lack regulatory programmes protecting their poor, a special focus in business and management research was put upon BOP markets (Prahalad and Lieberthal, 1998). Individuals within these were first addressed by President Roosevelt in 1932 who spoke about ‘the forgotten, the unorganized but indispensable units of economic power […​​​​​​], the forgotten man at the bottom of the economic pyramid’ (quoted in Mason et al., 2013, p. 402). Hammond et al. (2008) estimate the size of BOP markets to roughly 4 billion people mostly located in the developing world, based on an often monetary threshold, which is usually used in BOP definitions (Hammond et al., 2008; Kolk et al., 2014; Muthuri and Farhoud, 2021). However, profound differences to the BOP in developing nations require definitions of the BOP in affluent countries to reach beyond exclusively financial characterisations.

Developing nations often lack effective governmental and public programmes aiming at individuals at the base of the (income) pyramid. There are instances of social security systems, ‘but large population groups are not covered’ (Dethier, 2007, p. 280). Historically, developed nations invested into their social security after World War II, although this depends on the respective national business system (e.g. liberal market economies tend to have less extensive social security programmes). Still this helped to ‘reduce poverty drastically, by at least 40% in Europe - in heavily [sic] insured countries such as Belgium and Sweden by more than 70% - and by 28% in the United States’ (Dethier, 2007, p. 281).

More recently, however, social security, welfare states and organisations (such as unions) dedicated to vulnerable groups of affluent countries are failing to reach certain groups of the population. To name a few instances, (a) one-in-three workers in the UK fall into the category of ‘vulnerable workers’ which includes low pay and lack of representation by for example a union, as illustrated by Pollert and Charlwood (2009). Furthermore, (b) increasing total numbers of homelessness in the UK (Terry, 2019), of elderly homeless individuals in Canada (Gaetz et al., 2016), or an increase of 50% of total homeless people in France since 2001 (Yaouancq et al., 2013) show similar tendencies around differing affluent countries. These more frequently missed groups face constant psychological distress concerning (socioeconomic) anxiety and security. Furthermore, depending on an individual’s background, such institutions may fail affected people in several manners: due to the erosion of social security and welfare systems, more and more people fall through the social net of benefits, oftentimes minorities. Martin (2012) describes how unions, despite their best intentions, increase the social split between migrant workers and natives, ultimately resulting in even less coverage. Such lack of security from governmental organisations combined with the inability of non-governmental organisations (NGOs) and unions to fully substitute their services constitute a crucial component of BOP membership.

Poverty in developing nations is not congruent to poverty in developed nations. However, both become somewhat comparable using the concept of relative poverty, which is widely defined as having less than 50% of the median household income in a certain country. Applying this threshold for OECD countries, 11.7% of the population were (relatively) poor on average in 2016 (OECD, 2019b). However, not all (relatively) poor individuals are also members of the BOP: for example for Germany, the threshold for relative poverty is determined at 781€/month (Statista, 2008), an income level that more than one in four university students does not reach during their studies (Statista, 2019). Due to education, family background and only temporarily low standards of living, most university students would not consider themselves as part of the BOP in affluent countries. Hence, a combination with other types of handicaps is needed.

BOP members in general operate and act mostly in the informal market sector (London, 2008), a market sector which is characterised by ‘small-scale, semi-legal, often low-productivity, frequently family-based, perhaps pre-capitalistic’ enterprises (Maloney, 2004, p. 1). Compared to developing countries, where the informal sector sometimes represents the main economic market for a significant part of society – for example, 90% of 15–24-year-old Egyptian workers fall into the segment of informal work (Tansel and Ozdemir, 2019) – such markets are less salient in developed countries. Renooy (1990) states that the most crucial characteristic distinguishing the informal sector from the formal sector is a lack of governmental control. It thus seems plausible that the prevalence of informal sectors depends on a government’s ability to monitor and regulate (all) sectors of the economy, resulting most likely in smaller and less salient informal markets in developed countries. It is worth noting that evidence suggests that not every individual operating in informal markets is ‘[…] disadvantaged, precarious, or underpaid’ (Maloney, 2004, p. 2), not even in developing countries.

Summarising, we propose that the BOP in affluent countries may be defined by the simultaneous existence of three conditions as illustrated in Figure 1.2: (relative) poverty, membership in informal markets, and a lack of public protection, for example, by welfare or social security systems, unions or similar. Furthermore, it is worth noting that individuals within the BOP in affluent countries are most likely not a well-defined category but comprise a range of stratums within society.

Figure 1.2 Conceptualisation of BOP in affluent countries.

Sources: Own work based on concept of relative poverty, London (2008), and Maloney (2004).

BOP markets (BOPMs)

In 2015, the United Nations passed the Sustainable Development Goals (SDGs); several of which focus on issues mostly prevalent to BOP members in developing countries (United Nations, 2015). However, the SDGs apply to BOP individuals in the industrialised world as well. For example, Goal 10 ‘Reduce inequality within and among countries’ [emphasis added] has a direct aim to reduce inequalities not only between richer and poorer nations but also within (rich) nations (United Nations, 2015).

There are several possible avenues for reducing such inequalities which will be discussed within the expert interviews in this chapter. Concerning BOP research in developing nations, scholars argue for businesses to expand their economic activities beyond their core markets and integrate Base of the Pyramid Market (BOPM) activities into their portfolio (London, 2008). However, the BOPM perspective in general must be understood in a more nuanced manner than ‘large companies selling smaller sizes or easier-to-afford versions of their existing products to respond to the limited purchasing power and investment capabilities of those at the BOP’ (Hammond, Kramer, Katz, Tran, and Walker 2008, p. 2). We thus base our understanding of BOPM on the six principles of London (2008) as illustrated in Figure 1.3 and apply these to affluent countries based on our findings of BOP in affluent countries as shown in Table 1.1.

Figure 1.3 Six principles of the BOP perspective according to London (2008).

Sources: Own work based on London (2008), Hammond Kramer Katz Tran and Walker (2008), and London and Hart (2004).

Table 1.1 Exemplary application of the six principles to affluent countries

BOPM principle	Definition (London, 2008)	Developing countries	Affluent countries	Example affluent countries: The Big Issue
External Participation	‘Requires the entry of an exogenous, or external, venture or entrepreneur into the informal economy’	multinational corporations, domestic firms, NGOs, non-native individuals, …	Mostly NGOs and ecclesiastical organisations as well as former BOP-firms	The Big Issue Foundation cooperates with homeless people, allowing them to sell their paper for a profit
Connecting Local with Non-Local	‘Either bringing non-locally produced products to BOP markets [BOP as consumer], or by taking BOP-produced goods or services to non-local markets [BOP as producer]’	BOP as consumer: providing goods and services not currently offered in local markets; BOP as producer: taking locally produced goods and selling them in other (e.g. affluent country); marketsCombination: take a locally produced good and sell this product to BOP markets in other (non-local) regions or countries	Local problem (e.g. supermarkets buying more food than they can sell resulting in food waste) connected to non-local problem (e.g. low retirement funds of elderly people resulting in hunger) trying to solve both	Unemployed people reliant on welfare or NGOs (i.e. non-local problem) combined with ‘The Big Issue was launched in 1991 […] in response to the growing number of rough sleepers in the streets of London’ (i.e. local problem) to solve issues of homelessness and creating (social) jobs
Co-Creation	‘Allows these ventures to combine knowledge developed at the top of the pyramid with the wisdom and expertise found at the bottom’	Rather than relying on imported solutions from the developed world, the business model of the BOP venture and any associated technological solution is co-created among a diversity of partners, with local ownership and involvement	Not an application of pre-existing business solutions, but a collaboration top-down and bottom-up	Originally: People can buy Big Issue from their own money and re-sell it, making a profit. Nowadays: Additional, educational programmes (if wished for), trying to balance selling of magazines and providing income opportunity (bottom-up creation) with personal development through training (top-down)
Patient Innovation	‘Firms attempting to enter these markets must develop new problem-solving approaches, rely on different evaluation metrics, and find a structure that provides some level of isolation from the influence of existing organisational routines[, which takes time]’	Patient Innovation: Innovation just as important as in mainstream business research, but due to lower funds more patiently. No real try-and-error possible. Patient Capital: investments start small and are then potentially scalable	BOP individuals facing handicaps (e.g. illiteracy, addictions, etc.) are reliant on knowledgeable organisations further developing individual capabilities towards a suitable(!) ideal	The Big Issue Foundation reinvests funds into workshops for their sales personnel tackling (1) personal sale goals, (2) financial handlings, (3) housing, (4) obtaining ID, (5) health and well-being, (6) addiction treatment, (7) employment, (8) education, (9) personal aspirations -> innovation through education
Self-Financed Growth	‘Competitive advantage and the associated long term sustainability of the venture will most likely emerge from establishing a set of mutually beneficial partnerships with local organisations and entrepreneurs currently operating at the BOP’	Meeting the needs of the poor creates competitive advantage, that does not raise the overall playing field within the sector. Maximising the benefit of the poor = competitive advantage, that allows for slow, but self-financed growth	Organisations aiming to support BOP individuals grow through increased capabilities of its members and resulting profit; only exceptions are donations from outside that are reinvested into the cause	The Big Issue itself grows through increased sales of BOP individuals, which is achieved through learning processes and teachings (self induced growth). The Big Issue Foundation is open for external donations and reinvests its income into educational programmes for its employees, not market share growth
Focussing on What Is ‘Right’ at the BOP	‘This means that the BOP venture, be it a for-profit business or a non-profit initiative, ought to focus on leveraging what is “right” in BOP markets’	The BOP perspective enhances what already exists and builds from the bottom-up. This distinguishes it from poverty alleviation approaches emphasising the development of an enabling environment. These latter efforts are more policy oriented and stres...