Business models at the base of the pyramid : the case of Danone

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Amsterdam Business School MSc Business Studies, Strategy Track

The Master Thesis

Business Models at the Base of the Pyramid: the Case of Danone

By

Vytis Kapočius (No. 10599452)

Date of submission: 5th August, 2014

Supervisor: Dr. Arno Kourula

Examiner: Prof. Erik Dirksen

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Abstract

Performing business operations at the Base of the Pyramid (BOP) markets without an adequate business model might result not only in the loss of investment for business, but it might also worsen the chances for the community at the BOP to improve their standard of living. However, current academic understanding of what business models are best suited for the BOP is still lacking. In analyzing the three projects co-created by Danone and its external partners this study addresses the questions of how can business models for the BOP be best conceptualized and what are the main obstacles faced when developing such models. Findings indicate that a partial adjustment to a traditional understanding of a business model concept is needed. In particular, the BOP projects analyzed show that various obstacles are important moderators for business value created and suggest that obstacles should constitute and important building block when crafting a BOP business model. From the perspective of business strategy, the findings help linking the concepts of business model to the concept of the BOP. Consequently, further research is needed to advance the integration of both.

Key words: Base of the Pyramid, business model, Danone, business ecosystem, poverty alleviation

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Acknowledgements

I am sincerely thankful to my family, who always believed in my abilities during this academic journey. I would like to also express my gratitude to Dr. Arno Kourula for the inspiration and professional guidance. I am also grateful to Mrs. Asta Kulikauskaitė, who supported me during the hardest moment. At last but not least, I am greatly thankful to the key informants for sharing their experiences and knowledge as well as for putting all efforts on a daily basis to create a better life for the unprivileged ones.

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Declaration of conflicting interests

At the time of conducting this research, the author has been taking a traineeship at Danone Trading B.V. in the Netherlands. The traineeship assignment(s) had no direct relation to the topic of this study. None of the key informants interviewed internally for the primary data collection purposes were functionally or hierarchically related to the author. Otherwise the author declares no potential conflicts of interest with the respect to the research, authorship, and/or publication of this study.

The author received no financial support for the research, authorship and/or publication of this study.

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Abbreviations

ALMA Asia-Pacific, Latin America, Middle-East and Africa BOP base of the pyramid

CAPEX capital expenditures CBU country business unit

CIS Commonwealth of Independent States CSR corporate social responsibility

KPI key performance indicator MNE multinational enterprise

NGO non-governmental / non-for-profit organization OPEX operating expenditures

PET polyethylene terephthalate (a thermoplastic polymer resin used for producing bottles)

PPP purchasing power parity UN United Nations

USD United States dollar

U.S. The United States of America WHO World Health Organization

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List of tables

Table 1 The key elements of a business model (Author), pg. 20

Table 2 The theoretical business model conceptualization (Osterwalder & Pigneur, 2010), pg. 21

Table 3 The seniority of internal and external key informants interviewed (Author), pg. 26 Table 4 Key facts about Danone (Danone, 2013), pg. 30

Table 5 The mix of projects co-created by Danone Ecosystem Fund (Danone Ecosystem

Fund), pg. 36

Table 6 The theoretical conceptualization of OMDA-Sahteen project business model in Egypt, CBU (Danone Egypt) perspective (Author, compiled from various primary

and secondary data sources), pg. 39

Table 7 The theoretical conceptualization of Milk Communities project business model in Ukraine, CBU (Danone Ukraine) perspective (Author, compiled from various

primary and secondary data sources), pg. 46

Table 8 The theoretical conceptualization of Pepenadores project business model in Mexico, CBU (Danone Mexico) perspective (Author, compiled from various

primary and secondary data sources), pg. 51

Table 9 Examples of categorized obstacles to implementing business models at the BOP (Author, compiled from primary data), pg. 55-56

List of figures

Fig. 1 The model of project implementation in collaboration between Danone and NGOs (author, compiled from various primary and secondary data sources), pg. 32 Fig. 2 The longitudinal dimension of Danone Ecosystem Fund portfolio development

(Author, compiled from Danone Ecosystem Fund newsletters; 2010-2013), pg. 35 Fig. 3 The reshaped business model canvas (Author), pg. 59

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One fifth of total human population still live in extreme poverty

(World Bank, 2013a)

1. Introduction

More than a decade ago Prahalad and Hart proposed the concept of Base/Bottom of the Pyramid (BOP) claiming that there are great untapped possibilities for multinational enterprises (MNEs) aiming at the poorest 4 billion of human population – the potential first time consumers (Prahalad & Hart, 1999). Since then the notion of making profit while helping alleviate poverty levels has attracted interest of both business practitioners and academics. The research stream on this notion has been growing substantially, however given its complexity many challenges and unanswered questions remain (Kolk et al., 2013). The proponents of the BOP approach claim that a huge unrealized growth potential has been unrecognized by the corporate sector in the developing world. Moreover, it has been boldly declared that a substantial growth is achievable in a responsible and ethical way (Prahalad & Hart, 1999; Prahalad & Hammond, 2002). Early examples of real business cases driving innovation, making profits and helping to solve poverty issues at the BOP have been analysed by academics (Hart & Christensen, 2002), but also the criticism towards the BOP approach has emerged. Karnani (2007a; 2007b) argues that sound notion of ‘doing well by doing good’ has been painted too optimistically and simply marketing the poor consumers has nothing to do with poverty alleviation. On the contrary, it has been claimed that large MNEs acting ‘as-usual’ can even exacerbate poverty (Karnani, 2007b; Arora & Romijn, 2012). The ongoing discussion highlights the importance of the topic.

Various scholars propose that MNEs need cardinally new business models to successfully perform activities at the BOP (Prahalad & Lieberthal, 1998; Hart & Christensen, 2004; London & Hart, 2004; Ricart et. al., 2004). Adding to that, it is suggested that together with new business models, the new measurements of financial and economic performance

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under specific BOP environments are needed. Such a discourse by academics fired an interesting discussion whether the economic and financial logic widely applied in developed markets do stand at the specific BOP environments? It is evident that a better understanding of what makes various business models work well at the ‘base of the pyramid’ is essential to progress the development of the field (Kolk et al., 2013). To address these gaps in academic literature, this study raises two research questions: 1) how could MNEs business models for the BOP be best conceptualized? 2) What are the obstacles at the BOP environments when MNEs develop new business models there? Answering these research questions allow filling the gaps in recent academic BOP literature. It also helps linking the BOP concept with the concept of business models from business strategy research stream.

This research employs qualitative methods in order to analyze the case of Danone, a leading multinational company in the food industry worldwide, relation to the BOP markets. Danone has launched several initiatives, which besides other goals also address the BOP markets. One of such initiatives – Danone Ecosystem Fund – has not been widely analyzed by academic society yet. The study is based on both the analysis of primary and secondary data to build a credible case of what business models Danone use to approach the communities of BOP. In particular, the business models of three prominent projects in Egypt, Ukraine and Mexico co-created by Danone country business units, Danone Ecosystem Fund and external partners are analyzed and compared using the business model canvas by Osterwalder & Pigneur (2010).

The abductive reasoning approach employed to triangulate the data reveals the biggest differences among business models at traditional and within the BOP markets. Moreover, as alleviation of poverty levels is an inseparable question of the BOP concept the study highlights the importance that such business models help communities to step-by-step exit the poverty. The findings presented also have a potential for managerial application as the

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reshaped business model canvas conceptualized from Danone experience might allow business practitioners to reduce the risk of business when starting or expanding activities with the communities at BOP.

The study is structured in the following manner. First, the Literature review section presents the most recent developments in the BOP literature as well as current academic understanding of a business model concept. It then explains the questions to be answered in the research. Second, the Methodology and research design section explains how the research has been set-up, what data and procedures have been used to ensure the overall credibility of this qualitative study. Strengths and limitations of the study design are also explained in a self-critical manner. In the following Analysis and results section, the case of Danone and Danone Ecosystem Fund in relation to the BOP is presented. The core of this section is the analysis of the interviews with key stakeholders, which has allowed the conceptualization of three different business models and identification of key obstacles for the successful implementation of each model. The emerging changes to the traditional perception of business models are discussed in the Discussion section. Finally, the study contributions and potential to shape the direction for the future BOP studies are summarized in the Conclusion section.

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2. Literature review

2.1. The Base of the Pyramid

The Base of the Pyramid concept stands on a claim that businesses can engage in profitable activities serving the poor and help alleviate poverty levels at the same time. The definition of poverty has long been controversial in economic development literature (Wade, 2001). The income level distribution among the human population worldwide is often conceptualized as a pyramid, i.e. there is a relatively small population earning high income and a relatively huge population living at low income levels:

“More than 20 percent of the population in developing countries live on less than

1.25 USD a day, more than 50 percent on less than 2.50 USD, and nearly 75 percent

on less than 4.00 USD“. (World Bank, 2013a:5)

The income level of 1.25 United States dollar (USD) a day in purchasing power parity (PPP) is a widely accepted measurement of extreme poverty. This would equal 38 USD a month or 450 USD per annum. According to the World Bank Group data 1.2 billion of people - more than one fifth of a whole human population - still live in extreme poverty, most of who in South Asia and Sub-Saharan Africa (World Bank, 2013b).

Terms ‘the Base of the Pyramid’ and ‘the Bottom of the Pyramid’ are often used interchangeably to describe the concept. However, there is a variety of the BOP meanings used in the literature. Most of scholars use the definition, which considers the base/bottom of the pyramid to be people living at or below the income levels of 1,500 USD (Prahalad & Hart, 1999; London & Hart, 2004) or 2,000 USD per capita per annum (Prahalad & Hammond, 2002). Sometimes imprecise definition of the concept simply referring to “4 billion” poorest people in the world is used (e.g. Hart & Christensen, 2002). Alternatively, Hahn (2009) divides the economic world pyramid into five tiers, where Tier 1-3 indicates

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income levels above 2.00 USD a day, Tier 4 - income levels between 1.00 and 2.00 USD a day and Tier 5 represents income levels below 1.00 USD a day. The BOP is defined as Tier 4 and Tier 5 together that represented 2.7 billion poorest people worldwide in 2005 (Hahn, 2009). Interestingly to note, there are almost three times less people under Tier 5 than under Tier 4. This means that income levels worldwide could be better conceptualized as the bell rather than the pyramid.

The poverty can be viewed not only as a lack of income but also as a lack of capabilities (Ansari et al., 2012). Such a proposition complements and expands the notion that people in so-called developed countries could also belong to the BOP (Hahn, 2009). The variety of the BOP definitions in the literature illustrates that there is a great need to explicitly define the construct when used (Kolk et al., 2013). Thus, in this research paper I will define

the BOP as the people who live on income levels lower than 1,500 USD per person per annum (PPP) and lack skills and capabilities to substantially improve their living standards

(definition proposed by the author). The annual income of 1,500 USD approximately equals to an income of 4 USD a day. Such an income level already covers the majority of population in many developing countries (World Bank, 2013a), thus I consider the lack of skills and capabilities to be an important distinctive feature of the BOP. In an abbreviation “the BOP’ by letter “B” I mean a word “base” instead of “bottom”, which better reflects the income distribution among the people under Tier 4 and Tier 5 and, as argued by Arora & Romijn (2011), conveys the positive idea of the concept.

2.2. Profitable business activities and poverty alleviation

More than a decade ago Prahalad and Hart proposed the idea claiming that there are great untapped possibilities for multinational enterprises at the base of the worlds’ economic pyramid. Scholars argued that there are many potential consumers in the developing regions such as China, India, the former Soviet Union and its neighbouring countries, and Latin

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America (Prahalad & Hart, 1999). Since then the idea of making profit while helping alleviate poverty levels on a great scale at the disadvantaged world regions has attracted attention of both academic scholars and business practitioners. However, even if research on the topic has been growing substantially in recent years (Kolk et al., 2013) many challenges and unanswered questions remain.

The proponents of the BOP approach claim that a huge unrealized growth potential has been unrecognized by the corporate sector and that it is possible to achieve substantial growth in a culturally, environmentally and economically sustainable way (Prahalad & Hart, 1999; Prahalad & Hammond, 2002). One of the main arguments for the business engagement at the BOP is that MNEs have economical and political power, vast resources and smart talents – the attributes local governments and communities at the BOP typically lack. Thus, MNEs are said to be the ones that take the lead and responsibility to address challenges experienced by the poor. The importance of private sector engagement at the BOP is also stressed in United Nations Millennium Declaration, the resolution adopted by all member states of the United Nations (UN) General Assembly in 2000 (United Nations, 2000). In recent academic literature scholars even note that MNEs should also responsibly address the social and economic issues at the BOP (Ansari et al., 2012).

The BOP can become a source of innovations for the business, which can later on be applied in more developed - and higher income level marked - markets (Hart & Christensen, 2002). The proponents of the BOP concept do agree that creating products and services and being able to market them profitably in the developing markets for disadvantaged communities is a great challenge, which often may require a non-traditional approach, new managerial practices and innovative solutions. However, such thought-provoking conditions seem to be ideal for incubating new, leapfrog technologies (Ricart et al., 2004). The innovation is suggested to be understood not only as the innovation of products or business

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practices but as a development of the appropriate ecosystem that enables the innovative business to function profitably (Prahalad, 2012). Besides the profit led innovations at the BOP, MNEs also have ethical reasons to engage in sustainable development activities by forming partnerships with non-governmental organizations (NGOs) (Kourula & Halme, 2008). Hahn (2009) even argues that from a normative-ethical perspective enterprises should see poverty alleviation efforts as an integral part of their socially responsible strategies.

On the other hand, some scholars criticize the BOP concept as being ‘too good to be true’ or ‘painting too rosy picture’ of making profit and alleviating poverty levels at the same time. Critiques of the concept claim that the purchasing power of the poor at the BOP is often overestimated, thus these markets are of a low interest to MNEs (Karnani, 2007b). Moreover, Karnani (2007b) claims that there is a fundamental divergence between business goal of profit maximization and public welfare leading to scarcity of successful examples of MNEs presence at the BOP. Alternatively, it is proposed that the only way to alleviate poverty is by increasing the real income of the poor, which is impossible without a trade-off between price and quality of the product (Karnani, 2007b). Some scholars go even further claiming that the BOP discourse (e.g. incorporation of the BOP concept into UN Millennium Development Goals) is unethical itself as it serves a substantial ideological function and depoliticizes the corporate interventions in the world’s developing countries (Arora & Romijn, 2012). In short, it is claimed that poverty can be even exacerbated if business activities at the BOP are done ‘as usual’ (Karnani 2007a, 2007b; Arora & Romijn, 2012). Regardless the critique, there are some examples of ‘doing well by doing good’, where companies are both profitable and help eradicate poverty levels (e.g. see Seelos & Mair, 2007; Simanis & Hart, 2009).

It is true that there are only limited examples of the BOP initiatives led solely by MNEs (Kolk et al., 2013). There are several reasons for that. First, the BOP environments are significantly different from the more advanced top-of-the-pyramid environments

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Santos & Rufin, 2010). Such differences include not only lower levels of income leading to weaker purchasing power by the consumers but also differences in culture, political governance, structure of the local communities, perception of ethical standards, etc. Second, it must be noted that the conditions of the BOP markets are not like an early stage of Western markets development (London & Hart, 2004; Arnould & Mohr, 2005). Regions as South Asia or Sub-Saharan Africa develop in their own path-dependent way, sometimes with huge differences between geographically neighbouring regions. Even the proponents of the BOP concept note that successful activities of MNEs at the BOP very much depend on collaboration with other stakeholders, e.g. NGOs, local governments and local communities. Recent developments in academic discourse on the topic call for a more socially embedded and community-centric approach of the BOP (Ansari et al., 2012).

2.3. Fundamentally new BOP business models needed

The proposition of poverty alleviation through financially profitable activity is a relatively novel in academic literature - traditionally it has been discussed more explicitly in the journals targeting practitioners (Kolk et al., 2013). As a consequence, there is no one theoretical framework or construct of the BOP accepted by academia scholars. There are only the first steps to build one.

Anderson & Billou (2007) presents the so-called “4As“ approach based on the analysis of various industries at the BOP, such as fast moving consumer goods, financial services, telecommunications, construction, health care and home appliances. It is claimed that business ability to both earn profits and help the poor depends on four dimensions perceived by the management or the 4As – availability, affordability, acceptability and awareness. Prahalad (2012) notes that managers immersing into the lives of the poor consumers and looking through these four dimensions can get unique insights and create a new environment for innovation. However, the 4As framework has not been widely accepted by academics and

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business practitioners as it solely focuses on the poor as consumers of the products and services.

Poverty alleviation problem can be addressed more effectively if the poor are seen not only as consumers, but also as entrepreneurs or co-inventors of the products (London & Hart, 2004; Arnould & Mohr, 2005). Nevertheless, the examples of the profitable MNEs activities where the poor is seen not primarily as the consumers are still rare (Kolk et al., 2013).

There are many obstacles indicated in the literature, which make it hard to create and capture value for the businesses at the BOP markets. London et al. (2010) suggest looking at these obstacles in two dimensions. First, there are obstacles which create barriers for value creation and firm productivity (e.g. obstacles due to raw materials, financial or production resources). Second, there are transactional obstacles, which do not allow capturing the whole potential value (e.g. high cost of accessing the market, low power in the marketplace, lack of security and risk of shocks) (London et al., 2010).

Even though the BOP markets are claimed to constitute as much as 4 billion people, the poor are geographically widely dispersed. This is especially evident in the rural areas even not considering their potentially different status to the MNEs (e.g. consumers, employees, co-inventors, partners or entrepreneurs). The importance of the need to invest into distribution channels stressing the connectivity as the big issue for the BOP agents has been already noted by the pioneers of the BOP concept (Prahalad & Lieberthal, 1998). Together with a poorly developed infrastructure in the least developed countries it makes almost impossible for the MNEs to use the benefits of scale economies, thus corporations are called to transform their understanding of ‘scale’, which is typically understood as ‘the bigger the better’ (Ricart et al., 2004). Moreover, given the fact that incomes of the poor are low and great amount of expenditures is devoted to ensure the basic needs such as shelter and food, MNEs working at BOP face much higher price sensitivities compared to top-of-the-pyramid markets (Karnani,

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2007b). It usually means that products sold at other markets need to be positioned with a lower margin, in a smaller packaging or to be fundamentally redesigned for the BOP (Rivera-Santos & Rufin, 2010). These challenges call to question current perceptions by the management, which is often no easy task.

The other important factor reducing the scale of current MNEs presence at the BOP markets is low standards of governance, possible corruption and lack of reliable local partners (Rivera-Santos & Rufin, 2010). These are making high entry barriers not to mention the fact that MNE staff usually feels uncomfortable about the BOP markets (Prahalad & Hammond, 2002). This could be due to the lack of understanding of local culture, relatively high illiteracy rates of the poor, informal hierarchy and networks of local communities, different decision making mechanisms. The everyday practices in social lives of the poor are yet not well studied (Arora & Romijn, 2012) leaving the risk of the unexpected and possible shocks for the firms, which decide to became active at the BOP.

Finally, there are no widely agreed measures of the economic and social impact by the business at poverty alleviation initiatives. Recent developments in the field call for the need to consider the impact on capabilities, relationships among and within the poor communities and even how it affects views on gender, ethnicity and local culture (London, 2009). The lack of reliable measurements of poverty alleviation performance makes it difficult to judge success or failure of business models at the BOP. Thus, scholars in the recent literature stress the need of the explicit and objective measures on social impact, which present an interesting direction for future research (Kolk et al., 2013).

2.4. Conceptualization of business models

In order to distinguish what makes economic or social impact by business possible in a broad sense, it is important to understand the key foundations of what constitutes a business model. This section briefly analyses the recent academic literature on business models.

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Further, the theoretical conceptualization of the key elements of every business model is presented.

The business model in a managerial perspective can be compared to a scientific tool, or putting into the words of J. Magretta:

“Business modelling is the managerial equivalent of the scientific method – you start with a hypothesis, which you then test with action and revise when necessary“

(Magretta, 2002:90). Of course, a business modelling goes far beyond the combination of telling a good narrative backed by numbers (Magretta, 2002). Various scholars put emphasis on different key essential elements for an in-depth understanding of a business model. However, certain common elements can be indicated and compiled (see Table 1).

Particular business model is tailored to meet the specific needs of the target customer or customer segment (Chesbourgh, 2010; Osterwalder & Pigneur, 2010). The customer is closely linked to the value proposition business model offers (Johnson et al., 2008), i.e. the one that customer is ready to pay for (Hedman & Kalling, 2003). Thus, business model can only be economically sustainable if revenue streams generated are greater than cost incurred to generate such revenues. Several names to describe the concept can be found in academic literature, e.g. profit formula (Johnson et al., 2008) or profit potential (Chesbourgh, 2010). This concept can be compared to the notion of ‘value created’ in business strategy literature. Brandenburger and Stuard define ‘value created’ as a difference between the willingness to pay by consumer and opportunity cost incurred by the firm (Brandenburger & Stuard, 1996). However, it is important to note that some academics describing business models (see Table 1) do not explicitly distinguish between financial and opportunity cost. As a consequence financial and economic sustainability of business model is often mistakenly used interchangeably.

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Business Model: Key Elements

Johnson et al.

(2008) Chesbrough (2010)

Hedman & Kalling (2003)

Osterwalder & Pigneur (2010)

Customers Target customer Serving customer need

The offering

Market segment identified (i.e. users)

The one “who pays” for the value proposition

Customer segments (e.g. mass market, niche market) Customer relationships (e.g. customer acquisition, retention) Value proposition

“The value created for users by an offering based on technology”

“The offering must have a favourable quality/price position” Solving customer problems and satisfying customer needs Revenue streams Profit formula: - revenue model; - cost structure; - margin model; - resource velocity “Revenue generation mechanism specified (i.e. for what purpose is the technology useful)”.

“Revenue mechanism and the cost structure to identify the profit potential”

“The cash company generates from each customer segment”

Cost base “All costs incurred to

operate business model”

Resources Key resources: - people; - technology; - equipment; - information; - channels; - partnerships; - brand “The complementary assets needed to support position in [value] chain” - Human; - Physical; - Organizational.

“The most important assets required to make business model work:”

- physical; - intellectual; - human; - financial Activities Key processes:

- processes; - rules and metrics; - norms

The structure of the value chain required

Activities and organization The scope of management (e.g. “the cognitive and cultural constrains that managers have to cope with“)

Longitudinal process component (e.g. business model adaptation over time)

The most important issues the company must achieve to ensure business model works

Channels -- Firm position in the value network linking suppliers and

customers (incl. complementors and competitors)

-- The way company

communicates and reaches its customer Context /

partners

-- External actors in all

aspect of the business: - potential partners; and - competitors - [consumer] market level; - factor markets; - production inputs Key partnerships including the suppliers and partners: - strategic alliances - partnerships between competitors - joint ventures - buyer-supplier relationships

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Other important elements of each business model are the resources and activities needed to tailor the particular value proposition. Some scholars also put additional emphasis on the (distribution) channels of the product (e.g. Chesbourgh, 2010; Osterwalder & Pigneur, 2010). Finally, the contextual situation is always an important element as the same business model may fit the market opportunity and generate substantial returns in one case, but be inauspicious under different circumstances.

For the purposes of this research the theoretical business model conceptualization proposed by Osterwalder & Pigneur (2010) will be applied. This theoretical conceptualization (Table 2) combines of 9 main components of a business model: 1) customer segments; 2) value propositions; 3) channels; 4) customer relationships; 5) revenue streams; 6) key resources; 7) key activities; 8) key partnerships; and 9) cost structure. Such a conceptualization seems to be advantageous as it covers all key elements of business models as identified in the recent academic literature on business models (see Table 1). Furthermore, such a framework is often used practically by business managers to evaluate the viability of a business model. The topic of this research paper supposes that ‘the customer segment’ in broad terms can be narrowed to and described as the BOP.

Table 2. The theoretical business model conceptualization (Osterwalder & Pigneur, 2010)

Key Partners Key activities Value Proposition

Customer relationships

Customer segments

Key resources Channels

Cost structure Revenue streams

2.5. Research gap and research questions

Many scholars notice that MNEs need fundamentally new business models to successfully address challenges and work profitably at the BOP markets (Prahalad &

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Lieberthal, 1998; Hart & Christensen, 2004; London & Hart, 2004; Ricart et. al., 2004), however such business models are not extensively analysed and presents an interesting gap to be addressed in academic research (Kolk et al., 2013). Garrgiga & Melé (2004) even note that strategies aiming for the BOP could become a socially responsible way the businesses could achieve competitive advantage. Thus, conceptualizing business models for the BOP is an essential step to progress the academic understanding of the BOP concept. As the BOP concept claims that MNEs can generate profits and help alleviating at the same time, the initial subject of research should be a multinational enterprise. In this research I intend to look what business models are employed when addressing the BOP markets and look for important factors, which would allow improving these business models. Specifically, the research is planned to use qualitative methods and address the following research questions:

- How could MNEs business models for the BOP be best conceptualized?

- What are the obstacles at the BOP environments when MNEs develop new business models there?

Thus, the understanding of what factors make business models work well in the BOP environments would extend our current scientific understanding of how businesses may help eradicating poverty levels. Moreover, identifying the obstacles at the BOP environments may help conceptualize particular parts of business models. The research also has a potential to deepen and expand the current knowledge of underlying mechanisms of business corporate social responsibility, which still lacks qualitative studies (Aguinis & Glavas, 2012) Moreover, it has promising managerial applications as proved-to-work business models using appropriate financial and economic measures could be applied at traditional emerging and developed markets for low income consumers and thus become a source of competitive advantage led by responsible corporate innovation (Anderson & Billou, 2007; Kourula & Halme, 2008).

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3. Methodology and research design

3.1. Description of the case study

The engagement of multinational enterprises (MNEs) in poverty alleviation incentives and the impact on economic, social and environmental dimensions of such incentives is still not understood in-depth (Kolk et al., 2013). The lack of widely accepted theoretical frameworks of the BOP business models suppose that exploratory type of study using the qualitative methods is best suited to answer the research questions raised (Yin, 2009).

The data availability is always considered a great challenge in the BOP studies (Ansari et al., 2012). The Netherlands is a favourable place for this kind of research as couple of world leading MNEs are headquartered here that are engaged in the BOP market initiatives (Unilever, Philips, etc.). This research intends to analyse the case of Danone, a multinational enterprise having their operations division headquartered in Amsterdam, Netherlands (hereinafter – Danone or the Company). The company is leading four streams of core business activities, namely fresh dairy products, waters, early life nutrition and medical nutrition business. Annual sales of Danone amounted to 21,298 million EUR and more than 100,000 employees have been working for the Group in 2013 financial year (Danone, 2013). Thus, Danone is one of the leading entities in a food industry worldwide present in more than 100 countries and engaged in several BOP initiatives. Some of them, i.e. project Danone Communities led by Grameen-Danone Foods is quite comprehensively analyzed (and also criticized) in the academic literature (see Garrette & Karnani, 2010; Gold et al., 2013), while other initiatives of this company such as Danone Ecosystem Fund are underrepresented in scientific literature.

The choice to study this MNE is appropriate for several reasons. First, food makes the biggest share of the poor consumption (Banerjee & Duflo, 2007). Second, the overall BOP

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market activities by Danone are not extensively analysed in the academic literature. Third, the researcher has been taking an internship at Danone, which allowed getting otherwise burdened access to specific primary data about the business and its BOP activities. Finally, Danone Ecosystem Fund is an interesting example of a pioneering approach to business ecosystem, which had not been studied in relation to the BOP concept.

A single-case study design is chosen. There are recent explorative studies in the BOP literature, which use multiple-case study designs (e.g. Gold et al., 2013). However, given the specificity of the research question (e.g. the aim to compare business models within the same MNE) the single-case study design seems more appropriate given the time available for a master project. The case can be characterized as a unique snapshot of current business activities and challenges faced by Danone. However, there are also some elements of multiple-case study design used as three different projects at the BOP are analyzed and compared. Finally, the case has several longitudinal elements, which allow analyzing the development of the BOP business models over time.

3.2. Research instruments and procedures

First, to understand and analyze the business models Danone use at the BOP markets the theoretical framework based on recent business model literature (Chesbrough, 2010; Hedman & Kalling, 2003; Johnson et al., 2008; Osterwalder & Pigneur, 2010) has been applied. Qualitative research methods using abductive reasoning technique are employed, particularly semi-structured interviews for the primary data collection and documentary analysis of company annual reports, CSR reports, media announcements, etc. as secondary data sources to achieve an in-depth understanding of Danone presence at the BOP through the prism of the theoretical framework on business models. The aim has been to ensure a highly crafted, persuasive and credible case study (Cunliffe, 2011).

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Data set collection and analysis has been a two-step process. First, all publicly available secondary data has been collected and analyzed. The secondary data set included publicly available Danone Sustainability Reports (2006-2013, 8 documents), semi-annual Financial Reports of Danone (2006H1-2013, 14 documents), Danone Ecosystem Fund newsletters (2010-2013, 11 documents), Danone Economic and Social Reports (2006-2012, 7 documents), several internal documents as well as publicly available information on Danone Ecosystem Fund projects. As a first step in the process, all documents combining a secondary data set has been examined using qualitative data analysis software package NVivo 10 in order to filter the meaningful extracts relating to the research topic.

The second step in the data collection and analysis process has been crafting a thorough interview protocol. Such two-step strategy has allowed avoiding the replication of already known insights and concentrating on unrevealed topics during primary data collection phase. The questions prepared for semi-structured interviews can be broadly categorized into 5 blocks – (i) information about the key informant, (ii) informant perspective on Danone Ecosystem Fund and BOP initiatives by Danone, (iii) key elements of a business model of certain initiatives including the greatest obstacles, (iv) economic and social performance measurement and (v) lessons learnt and value added for the Danone business. This particular combination of question blocks is a result deductively dictated by current academic knowledge on the BOP and business model concepts as well as by the outcomes of a comprehensive secondary data set analysis. Such a priori specification allows focusing the theory expansion and development aimed research (Eisenhardt, 1989).

Before starting the primary data collection, two possible scenarios have been foreseen. According to the Scenario no. 1, the purposeful and snowball sampling techniques would be combined to interview managers of the company from various departments (e.g. directly responsible for the BOP markets as well as functions indirectly related to BOP such as

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finance, CSR, procurement, product design) as also as stakeholders outside the Company – the representatives of suppliers or NGO’s related to Danone activities at the BOP. Alternatively, in case there was no access to interview stakeholders outside the Company, Scenario no. 2 would mean only managers and employees within the Company would be interviewed. Naturally, Scenario no. 1 offered a greater variety of respondents’ perspectives and perceptions leading to a better understanding of the case context than Scenario no. 2, which may result into collecting a primary data influenced by certain biases (Eisenhard & Graebner, 2007). Overall, the aim has been to interview 10 to 15 different key informants within and, if possible, outside the Company.

Table 3. The seniority of internal and external key informants interviewed

Seniority level

Internal key informants (Danone) External key informants (NGOs) Function: indirectly related to BOP initiatives

Function: directly related to BOP initiatives Executives & directors

>7 years of experience

Senior managers

2 to 7 years of experience -- --

Junior managers

<2 years of experience -- --

- Face to face interview, - Telephone interview

Initially, it turned out that the researcher managed to arrange interviews with a total of 8 key informants (Table 3), most of who represented executive and director level personnel having at least 7 years of managerial experience closely related to their function. These informants can be seen as the most knowledgeable informants working on BOP related initiatives within the Company and at external Company partners. Adding to that, 2 project managers at Danone Ecosystem Fund engaged in daily business operations have also been

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interviewed, thus it might be concluded that initially planned Scenario no. 1 has been implemented to a sufficient extent.

Both face to face and telephone interviews have been arranged depending on each informant availability and preference. Overall, primary data collection phase in a form of semi-structured interviews took three months from May to July 2014. The shortest interview took 35 minutes (with an informant of a junior management level), while the longest lasted for 1 hour and 30 minutes. On average, the interview lasted 55 minutes. The interview protocol crafted had ensured that all relevant topics were covered in a semi-structured fashion and ensured the consistency of the research process with each of the key informant. However, before each interview the questions in the interview protocol have been slightly adjusted as research progressed and the researcher on purpose tried to use the informant language during the interviews to ensure the qualitative rigor (Gioia et al., 2012). For example, all face to face interviews included a small exercise, where the informants have been asked to draw a sketch of how does Danone Ecosystem Fund work. All interviews have been audio recorded having a prior agreement of the key informants. Also notes have been taken during the process.

After each interview has taken place, it has been carefully transcribed into the text. Then, the transcribed version of interview has been sent to most respondents for the consistency check, confirmation and additional comments, if any. The total primary data set collected amounts to 51 page of transcribed interviews (page size: A4, font: Times New Roman; size: 12 pt; line spacing: 1.5 lines; 1-inch margins) plus researcher notes and sketches drawn by the informants.

After interviewing process has been finished, both primary and secondary data sources have been analyzed simultaneously. The key element in this process to avoid certain biases has been the codification of textual data according to the predefined coding scheme. The coding scheme mirrors the interview protocol questions – all textual quotes by its relevance

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have been grouped into 6 clusters: 1) purpose of the BOP initiative, 2) resources needed to achieve certain goals, 3) business model elements: 3a) consumer / beneficiary, 3b) revenues, 3c) costs, 3d) value proposition, 3e) key partners, 3f) key activities, 3g) relationships, 3h) channels, 4) challenges and obstacles, 5) performance measurement: 5a) business KPIs and 5b) social KPIs, 6) lessons learnt and value added. The clusters emerged from both literature review and interpretation of both the primary and secondary data. Such a combination of both secondary and primary data allows limiting possible biases, which may emerge from interpreting only interview data (Eisenhardt & Graebner, 2007). Each cluster has been applied and analyzed through the prism of the theoretical framework on business models to gain insights, build the comprehensive and representative case, which would allow drafting conclusions and generalizations of a certain degree.

3.3. Strengths and limitations of the research design

The research design of this study has some limitations. The research design itself may be subject to certain unavoidable biases influenced by the researcher’s experience, i.e. a note should be taken that the author is conducting the qualitative research of such a level for the first time. Moreover, a single-case approach to explore BOP business models of various projects only in a multinational enterprise representing food industry is used, thus findings may be rather idiosyncratic. As a result findings of this study might not directly be applicable and replicable to other industries as context specificity must always be taken into account when interpreting the results of any qualitative study. Even though both secondary and primary data are used to build up the case, one might argue that a relatively low number of key informants interviewed to create a primary data set might result in representing only the part of the ‘real story’. It has to be admitted that timely collection of good quality primary data is always challenging for studies like this, e.g. using similar research design techniques.

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Still the research design employed poses several important strengths. First, studies on corporate social responsibility and especially the BOP still lack qualitative research (Aguinis & Glavas, 2012; Kolk et al., 2013), thus the academic field is enriched with the analysis of new primary data as well as newly available secondary data. Second, research process has been documented in detail. Third, a high degree of primary data reliability is ensured via selection of key informants highly knowledgeable on the topic and careful transcription of semi-structured interviews. Fourth, both primary and secondary data sources are used to triangulate data via a predefined coding scheme, which reduces the likelihood or even allows avoiding certain biases, thus increasing internal validity of the study. Finally, usage of abductive reasoning ensures an adequate degree of reliability of the research results.

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4. Analysis and results

4.1. Co-creation as a cornerstone for business ecosystem approach

Danone, the company presented in this case analysis, has a quite unique approach to its business environment stressing the importance of an alignment of both economic and social goals, which are embedded into its business strategy. The importance of such an approach is also stressed by the top management of the Company, or putting it into the words of Franck Riboud, CEO Danone:

“Company’s ecosystem - economic and social environment, meaning its suppliers, its

employees, its customers, and the places where it operates; <...> It’s in a Company’s best interest to take care of [it].” (Danone Ecosysteme, 2010:2) A healthy business ecosystem is seen as an essential prerequisite for business growth. The global financial crisis in 2008-2009 affected Danone performance and the importance of business ecosystem approach has been once again confirmed as expressed by the management of the Company. Thus, the decision to strengthen business environment was taken and Danone Ecosystem Fund (also known as the Danone endowment fund) was established in 2009.

Table 4. Key facts about Danone

Year founded 1919

Sector, Industry, Sub-industry Consumer Staples: Consumer products: Food manufacturing

Annual Sales, 2013 21,298 million EUR

Net Profit, 2013 1,550 million EUR

Number of Employees, 2013-12-31 104,462

Markets Active (% of 2013 Sales) Europe incl. Turkey (39%),

North America & CIS countries (22%), ALMA zone (39%)

Year Danone Ecosystem Fund established 2009

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The Danone Ecosystem Fund (hereinafter - the Fund) was established by Danone Annual General Shareholders meeting on 3rd April, 2009, as 98.36 per cent of Danone shareholders voted for a creation of the Fund (Danone, 2009). The Fund is a separate legal non-profit entity aiming at strengthening Danone business ecosystem including its business partners, farmers, suppliers, etc. This is done by concentrating on three goals: 1) growing employment opportunities, 2) providing training and new skills, and 3) fostering micro-entrepreneurship (Danone Ecosysteme, 2010). The fund has received an initial investment from Danone equal to 100 million EUR, which formed its investment base. Interestingly to note, from the legal standpoint of view the approval of Danone shareholders was not necessary to establish such a fund, however the decision by the top management to go for such an approval ensured shareholders – the most important stakeholder group of any Company - had been on the same boat with the top management team.

The Fund is governed by The Guidance Committee setting the Fund’s strategy, by the Board of Directors responsible for the operational level decision making and The Social Innovation Committee, which approves if projects proposed are in line with the policies of Danone and strategy of the Fund. Thus, it can be argued that it is in the Company’s best interest to approve only such projects, which, among other goals set, have a potential to benefit further core business growth. Moreover, most of the Fund project managers are former Danone employees, who still belong to Danone group, have access to internal data, contacts and other Company resources and are supposed to act with an alignment to the Danone strategy.

Collaboration with external parties is seen as a key element for knowledge exchange to foster social innovation and achieve Fund goals. All projects within the Fund are co-created in collaboration among the team of the Fund, Danone country business unit (CBU) and an

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Fig. 1. The model of project implementation in collaboration between Danone and NGOs

Source: author, compiled from various primary and secondary data sources

Financing Governance Co-creation Co-Financing Building project case Implementation Financing Direct business benefits Indirect business benefits Non-for-profit Fund by MNE Funds centralized Managerial expertise Project manager Team of the fund

NGO Main partner Project manager Expertise (local know-how) Multinational Enterprise (CBU) Project manager Other non-profit partners Communities at the BOP Field communities Benefits Audit Independent Auditor Financing Governance Co-creation Co-Financing Building project case Implementation Financing Direct business benefits Indirect business benefits Non-for-profit Fund by MNE Funds centralized Managerial expertise Project manager Team of the fund

NGO Main partner Project manager Expertise (local know-how) Multinational Enterprise Project manager Other non-profit partners Field communities Benefits Audit CBU Legend

- stakeholder - key actions & relations Dashed/dotted if observed - key resources - value added / benefits not in all projects

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external NGO as a partner. Based on the empirical data and analysis of available secondary data the model explaining project implementation in collaboration between Danone and NGOs has been shaped (Fig. 1). The project co-creation works as follows. The MNE has provided an initial investment as well as other resources and performs the governance of the Fund. The Fund concentrates the human capital and business expertise and works together with the local CBUs to create a business case with an aim to strengthen the business environment of the Company in the local area CBU operates. The project must always aim to reach both business and social goals. Due to that reason a partnership with a non-for-profit organization is a prerequisite to start the project. In case a project is confirmed, the funding is always provided to the main partner (NGO), but never to Danone CBU. According to the informed Fund managers, in the recently started projects Danone CBU participating in the project co-creation is also asked to co-finance the project, which gives the incentive for the CBU to more actively participate in a project co-creation process. The project is always led by two project managers, one representative of the Fund, and one representative of the NGO, the main partner of the project. The Fund project manager expresses the importance of NGOs as a partner:

„They [NGOs] bring their enthusiasm, their expertise and their engagement in territories where we [Danone] operate.“ (quote, the Fund representative) The end goal of each project is to create a self-sustainable business model supporting Danone business ecosystem and also creating social value with a clear predefined criteria (Danone, 2012).

The projects are established in such a way that all parties provide their expertise and resources to test and establish mutually beneficial solutions. The beneficiaries here are the local communities (a target group of a project), whose achieved life improvement is measured by the social key performance indicators (KPIs) and also Danone (through the local

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CBU) is about to gain both direct and indirect business benefits, which are measured by business KPIs. According to one manager of the Fund, since 2014 the achievements in terms of social impact are started being audited by an external auditor in order to ensure the trustworthiness of the impact. What is more, NGO also gets some benefits from partnering with the MNE as it gets publicity, recognition and ability to grow through having high responsibilities as the main partnering NGO is always responsible for managing financial resources. The Fund itself does not earn any revenue. The important note must be made that local beneficiary communities are not necessarily equal to communities at the BOP as the Funds’ initial goal is to strengthen business ecosystem of the Company by achieving social goals, but not simply to address BOP communities or fight poverty in developing countries. 4.2. Project portfolio mix – does it really stand for the BOP?

The first projects approved by the Fund have been launched in January 2010 and by the November 2013 there were total 46 projects in the Fund’s portfolio. The amount of projects co-created by the Fund was growing fast within 2010-2011, however the growth pace of project scope slowed in 2012-2013 (see Fig. 2). Such a dynamics raises several questions. It might be that it has become hard to manage a lot of different projects in the portfolio. Moreover, it might also be that reaching goals of first projects took longer than initially planned. Reaching the self-sustainability of the project is extremely hard as also confirmed by the key informants. According to one project manager of the Fund:

„Today, I think, we have two projects maybe, which have the maturity to be self

sustainable, <...> and I am sure that some of them... some of them probably will fail out of the whole portfolio.“ (quote, the Fund representative) The project is considered self sustainable once no more input in terms of money and expertise is required from the Fund’s team and the partnering NGO, meaning that field communities have enough skills and capabilities to continue running the project on their own.

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Fig. 2. The longitudinal dimension of Dano

Source: author, compiled

The Fund is currently engaged in a co

broad categories – sourcing, care services, distribu

half of the projects are related to sourcing (17) and caring services (11) (see According to World Bank data most of the BOP population is concentrated in sub Africa and rural areas in Asia (World

great part of Danone Ecosystem Fund projects are located in regions of

development, such as Western Europe or North America. This mismatch implies that outcomes of fund projects may

markets (see Appendix). This can have several explanations. First, the Funds’ initial and main goal is to strengthen business environment and its operations, thus one would expect projects to be located at similar locations where a company is currently running its business. Second, even if some projects are devoted to help the poor by being aimed directly at the

2 8 12 6 4 0 10 20 30 40 50 60

Jan Jun Oct

2010

Cumulative number of active projects co

Number of new projects launched since last report

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The longitudinal dimension of Danone Ecosystem Fund portfolio development

compiled from Danone Ecosystem Fund newsletters (2010

engaged in a co-creation of projects, which can be defined into 5 sourcing, care services, distribution, territory and recycling. More than half of the projects are related to sourcing (17) and caring services (11) (see

According to World Bank data most of the BOP population is concentrated in sub

Africa and rural areas in Asia (World Bank, 2013). However, it is interesting to note that a great part of Danone Ecosystem Fund projects are located in regions of

development, such as Western Europe or North America. This mismatch implies that outcomes of fund projects may reach only ‘the top of the base‘ of the poor at

This can have several explanations. First, the Funds’ initial and main goal is to strengthen business environment and its operations, thus one would expect ted at similar locations where a company is currently running its business. Second, even if some projects are devoted to help the poor by being aimed directly at the

22 25 33 39 39 41 10 3 8 6 0 2

Feb Jun Nov Feb Jun Sep

2011 2012

Cumulative number of active projects co-created by Danone Number of new projects launched since last report

ne Ecosystem Fund portfolio development

Danone Ecosystem Fund newsletters (2010-2013)

ts, which can be defined into 5 tion, territory and recycling. More than half of the projects are related to sourcing (17) and caring services (11) (see Table 5). According to World Bank data most of the BOP population is concentrated in sub-Saharan Bank, 2013). However, it is interesting to note that a a relatively higher development, such as Western Europe or North America. This mismatch implies that of the poor at the BOP This can have several explanations. First, the Funds’ initial and main goal is to strengthen business environment and its operations, thus one would expect ted at similar locations where a company is currently running its business. Second, even if some projects are devoted to help the poor by being aimed directly at the

43 46

2 2 3

Apr Nov

2013 created by Danone

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Table 5. The mix of projects co-created by Danone Ecosystem Fund

Region

Type of the BOP project

Total Sourcing Caring

Services Distribution Territory Recycling

Western Europe 2 5 2 5 - 14

Asia 5 1 1 2 1 10

Latin America 3 1 2 - 3 9

Central & Eastern Europe 5 3 - - - 8

Africa & Middle East 2 - 2 - - 4

North America - 1 - - - 1

Total 17 11 7 7 4 46

Source: Danone Ecosystem Fund

BOP, it would also make little sense to start such a project as a „green field“ investment, i.e. in a place where business is not present now (or is not planning to be present in the near future). For example, Danone core business activities are performed in some countries in sub-Saharan Africa, however not the poorest ones such as Tanzania or Ethiopia, where respectively 28 million and 25 million live in an extreme poverty (World Bank, 2013). There are also none Danone Ecosystem Fund projects established in sub-Saharan Africa so far (see Appendix). On the other hand, it is evident that poverty is still an existing phenomenon also at more developed countries. Some unprivileged communities do not live in an extreme poverty but still on very low income levels. Additionally, such communities also often lack skills and capabilities to improve their living standards. Thus, it cannot be unambiguously generalized that the Fund projects do not tap the BOP markets. Based on such a conclusion it is evident that an in-depth analysis per project is necessary.

In short, it can be summarized that only part of the Fund projects aim at helping people at the BOP, however not in the countries where the extreme poverty levels are the highest. As the Fund does not operate in the least developed markets worldwide, it can be argued that the

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positive impact on a social dimension and effects on poverty alleviation are ex-ante determined to be of a limited fruitfulness at the BOP.

4.3. Business model analysis of the selected projects

In the following section 3 different projects co-created by Danone Ecosystem Fund are analyzed using the business model canvas by Osterwalder & Pigneur (2010): (i) a fresh dairy product micro-distribution network in Egypt, (ii) fresh milk sourcing from small scale farmers in Ukraine, and (iii) a waste management project in Mexico. Even though these projects have slightly different relation to Danone core business, I claim that all of them tap the BOP as target groups of all three projects have income levels of 1,500 USD per annum or less and also lack skills and capabilities to substantially improve their standard of living. Moreover, according to the information provided by the key informants during the primary data collection, all these projects have reached an adequate level of maturity or even self-sustainability to try replicating them in different contexts. As a result, it creates a unique opportunity to analyze the business models behind each of the project.

4.3.1. Micro-distribution network in rural Egypt

Out of the whole Danone Ecosystem Fund project portfolio only 4 are located in Africa and Middle-East region (Table 5). One of these four projects one is a distribution project in Egypt named OMDA-Sahteen. This project has three main aims: 1) to create new jobs in rural areas of Egypt; 2) to generate sustainable income for the local communities involved in the project and; 3) raise society awareness around nutrition and health habits (Danone Ecosysteme, 2012). According to one project manager of the Fund interviewed this project has a potential to be replicated in other countries, thus it is interesting looking at the business model behind it in more detail.

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available data, the business model of OMDA-Sahteen project can be conceptualized using the theoretical business model canvas (Table 3). The business model (Table 6) is presented from Danone Egypt, which is the CBU of Danone, perspective.

The project name OMDA-Sahteen stands for small local entrepreneurs (OMDAs) and health ambassadors (Sahteen) representing the program. The project is co-created in partnership among the Fund, Danone Egypt and a local branch of non-for-profit organization Ashoka Arab World. The non-for-profit organization brings their expertise on social entrepreneurship and the knowledge about the local market. Furthermore, the three main target groups (conceptualized as Customers) of the project can be identified, namely small local entrepreneurs owning the shops in rural Egypt, unemployed Egyptian women and men, and poor families with children in rural areas of Egypt. Each of the target group plays a different role within business model behind the project.

First, the project team provides of up to 6 month training to unemployed, mostly women, who once performed the training become the Sahteens - ambassadors - of the health programme. These Sahteens visit families in local communities and share their knowledge about health and food safety, thus taking an active role to change the perception and common food consumption habits of local communities. As exemplified by project manager close to the matter:

„The point is to show that nutrition is important for child to grow and to stop buying

chips for example but better buy fruits or yoghurt to have a good health.“

(quote, the Fund representative) Usually there are 4 different training models applied, thus each community or family is visited at least 4 times by the Sahteen women. Such approach has its own benefits as local communities are more willing to trust local women and accept the training provided by them rather than from someone unfamiliar from outside the local community.

Business models at the base of the pyramid : the case of Danone