Dutch SMEs challenges at the Base of the Pyramid (BoP) : a multiple case study exploring how Dutch SMEs overcome the challenges faced at the Base of the Pyramid in emerging markets

Dutch SMEs challenges at the Base of the Pyramid (BoP)

at the Base of the Pyramid in Emerging Markets

Institution Amsterdam Business School – University of Amsterdam

Qualification MSc. Business Administration – International Management Track Student Michael Petrus Suijkerbuijk

Student number 10872051 Supervisor Drs. E. Dirksen Date of submission January 29th, 2016 Version Final version (1.0) Word count 16,290

Statement of originality

This document is written by Student Michael Suijkerbuijk, who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Table of Content

1.3 Research aim & research question ... 3

1.4 Research Design ... 4

1.5 Thesis outline ... 4

2. Base of the Pyramid (BoP) ... 5

2.1 BoP Definition ... 5

2.2 Poverty alleviation ... 7

2.3 Profiting from the poor (BoP 1.0) ... 8

2.4 Working with the poor (BoP 2.0) ... 11

2.5 Research gap and research question ... 13

3. Theoretical Framework ... 15

3.1 SMEs ... 15

3.2 Co-creation / building mutual value ... 16

3.3 Context: Emerging Markets (EM) ... 17

3.3.1 Institutional voids ... 18

3.4 Characteristics of the BoP ... 19

3.4.2 Awareness ... 21

3.4.3 Accessibility or availability ... 21

3.4.4 Acceptability ... 21

3.4.5 Four A framework ... 22

3.5 Overview Working Propositions (WPs) ... 22

4. Methodology ... 23

4.1 Qualitative research design ... 23

4.2 Multiple Case Study ... 23

4.3 Selection of cases ... 24

4.4 Collection of data ... 25

4.5 Analysis of data ... 26

5. Analysis and Results ... 28

5.1 Analysis ... 28

5.1.1 SME activities ... 28

5.1.2 Type of company: SME ... 28

5.1.2 BoP 2.0 Approach ... 30

5.1.3 Role of partnerships ... 32

5.1.4 Institutional voids ... 33

5.1.5 BoP Characteristics ... 35

5.2 Results Working Propositions ... 38

6.2 Conclusion ... 41

6.2.1 Limitations of this research ... 42

6.2.2 Managerial Implications ... 43

6.2.3 Academic Implications ... 43

6.2.4 Suggestions for future research ... 43

References ... 45

Appendix ... - 1 -

Appendix I: Interview protocols ... - 1 -

Appendix II: Coding scheme ... - 9 -

Abbreviations

BoP = Bottom or Base of the Pyramid ToP = Top of the Pyramid

SME = Small and Medium-sized Enterprises MNE = Multi-National Enterprise*

MNC = Multi-National Corporation** MFI = Micro-Finance Institute

* and ** are used interchangeable in this research, following the source of literature used. List of tables

Table 1 Overview of the Working Propositions p. 21

Table 2 Overview of the interview respondents p. 25

Table 3 Overview of the results on the Working Propositions p. 37 Table 4 Final Coding Scheme Manager & Expert (Author) p. -9-

List of figures

Acknowledgement

First of all, I want to take the opportunity to thank Dr. J. Lindeque. His lectures on International Strategy and his guidance at the period of topic choices pointed me towards this research subject. Started off with an interest on business in Africa, the topic was further elaborated towards Dutch SMEs business practices at the Base of the Pyramid in the Emerging Markets context. For that shift from specific to a more general perspective, I want to thank my supervisor, Drs. E. Dirksen. His guidance, expertise, and motivational words were a great help in narrowing down my subject and finalizing this research. Exemplary were his words right before I had to finish writing up my Thesis: ‘it’s about burning the midnight oil’.

Finally, I want to thank my friends and family, who were fully aware of the situation I was in and were very supportive and patient in process. While unable to help me in detail, they did everything in their power and supported me unconditionally.

Abstract

Poverty alleviation is increasingly being picked up by businesses, as alternative actor over the traditional actors, such as governments and NGOs. This, combined with MNCs increased interest in emerging markets (EM), leads to the Base of the Pyramid (BoP) as the market being increasingly targeted by firms. In this BoP market, there is an opportunity for firms to combine a commercial orientation with a social one, poverty alleviation.

The BoP provides companies with an enormous target market for their products and services, with the unit of analysis originally being the MNE. However, current academic understanding on other actors, such as SMEs, is lacking. Therefore, this research focuses on SMEs, by means of Dutch SMEs. A combination of an institutional perspective, with a perspective by which the challenges of companies targeting the BoP are accounted for, is used to analyze how Dutch SMEs are challenged, and how they are overcoming the challenges, when targeting the BoP.

A qualitative research design is used, by means of a multiple case study on both six Dutch SMEs and four BoP topic experts. The comparison of these cases within and across cases, results in multiple findings. The finding is Dutch SMEs are targeting the BoP market in an inclusive way, by working with the local people, instead of merely seeing them as consumer. Furthermore, partnerships are critical for Dutch SMEs to target the BoP. Finally, the BoP characteristics by means of the 4A framework form an exhaustive set of elements to take into account when targeting the Bop as a market.

1. Introduction

For a very long time, alleviating the poverty of the poorest people on earth is done by governments, international organizations (e.g. World Bank), non-governmental organizations (NGOs), and by means of aid (Karnani, 2007a). Poverty alleviation is formulated as an urgent challenge, challenge number one, by the UN in the Millennium Development Goals (UN, 2015). The goal is halving the number of people living on $1.25 per day and therewith eradicating extreme poverty and hunger. Over the years, businesses have picked up the challenge as well and are doing their part in fighting this battle against poverty (Kolk, Rivera-Santos and Rufin, 2014; London & Hart, 2004). Furthermore, the topic is on the agenda of the international business (IB) literature (Ricart, Enright, Ghemawhat, Hart, & Khanna, 2004).

1.1 Background

Multinational Corporations (MNCs) are looking and operating more and more in emerging markets (EM) (Arnold & Quelch, 1998). With this comes the challenge of institutional voids, which is the term for the absence of market intermediaries, both in a physical and institutional way. The effect is that the market functions differently than in developed markets (Khanna & Palepu, 2013).

With this shift towards emerging markets, another shift has occurred. One where firms are increasingly targeting the base of the pyramid (BoP), instead of the top of the economic pyramid (ToP) (London & Hart, 2004). Early research by Prahalad and Hart (2002) on the BoP subject shows that there is an opportunity for the world’s larger companies, MNCs, to make a fortune at BoP, while alleviating poverty at the same time. Prahalad and Hart (2002, p. 1) define the BoP as the “billions of aspiring poor who are joining the market economy for the first time”. The BoP is also referred to as the 4 billion people with an income of $1,500/$2,000 or lower per year. Or, a figure of around $2 per day is used (Banerjee & Duflo,

2007; Prahalad & Hart, 2002; Prahalad & Hammond, 2002). Hammond, Kramer, Tran, Katz, and Walker (2007) define the total consumer market at the BoP on $5 trillion, based on an annual income level of $3,000 or lower. While definitions differ and no consensus is reached, it is clear that the potential the BoP presents for firms is enormous. Critique by Karnani (2007a), on the above-described BoP approach, is whether firms are actually helping the poor when targeting them with their business practices. In response, a BoP 2.0 approach is formulated (Simanis & Hart, 2008). Which, in contrast to the early approach, focuses on firms targeting the BoP in an inclusive manner. In this 2.0 approach, the BoP people are not only seen as consumer, but also as potential producer, employee or entrepreneur (Simanis & Hart, 2008).

1.2 Problem statement

The original focus of the BoP subject is on the role of MNCs (Prahalad, 2005; Prahalad & Hart, 2002). In critique, Karnani (2007a) does not see a role for MNCs, but suggests the small and medium sized enterprise (SME) to take the lead. Kolk et al. (2014) argue that a shift is occurring from this original focus, but also conclude that MNE initiatives are limited. Kolk et al. (2014) call for more research on the different actors active in BoP initiatives, which the SMEs are part of.

1.3 Research aim & research question

The aim of this research is the exploration of the challenges that Dutch SMEs face when targeting the BoP in emerging markets (EM). It is about both the challenges faced and the solutions used to overcome these. The main research question used in this research is:

“How are Dutch SMEs overcoming the challenges faced when targeting the Base of the Pyramid (BoP) in emerging markets (EM)?”

1.4 Research Design

This research has a qualitative research design and a multiple case study is used. The case studies are based on the business activities of six Dutch SMEs, active at the BoP, and the viewpoint of four experts on the BoP subject. To collect the primary data, semi-structured interviews are held with managers of Dutch SMEs and experts on the BoP subject. The use of semi-structured interviews allows for gaining a rich and in-depth insight into the challenges SMEs face, complemented with the approaches followed to cope with these challenges. This is in line with the explorative nature of this research.

1.5 Thesis outline

This thesis follows the steps of the research process. First, a Literature Review is provided on the BoP literature, by means of a discussion on the development of the BoP subject over time and how firms can approach the BoP market when doing business in it.

Second, the Theoretical Framework is discussed. This chapter contains a discussion on the key terms and concepts which will be the focus of the research. Third, in the Method chapter the design and steps of the study are explained. This is done by discussing the research method, data collection and analysis procedures, and the way how research results are formulated. Fourth, the Analysis and Results chapter starts off with a detailed exploration of the Dutch SMEs company cases. Furthermore, it will include data of experts on the BoP subject. All the results and findings are summarized at the end of the chapter in the Results section. Finally, in the fifth chapter, the study will be concluded with a combined Discussion and Conclusion. This chapter contains a summary of the results, a discussion and statement of the contribution, the answer to the research question, and finally, the limitations and suggestions for future research are addressed.

2. Base of the Pyramid (BoP)

This chapter presents an outline of the most relevant literature regarding the Bottom / Base of the Pyramid (hereafter: BoP) concept. Multiple definitions for both Bottom and Base of the Pyramid exist, which are sometimes used interchangeably. First of all, the definition used in this research is addressed. After this, the development the BoP subject has undergone over the years is discussed. Finally, the gap in the literature addressed by this research is stated, followed by the research question.

2.1 BoP Definition

A consensus on how the Bottom, or Base, of the Pyramid should be defined, is not yet reached in the literature. The debate in the academic literature starts in 2002, when Prahalad and Hart define the Bottom of the Pyramid as four billion people who are living of a yearly income of $1,500 or lower (Prahalad & Hart, 2002). Also a definition of a yearly income of $2,000 or lower is used (Prahalad & Hammond, 2002). Besides these figures, Prahalad also argues that the BoP consists of the “world’s 4 billion poor – people who live on far less than $2 a day” (Prahalad, 2005, p. 3). Another definition is raised by Hammond et al. (2007), who define the BoP as people living on an annual income of lower than $3,000 per capita, per year (based on the 2002 Purchasing Power Parity; or PPP). The global consumer market, based on that figure, is calculated to constitute of around $5 trillion.

Critique on the BoP concept follows in 2007, when Karnani argues that there are less people in the specified BoP market (Karnani, 2007a). Karnani (2007a) argues that the estimation by Hammond et al. (2007) is high due to the use of the $3,000 level, which according to him is not a commonly used cut-off level. Prahalad himself responds to the critique in the foreword of the book by London and Hart (2010)., in which he points out that that the number of people and the actual income calculated, by PPP or other measures, does

not matter to the actual validity of his proposition of the BoP topic (London & Hart, 2010). This is agreed on by London and Hart, but they do define the BoP by other characteristics. One of these is that the BoP is an excluded part of the formal capitalistic economy (London & Hart, 2010).

It is clear that the definition of the BoP concept is widely dispersed and no single answer is in place. As a result of their literature review of the BoP subject over the years 2000-2009, Kolk et al. (2014) argue for a statement of the definition used, when researching the BoP as a construct. Following the argument by Kolk et al. (2014), this research is guided by a definition in line with the definition by Prahalad (2005), who frames the income level at $2 per day. The choice to use this definition is based on two arguments. First, it is the lowest figure within the definitions mentioned, so the target group will be underestimated rather than overestimated. Second, and more importantly, the income figure is framed per day, instead of per year. This has the advantage that it takes into account the finding by Banerjee and Duflo (2007), who argue that not only the income of people at the BoP is low, but also highly variable. The $2 per day figure is used when there needs to be any judgment whether cases and/or firms are targeting the actual BoP.

While in theory there can be a difference in framing the concept by income level and (potential) market size, in this research the spirit of late Mr. Prahalad will be prevalent. This means that the focus is not constantly on the actual income level as most important factor, but the exploration of the BoP concept and the knowledge development of it has the highest priority.

The use of the abbreviation BoP, within this research, reflects Base of the Pyramid instead of Bottom of the Pyramid. This vision follows the statement of Arora & Romijn (2012), who state that ‘Base’ is the more favorable word over ‘Bottom’, as this has a more positive stance.

2.2 Poverty alleviation

Early in the BoP literature, the private sector is seen to be equipped to, on the one hand develop a profitable business at the BoP, while on the other hand also create economic development for the persons who are living in poverty (London & Hart, 2004; Prahalad & Hammond, 2002; Prahalad & Hart, 2002). Prahalad (2005, p. 1) argues that “if we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole need world of opportunity will open”. Following Karnani (2007a), who proposes that, while poverty reduction is relevant and necessary, the consumers at the BoP will only have an advantage when either the initiative will reduce the price, and by that the trade-off between product and quality, or when it will increase their income.

The position is elaborated on by Prahalad and Hammond (2002) and London & Hart (2004), who argue that for poverty alleviation to happen partnerships are essential. This can be partnerships with agencies, non-governmental organizations (NGOs), or communities locally, but there should be some kind of partnership to let markets develop and create access to these markets for the people at the BoP.

While poverty alleviation has a strong link to ethics and corporate social responsibility (CSR) (Porter & Kramer, 2011), this research focuses on the economical view of doing business at the BoP. The very strong link between the economic and social element will be visible when going into detail on the development the BoP field has undergone over the years. For this research, CSR will not be zoomed into in great detail, as this is not the focus, but it will be elaborated on when necessary to provide a full argumentation on a topic at hand.

In sum, poverty alleviation lies at the heart of the early BoP concept and is suggested to be the next role for the private sector, as they can have an important contribution. The BoP concept is discussed in detail in the next sections.

2.3 Profiting from the poor (BoP 1.0)

The earliest mention of the BoP is by Prahalad & Lieberthal (1998) in a working paper, not yet as an academic concept immediately. Prahalad & Lieberthal (1998) state that companies cannot simply increase their sales in emerging markets (EM) with existing products, as that only leads to limited success. Companies need to adopt a new way of thinking and in doing so, rethink and reconfigure their business models (Prahalad & Lieberthal, 1998). In their analysis on the emerging markets the authors see four tiers, of which the first three are the focus for companies, and a simple mention of the fourth as “a huge group made up of people who are unlikely to become active consumers soon” (Prahalad & Lieberthal, 1998, p. 71).

In 2002, articles by Prahalad and Hammond, and Prahalad & Hart provide a clearer picture on this huge group. According to their definition, the BoP consists of 4 billion people, who earn less than $2,000 per year. This presents an economic potential for firms at about 65% of the world’s population, which is concluded to be only tapped into by a small number of governmental organizations, NGOs and MNEs (Prahalad & Hammond, 2002; Prahalad & Hart, 2002). This group, described as Tier 4, is visible in below-mentioned schematic overview of the world population.

Where the early notion is that firms should adapt their business models, the more recent perspective is that there is a demand for “innovation in technology, business models, and management processes” (Prahalad & Hart, 2002, p. 6). Multiple scholars state the importance of the necessary adaptation to the offering and the business model, beyond the incremental changes to make products and services fit the BoP market (London & Hart, 2004; Ricart et al., 2004).

London & Hart (2004) elaborate on the BoP subject and discuss an important difference between the developed and emerging market. This difference is the existence of a large, most of the time quite hidden, informal economy. In comparison with the developed world, where this informal economy is much smaller it is too costly and/or complicated to enter the formal economy of emerging markets. Therefore, the informal economy plays a larger role in these markets (London & Hart, 2004).

A key point in time in the BoP literature is the book by Prahalad (2005), called The Fortune at the Bottom of the Pyramid. In this book multiple cases are described from the viewpoint of the multinational company (MNC), as Prahalad pushes MNCs to regard the BoP as a business opportunity by changing the focus of their international strategy. The main proposition of the book is accurately summarized by Karnani (2007a), who states three key elements: 1) the untapped purchasing power at the BoP, which private companies can profit from, 2) the role of private companies in eradicating the poverty of the poor by selling their products/services, and 3) the suggested leading role of MNCs in selling to the poor (Karnani, 2007a).

Important when looking at the BoP as a market, is the fact that people in this target market have a lack of a sufficient income and, therefore, a limited ability to pay (Seelos & Mair, 2007). Therefore, the margins on a specific product or service need to be low, in order

to be affordable for people at the BoP. The high number of consumers, however, can make the BoP market interesting for the private sector (London & Hart, 2004; Seelos & Mair, 2007).

Extensive research by Hammond et al. (2007) shows that the people living in poverty, those in the BoP, are both poorly served by firms and not included in the market. Exemplary is the often limited access, or none at all, to employment and basic products and services. The BoP segment can be characterized by three elements, according to Hammond et al. (2007). First, they have significant unmet needs, for example the access to basic needs as water, sanitation, electricity, and health care. Second, they are dependent on an informal way of living. Third, they are impacted by the so-called poverty penalty. This poverty penalty is described as: “many in the BoP, and perhaps most, pay higher prices for basic goods and services than do wealthier consumers - either in cash or in the effort they must expend to obtain them - and they often receive lower quality as well” (Hammond et al., 2007, p. 5). These three elements can be resolved by means of market-based solutions, but are creating a business challenge specific to this BoP context (Hammond et al., 2007).

London and Hart (2004) describe the informal sector as “an immense and fast-growing economic system that includes a thriving community of small enterprises, batter exchanges, sustainable livelihoods activities, subsistence farming, and unregistered assets” (London & Hart, 2004, p. 353). This corresponds with a conclusion by Prahalad (2005), who argues that the market for products and services is latent at the BoP.

In conclusion, by creating profitable businesses in an inclusive manner, the private sector can play their part in alleviating poverty for the unprivileged people at the BoP, who are in fact representing the largest group of the world population. Central for firms targeting the BoP is the profitable opportunity of an active role as alternative to handing out aid to these people. This is visible by the words of Prahalad: “when the poor at the BoP are treated as

consumers, they can reap the benefits of respect, choice, and self-esteem and have an opportunity to climb out of the poverty trap.” (Prahalad, 2005, p. 99).

2.4 Working with the poor (BoP 2.0)

The initial version of the BoP concept by Prahalad receives much attention in the academic literature and by practitioners. However, it also receives fierce critique, mainly in the person of Karnani, as concluded by Kolk et al. (2014). Karnani (2007a, 2007b, 2007c) argues that the proposition of profiting from the poor is mainly successful for the MNC, while it does not address the actual needs of the poor. Karnani (2007a, 2007b) argues that the BoP proposition is too good to be true and has fallacies. The most important one being that most initiatives do not target the BoP, as a result of using an incorrect definition/measure of poverty (Karnani 2007b). According to Karnani (2007a), the welfare of the poor can even be reduced by a firm’s BoP practices. He argues that: “the poor are vulnerable by virtue of lack of education (often they are illiterate), lack of information, and economic, cultural, and social deprivations” (Karnani, 2007a, p. 97). Furthermore, he criticizes companies who only target the BoP as consumer, where he wants people from the BoP to become producer. He strives for the involvement of people locally at the BoP as a way to really improve their income level (Karnani 2007a, 2007b). According to Karnani (2007a) the way to help the poor, and alleviate poverty in the process, is either to lower the price of the product or service, or to improve the actual income or people.

Simanis and Hart (2008) are the first who argue for a BoP 2.0 perspective, by means of the ‘BoP 2.0 Protocol’. This protocol is in line with Karnani’s (2007a) question whether the poor profit from the companies activities when seen as a target group. Simanis and Hart (2008) argue for a bigger role for people at the BoP. Rather than only consume, they can become a business partner by means of producer, employee or entrepreneur. By following this approach, companies provide the BoP with products/services and thereby reduce the access

barrier, but also create potential for income and economic activity. Furthermore, it can be a means for co-creation, when the insight of people locally can be valuable input for companies (Simanis & Hart, 2008).

London, Anupindi, and Sheth (2010) zoom in on local BoP producers and argue for the possibility of mutual value creation, but only when productivity and transactional constraints are alleviated. Rangan, Chu and Petkoski (2011) argue to segment the BoP by value-creation role. The defined roles someone at the BoP can play is consumer, coproducer, or client. When companies do this successfully it they can profit themselves, while the community profits as well.

London and Hart (2010) explain, in their book Next Generation Business Strategies for the Base of the Pyramid, that the distinct factor between the first and second BoP approach is the shift from ‘fortune at the BoP’ to ‘fortune with the BoP’. Furthermore, the authors state the shift from the first BoP approach, where products are to be lower priced and further distributed, to a second approach where co-creation is emphasized (London & Hart, 2010). London and Hart state that: “This more nuanced view of BoP venture strategy extends and enhances our thinking about market development, innovation, capability requirements, and cross-sector partnerships” (London & Hart, 2010, p. 3).

Concluding, the BoP 2.0 approach is a much researched part of the literature. But, while the 2.0 approach is the next milestone, the actual debate and development of the BoP literature has not yet stopped. Simanis (2012) states in a critical article, described as a reality check at the BoP, that the original theory by Prahalad does not work after all. The theory of Prahalad, summarized in the article by Simanis (2012), advocates that the very low-income markets are best reached by a low-price, low-margin, and high-volume model. Simanis (2012) states two important conditions that needs to be met for this model to work. First, there should be an existing infrastructure that can be leveraged to serve ‘poor’ consumers. Second, the

consumers have to know how to buy and use it. Over the years, it has become clear that these conditions face firms with problems on the long term. This is the case when the conditions are not met, for example when firms want to scale their business to a larger number of villages or when consumers are not accustomed to using the provided solution. The solution, according to Simanis (2012), lies in margin, because the high costs of doing business can be retrieved by increasing the margin and thereby the contribution per transaction. In this way, firms can build up towards a more sustainable business (Simanis, 2012).

2.5 Research gap and research question

Garrette and Karnani (2010) conclude that MNCs are hesitant about entering the BoP, due to the (flexible) income level of the people and the lack of a decent infrastructure for distribution means. Moreover, different external barriers are mentioned in the literature which impact the different actors when targeting the BoP, examples of these being the lack of infrastructure and problematic distribution possibilities, corruption, and income to spend (Prahalad & Hart, 2002; Hammond et al., 2007; Karnani, 2007a; Seelos & Mair, 2007; Mohr, Sengupta, & Slater, 2012).

While Kolk et al. (2014) conclude that the idea of a combination of profit generation and poverty alleviation has attracted the attention of business practitioners and academics, many questions remain on this topic. One of the questions is particularly important in addressing the research gap for this research, the debate on the unit of analysis. The original unit of analysis of the BoP literature, the MNC, is moved away from (Kolk et al., 2014). The original viewpoint, as introduced by Prahalad and Hart (2002), is that the MNC is suited best to alleviate poverty, while generating profit in doing so. In response, Karnani (2007a) criticizes the role of the MNC and suggests a bigger role for the small and medium-sized enterprise (SME). He sees this as the type of company which can best exploit the opportunity of developing a business environment for poverty reduction at the BoP. This argument is

supported by Kolk et al. (2014), who conclude that the examples of MNE initiatives are limited. Exemplary for this is the statement that the most cited example is Unilever India (HLL), which is the first example mentioned by Prahalad and Hart (2002). Kolk et al. (2014) conclude that an important role can be played by other firms besides the MNEs as well, and state that: “Thorough discussions of the role of different actors in BOP initiatives are therefore called for, as these discussions carry important implications for the very notion of profitability at the BOP” (Kolk et al., 2014, p. 360). Kandachar and Halme (2008) also state the inclusion of other market-based solutions by entrepreneurs different than MNEs, such as SMEs. While Karnani (2007a) suggests a bigger role for SMEs, in recent literature there is no specific focus on their potential role in the BoP. Furthermore, Kolk et al. (2014) conclude that most initiatives reviewed regard the poor mainly as consumer.

In sum, to knowledge of the author, the business activities and challenges faced by SMEs targeting the BoP are understudied and constitute an interesting gap in the literature to study. This research focuses on the exploration of the BoP subject, specifically for Dutch SMEs. The research question is:

“How are Dutch SMEs overcoming the challenges faced when targeting the BoP in emerging markets?”

To answer above-mentioned question, this research takes the perspective Rivera-Santos and Rufin (2010) use in their research, and focuses on a combination of the institutional perspective and the elements which characterize the BoP environment. In sum, the starting point of this research is looking at the challenges Dutch SMEs face when targeting the BoP by means of institutional voids and the BoP characteristics.

The next chapter, the Theoretical Framework, provides a detailed theoretical perspective on how the above-mentioned literature gap is explored.

3. Theoretical Framework

After introducing the BoP as a general concept, this chapter goes into detail on the actual context where the BoP is placed in for this research. This is followed by the key concepts and themes, which are used to explore the BoP subject for Dutch SMEs. First, it is necessary to define the type of company which functions as the unit of analysis in this research, the SME.

3.1 SMEs

To define an SME, the definition of the European Commission (2015) is followed for this research. This definitions states that an SME can either be defined by headcount, in combination with turnover or balance sheet total. In detail, SMEs have a headcount under 250 employees and a turnover under €50 million, or a balance sheet total under €43 million. This description defines the medium-sized company category, while the small category is defined by a headcount under 50 people, turnover and balance sheet under 10 million, and finally, the micro category is defined by headcount under 10 people, turnover and balance sheet under 2 million (European Commission, 2015).

This study addresses the understudied nature of SMEs, while most existing literature has a strong focus towards the MNCs. Prahalad and Hart (2002) compare MNCs to local firms and state that MNCs have an advantageous position, as MNCs have the resources, are able to transfer knowledge over markets, and can build towards a commercial infrastructure in which actors can unite. There are two elements questionable when comparing above-mentioned MNC advantages to SMEs. First, the question arises whether SMEs have the same advantage over local BoP firms, as they probably are not able to leverage their resources and transfer knowledge to the extent MNEs can. The second question, in line with the first question, is whether SMEs are at a disadvantage compared to MNEs. For example, it could be the case that SME, when compared to MNEs, have a smaller amount of resources, less

knowledge transfer, and a smaller ability to build towards an infrastructure where actors are united (Prahalad & Hart, 2002). Recent literature with a focus on the BoP does not provide an answer to these questions, to knowledge of the author, and provides an interesting aspect to explore with this research.

3.2 Co-creation / building mutual value

In spirit of the BoP 2.0, or the mutual value creation, approach (London & Hart, 2010; Simanis & Hart, 2008), Dutch SMEs should work together with the poor. By doing this, firms can create trust and build a long-term relationship with local parties (Reficco & Márquez, 2012). Following London and Hart (2004), firms need to get local capacity and social embeddedness. The suggested BoP 2.0 approach focuses on that, as “it moves corporations beyond mere deep listening and into deep dialogue with the poor, resulting in a shared commitment” (Simanis & Hart, 2008, p. 2). In this approach people at the BoP are included as consumer, but also e.g. producer, employee or as an entrepreneur (Simanis & Hart, 2008). In this 2.0 approach, the BoP people are not only seen as consumer, but also as potential producer, employee or entrepreneur (Simanis & Hart, 2008).

Anderson, Markides, and Kupp (2010) conclude that companies, which are a success at the BoP, have community buy-in and trust, for which non-traditional partnerships are needed. To analyze MNEs on this subject, Rivera-Santos and Rufin (2010) look at the network implications MNEs face when the BoP is entered. These implications are important as these, partly, address the business and social differences firms can face between the ToP and BoP market. The starting point for the authors is the conclusion of London and Hart (2004), who determine the importance of partnerships with non-traditional actors. These actors are described by London and Hart (2004, p. 361) as: “successful base-of-the-pyramid strategies relied heavily on non-traditional partners. These partners include non-profit

traditional partners such as national governments and large local companies”. Therefore, the following two propositions are proposed:

WP1a: Dutch SMEs include the people living at the BoP not only as consumer, but also in a more inclusive role of producer, employee or entrepreneur.

WP1b: Dutch SMEs use non-traditional partnerships to create buy-in and trust, to be able to build long-term relationships with people at the BoP and the community they live in.

3.3 Context: Emerging Markets (EM)

For this research the focus is limited to the BoP in emerging markets (EM), also described as emerging economies (EE). Most BoP markets are situated in these markets in Africa, Asia, and Latin America and the poor people live predominantly in the rural areas of the country (Mohr et al., 2012). Hoskisson, Eden, Lau, and Wright (2000, p. 249) describe EE as: “low-income, rapid-growth countries using economic liberalization as their primary engine of growth”. Following the arguments of Hoskisson et al. (2000) and Peng (2002), institutional theory is used to analyze how firms formulate strategies for EE.

North (1990, p. 3) describes an institution as: “humanly devised constraints that structure political, economic and social interactions”. According to North (1990), the institutional frameworks exist of both a formal and an informal constraint. Where the former refers to constitutions, laws and property rights, the latter includes norms of behavior and traditions. As show of importance of this subject, London and Hart (2004) argue that firms should both incorporate the formal and informal economy at the BoP, in order to become successful.

3.3.1 Institutional voids

Rivera-Santos and Rufin (2010) conclude that successful MNEs share activities with non-market actors, as these help them to address the faced institutional voids or work around missing actors in the value chain. So, according to Rivera-Santos and Rufin (2010) there is a disadvantage for MNEs targeting the BoP, which is linked to institutional voids.

The institutional voids concept describes the institutional differences between the home-country of a developed market MNE and the EM host-country it enters (Khanna & Palepu, 1997; 2006). The research by Khanna and Palepu (1997; 2006) has one central perspective: the finding that strong institutions are absent in EM. The presence of institutional voids describes the absence of the physical, sociopolitical, and economical infrastructure, the market does not function fully (Khanna & Palepu, 2013). In greater detail, Khanna & Palepu (1997) derive five institutional dimensions: capital market, labor market, product market, government regulation, and contract enforcement. Firms must overcome the lack of institutions and fit their strategies to the institutional context in the country they want to enter (Khanna & Palepu, 1997). So, this means that this has impact on firms, such as Dutch SMEs, who are targeting EM, and within those the BoP.

De Soto (2000) describes the institutional environment of an entrepreneur in Lima, who wants to set up a formal business. Working through the ‘red tape’, not to mention the existence of corruption in emerging economies, took him over three hundred days. This is an example of why a social contract, and hence the informal institution, is more important than a formal contract in the BoP (De Soto, 2000; London & Hart, 2004). Furthermore, London and Hart (2004) advice firms to, most importantly, respect and adapt to the local institutions present, and not only look at the institution non-present. This, because, in these situations the community characteristics (such as religion) will replace the more or less formalized institution (Rivera-Santos & Rufin, 2010). Wright, Filatotchev, Hoskisson, and Peng (2005)

argue that developed country firms (MNCs) entering the emerging market cannot simple extent their existing strategy. This is a recipe for failure, as they lack knowledge of the formal and informal institutions and what impact this will have on their business. Both London and Hart (2004) state the importance of partnerships with non-traditional actors, and Reficco and Márquez (2012) conclude that cooperation for firms entering the BoP context is a necessity. Furthermore, Reficco and Márquez (2012) describe that the weak institution, and the complementary increased cost of doing business, is the main reason firms are restricted to enter the BoP market. It is proposed that:

WP2: Dutch SMEs work around institutional voids by cooperating with non-traditional partners, to be able to succeed in targeting the BoP market.

3.4 Characteristics of the BoP

As Karnani (2007a) and Simanis and Hart (2008) point out, it is important for firms to take the well-being of customers into account to achieve results at both an economic and social level. Kandachar and Halme (2008) argue that MNCs fail to take the input of BoP consumers into account when developing products and services for the BoP market. This is in contrast to the earlier conclusion that solutions, by means of products and business models, should be co-invented (London & Hart, 2004; Prahalad & Hart, 2002).

For the BoP characteristics, this research follows the approach of Angeli and Jaiswal (2015), who use the 4As framework as a theoretical lens to understand how the institutional framework influences the requirements of customers. While Angeli and Jaiswal (2015, p. 186) use it to study the “inter-firm competitive dynamics in low-income markets”, this study uses the concept to explore which BoP characteristics Dutch SMEs face when targeting their business practices at the BoP market.

Prahalad (2005) argues for three As, affordability, access, and availability, as an important basis to fit consumer needs and for the basis for innovation by firms. To cite

Prahalad on this consumer perspective: “for the BOP consumer, gaining access to modern technology and good products designed with their needs in mind enables them to take a huge step in improving their quality of life” (Prahalad, 2005, p. 106). An extended version, the four A model, is argued for by Anderson and Bilou (2007), and Anderson and Markides (2007). The four As in the framework are: awareness, affordability, acceptability, and availability. Prahalad (2012) replaces the A of acceptability in accessibility. Both Anderson and Bilou (2007) and Prahalad (2012) link the four A framework to innovation as the way to meet the BoP customer’s needs. Innovation for products and business models, as an undifferentiated strategy to the BoP market will not work due to the differences (Prahalad, 2012). Subrahmanyan and Gomez-Aris (2008) describe that firms should go beyond the downgrading for cost purposes, but point out that products and services should be adapted and tailored to the needs of the people at the BoP.

In sum, the four A framework, which in practice has five different As, is used to summarize the characteristics of de BoP market. The framework is discussed per element in the next paragraphs.

3.4.1 Affordability

As stated previously, for the people at the BoP the income level is very low and the variability of income is high (Banerjee & Duflo, 2007). These two elements form the basis for the affordability element (Anderson & Bilou, 2007; Anderson & Markides, 2007). Therefore, firms need to provide products and services which are affordable for them, while keeping into account the limited cash-flow, e.g. daily income, and income to spent besides the basic needs (Anderson & Bilou, 2007; Anderson & Markides, 2007; Prahalad, 2012).

3.4.2 Awareness

Prahalad (2012) describes awareness as the BoP consumer and producer being aware of the products and services available and knowledgeable on how to use those. Anderson & Bilou (2007) point out that most BoP customers do not have access to media and need to be reached by different methods than advertisements in for example media. This is labeled as ‘media dark’ by Prahalad (2012). In order to overcome this problem, resellers are a suggested solution, as these can spread the word within their communities (Anderson & Bilou, 2007; Anderson & Markides, 2007). Furthermore, Subrahmanyan and Gomez-Aris point to the promotional challenge to reach people with lower literacy.

3.4.3 Accessibility or availability

Anderson and Bilou (2007), Anderson and Markides (2007), and Subrahmanyan and Gomez-Aris (2008), all state that one of biggest challenges for firms targeting BoP markets is availability. Firms can only get products available by distribution, and it are exactly these distribution networks which are partly in place, or sometimes even not at all in place, for example in the more rural areas. Prahalad (2012) also mentions availability, but with a linkage towards trust and loyalty. He states that to reach those elements, a steady supply of products and services is necessary. Prahalad (2012) mentions another A, access, which is grouped in this category for the logical reason that Prahalad describes this as the key element that consumers in the BoP should be able to have access to products and services, even in remote areas. This is closely linked to availability and distribution.

3.4.4 Acceptability

Acceptability, as an A, is only mentioned by Anderson and Bilou (2007), and Anderson and Markides (2007). With this, the product or service has to be accepted by the customer and

distributor and in line with their unique needs, culture and beliefs (Anderson & Bilou, 2007; Anderson & Markides, 2007).

3.4.5 Four A framework

Concluding on the elements of the 4A framework, it is proposed that:

WP3: For Dutch SMEs the use of the four A framework, being a description of the characteristics of the BoP environment, is exhaustive to use as adaptation criteria when doing business at the BoP.

3.5 Overview Working Propositions (WPs)

Below-mentioned table provides an overview of the working propositions (WPs) used in this research.

WP Proposition

WP1a: Dutch SMEs include the people living at the BoP not only as consumer, but also in a more inclusive role of producer, employee or entrepreneur.

WP1b: Dutch SMEs use non-traditional partnerships to create buy-in and trust, to be able to build long-term relationships with people at the Bo and the community they live in.

WP2: Dutch SMEs work around institutional voids by cooperating with non-traditional partners, to be able to succeed in targeting the BoP market.

WP3: For Dutch SMEs the use of the four A framework, being a description of the characteristics of the BoP environment, is exhaustive to use as adaptation criteria when doing business at the BoP.

4. Methodology

This chapter addresses the methodology of this research. The research design, a qualitative multiple case study design, is presented, followed by the data collection and case study selection. Afterwards, the data analysis procedures are presented. In sum, this chapter explains and justifies the method followed to address the research question with this research..

4.1 Qualitative research design

As Dutch SMEs, as type of company, are understudied in the BoP literature, the activities of Dutch SMEs and challenges to cope with when entering the BoP market are of unexplored nature. Therefore, following the argument of Yin (2009), this research adopts a qualitative research design. Adopting an explorative design is used by more authors in the international business (IB) literature and provides an interesting perspective on this subject (Hoskisson et al., 2000; London & Hart, 2004). Furthermore, Pratt (2009) suggest that qualitative research is an excellent choice when addressing “how” questions, such as the central question of this research.

A deductive approach is used for this research, which means that the literature is used for theory gathering, which accordingly will be used to test data (Saunders, Lewis, & Thornhill, 2012). The focus in literature has been mainly on MNEs, but shifted slowly to other actors (Kolk et al., 2014). Theories from the BoP literature review are used to create a theoretical framework, which is used to test the working propositions on the gathered data (Saunders et al., 2012).

4.2 Multiple Case Study

Within the qualitative design followed, a multiple case study is used for this research. As little research is available which explores the specific role of SMEs and challenges faced by Dutch SMEs targeting the BoP market, there is a lack of large datasets. This justifies doing a

qualitative multiple case study on this topic, with the aim of creating a rich description of the phenomenon coming from the data (Yin, 2009). According to Yin, the advantage of a multiple case study design, over a single case study design, is that “the evidence from multiple cases is often considered more compelling” (Yin, 2009, p.53). Furthermore, the usage of a multiple case study provides the researcher with a possibility to find similarities and differences across the cases (Eisenhardt & Graebner, 2007). The choice of a multiple case study is consistent with other authors in the BoP field, as the multiple study is frequently used in the BoP literature (Prahalad & Hammond, 2002; Prahalad & Hart, 2002; Simanis, 2012)

4.3 Selection of cases

As there is no comprehensive list available on the complete sample of Dutch SMEs active in the BoP in EM, a non-probability sampling technique is used. According to Saunders et al. (2012) that means using a “variety of sampling techniques for selecting a sample when you do not have a complete list of the population” (Saunders et al., 2012, p. 134). Besides Dutch SMEs cases, additionally experts on the BoP subjects are included as cases. By doing this, the findings of the SME managers can be triangulated by the findings of these experts, which are on an industry, trade association, or regional (f.e. Africa) level.

The selection of cases for this research is done by a combination of purposive and snowball sampling (Saunders et al., 2012). By purposive sampling the author selected cases of Dutch SMEs who are active with their business practices in the BoP of EM. Early interviews are used to ask respondents whether they know any other managers of Dutch SMEs or experts on the BoP subject who would be willing to be interviewed by the author, a case selection method described best as snowball sampling (Saunders et al., 2012).

4.4 Collection of data

The data collection method of this research is collecting primary data by means of interviews.. According to Robson (2002, as cited in: Saunders et al., 2012, p. 320) interviews are helpful in an exploratory study, as a way to “find out what is happing and seek new insights.”

Semi-structured interviews are used, instead of structured and unstructured interviews, as this enables the researcher to ask questions based on a pre-defined list of themes and questions, while the exact questions and the order of the questions can be varied per interview. Furthermore, it ensures the possibility of asking additional questions, which is useful for the explorative character of this research (Saunders et al., 2012). As guidance for the semi-structured interviews an interview protocol is established. This interview protocol contains the following themes: (i) general information on the background and function of the respondent, (ii) SME or expert firm general information, (iii) type of company SME, (iiii) BoP 2.0 Approach, (iv) role of partnerships, (v) institutional voids, and (vi) BoP characteristics. The interview protocol is crafted according to the outcome of the literature review and theoretical framework/working propositions and is found in Appendix I.

A total of six managers of seven Dutch SMEs are interviewed (one manager is working at multiple Dutch SMEs). Furthermore, four experts on the BoP subject are interviewed. The total number of interviews is 10, which is the maximum number of cases mentioned by Eisenhardt (1989) from a perspective of work load and data volume.

The interviews are held in December and January, either by Skype or face-to-face. Two of the interviews are held in the English language, while the others are held in Dutch. The shortest interview is 29:15 minutes, the longest is 1:52:43, and on average the interview lasts 53 minutes. Upfront the respondent is asked to consent with recording to interview for transcribing purposes, which all respondents did. Furthermore, it is proposed to send the respondents the complete interview transcript, or only the direct in-text quotations. To agree

on the correct representation of the conversation. All respondents have agreed on either the full interview transcript, or the usage of the direct quotes in-text. The transcribed interviews represent a total of 85 pages, by Times New Roman lay-out, with a line spacing of 1.0.

Concluding on data collection, all SME managers and BoP subject experts are presented in an anonymous way in this research. Therefore, below-mentioned table gives an overview of all interview respondents, with their reference, the role of the respondent at the company, and the product or sector active in.

Reference Function Respondent Product/Sector

SME #1 Head of Programmes Water Filters / Water Treatment Solutions SME #2 Co-Founder & Financial Director Micro financing / distribution

SME #3 Commercial Director & Co-Founder Cooking Stoves

SME #4 Key Account Manager Solar

SME #5 Founder & CEO Solar / Cooking Stoves / Pest Control

SME #6 C.O.O. Smart Grid Solutions

Expert #1 Knowledge & Innovation Manager Advisory Expert #2 Managing Director Consultancy

Expert #3 Program Mngr. Enabling Environment Industry Association Expert #4 Senior Project Manager Business Council Table 2. Overview of the interview respondents (Author)

4.5 Analysis of data

Before the data is analysed, all interview recordings are transcribed into text files. Following the approach of Neuendorf (2002), content analysis is used to code and analyze the interview transcripts. The aim of the content analysis is making sense of the data and getting insight into the important findings. Computerized data analysis is used by the program NVivo Starter.

For coding, the definition of Saldana (2009, p.3) was followed: “a code is most often a word or short phrase that symbolically assigns a summative, salient, essence-capturing, and/or evocative attribute for a portion of language-based or visual data”. The first step of the data analysis is reading all transcripts, with the research question and interview protocol in mind. Afterwards, the interview protocol is used input for a preliminary coding scheme, to ensure that the codes are a good reflection of the questions asked and the theoretical framework used. Text is coded on basis of the preliminary codes, or when relevant in general is given a provisionary code with a close resemblance to the specific text coded. By means of an iterative process, all relevant texts are grouped and named into related categories (new nodes), working through all transcripts again.

Following Saldana’s (2009) cyclical approach for coding and recoding, the coding scheme is completed and all nodes are reconfigured into parent and child nodes. An overview of the used coding scheme, with total number of references, is found in Appendix II.

NVivo Starter is used as tool to analyze the data by looking through all the codes per parent node and child node, performing text searches and looking at frequencies and occurrences of specific sources and topics.

The final stage of the analysis is working towards the results and findings of this research, for which the analyzed data is looked at from two different angles. First, the interviewed managers of Dutch SMEs form a group and the experts form another group. These groups are analyzed independently and results are formulated. Second, the two groups are compared on similarities and differences. This approach is compared to the within-case, and cross-case analysis, suggested by Eisenhardt (1989).

5. Analysis and Results

To start off this chapter, an analysis per interview theme, by means of the collected data, is presented and the results of the working propositions formulated for this research are given.

5.1 Analysis

5.1.1 SME activities

All firms combine a commercial orientation with a social orientation when targeting the BoP. Illustrative for the ambition of one of the firms is the following quote:

“The starting point is the combination, this product can provide an incredible improvement for the lives of half the world’s population, and has a commercial model.” (Commercial Director, Co-Founder SME #3)

5.1.2 Type of company: SME

One of the questions, before the theoretical challenges and working propositions are discussed, is whether Dutch SMEs are advantaged or disadvantaged by their type of company compared to MNEs or local firm active at the BoP.

The interviewed managers of SMEs do see both advantages, disadvantages, and are also aware of the way they are differentiating from these parties. The advantage mentioned by both SME #1 and SME #2 is that large firms focus mainly on the easy to reach areas and state that the required volume is a requirement. As a result, the more rural areas are less competitive and can be niche markets for the smaller players. The volume element is also mentioned by SME #5, volume being the necessary factor for MNEs to enter a certain industry or market. Another advantage for smaller firms, mentioned by SME #3, #5 and #6, is the flexibility aspect. These firms see flexibility versus an MNEs as an advantage. This is illustrated by the following quote:

“When you look at innovation of our product portfolio, we can adapt our model very quick, for example on our payment solutions, the distribution network, or our marketing strategy.” (Key Account Manager, SME #4)

The disadvantages mentioned are financial resources (SME #3), smaller distribution possibilities and to get a larger distribution network the too large investments for SMEs to carry, when compared to MNEs (SME #4), and SME #6 points out the disadvantage of the long time period and needed financial resources that are necessary to even reach the Bottom of the Pyramid with your offering. Finance and distribution are mentioned to be necessary to reach scale. There are multiple solutions, SME #3 and #5 are mainly self-funded, while SME #4 and #6 have investors aboard. Furthermore, the manager of SME #6 sees an interesting trend, large firms (MNEs) which are searching for ways to collaborate with smaller firms. This is illustrated by the following quote:

“Large firms nowadays invest a lot in interesting start-ups by their CSR/ social funds. In this way they can profit when the smaller party becomes successful. Initially, I don’t think it is a commercial approach, but they are able to follow the result and find out whether it becomes interesting.” (C.O.O., SME #6)

The experts mention multiple disadvantages for Dutch SMEs and SMEs in general. For a Dutch SME the disadvantage is that the firm does not have presence in the operating country. For SMEs in general, the disadvantage is distribution and access to finance, with finance even acclaimed as bottleneck number one in the industry association by Expert #3. MNEs have very elaborate distribution networks, e.g. Unilever, which SMEs want to use. The advantage for SMEs is agility, which is illustrated by the following quote:

“If you are an SME, you are much more agile. You can react faster to what is going on in the BoP market that is critical. Because you have so much actually business failure, on financing, distribution, or marketing, you have to adapt very fast to what is

happening on the ground. And that is the thing with multinationals, they will need to go to processes, and that will not work. An SME, which by nature is smaller, has less processes, will react faster. While it is not always an advantage in developed markets, but it is always an advantage in a developing country.” (Expert #1)

An interesting aspect mentioned by Expert #1 and #3 is the intensified collaboration between MNEs and local or international SMEs. This collaboration is providing the SMEs with scale, financial means and distribution opportunities at one hand and, on the other hand, it is SMEs which are being bought (or parts of it) by MNEs as a result of their success in the BoP market.

Finally, the perspectives of the managers and experts are compared. The advantage mentioned by both managers and experts is flexibility, SMEs can adapt their product, business model and practices on the ground more easily, as it does not have the burden of a (sometimes) bureaucratic process of an MNE. The disadvantages, in contrast, are the smaller amount of financial resources and the more difficult distribution reach. Furthermore, both managers and experts see an increased collaboration between SMEs and MNEs, by investments or even take-overs.

Interestingly, where managers do see a minimum volume/market size as a barrier for MNEs to enter a certain market, this is not mentioned by experts. Neither is the consequence mentioned by SMEs, which is the market potential in more rural areas where there is less competition by absence of larger players.

5.1.2 BoP 2.0 Approach

This theme relates to whether Dutch SMEs are actually following the BoP 2.0 approach in practice. In this 2.0 approach, mutual value creation and ‘working with the poor’, beyond a mere consumer role, are central elements (London & Hart, 2010; Simanis & Hart, 2008).

All the managers mention the element of inclusiveness and working with the poor. While they do target the consumer market, they include the local people in various roles, sales agents (SME #1 and #4), installation and service providers (SME #5), entrepreneurs (SME #1, #5, and #6). One of the roles is illustrated by the following quote:

“In a very pragmatic way, we saw at our pilot that the entrepreneur model is a very good way of working. Someone really has ownership over the product and can become a brand ambassador when satisfied. It is a win-win situation, the end consumer has a better product, and both the entrepreneur locally and we earn our shares.”

(C.O.O., SME #6)

The managers do have differing views on one particular role of the inclusive approach, the local production. While four SMEs do produce locally, two others do not produce locally from a product cost perspective (SME #3 and #5). The latter two state that they will not reach the quality and cost price necessary for the product to stay affordable, when they product it locally. But, when feasible they do see it as a good possibility for the future.

Experts do see co-creation and an inclusive way of working happening. Expert #1 sees co-creation as the better alternative for firms, as they will not succeed by just dropping products everywhere. But, some are critical. One expert (#3), for example, sees the solely commercial approach as prevalent still. Firms which are not adapting their product or service offering, but try to extent their current offering to the BoP market. Another expert clarifies local production from a different angle, which is illustrated by the following quote:

“Some firms say, when we keep our production in the Netherlands, our product is much more expensive and we want people in rural areas to be able to afford our product. So, our production needs to be done locally, to lower the price.” (Expert #4) Comparing the views, with the manager view being most elaborate, it is concluded that Dutch SMEs do include the people in a variety of roles at the BoP. Whether this is as

producer, employee, or entrepreneur, local people are included in all cases and benefit from the commercial business. Therefore, WP1a is supported.

5.1.3 Role of partnerships

From the previous paragraph it is clear that the SMEs work with non-traditional partners, such as local entrepreneurs or employees. This theme zooms in on the role and importance these partnerships have for Dutch SMEs doing business with the BoP.

The manager of SME #1 describes a very clear role of partners to decrease the distance faced when operating from the Netherlands. For all their projects this firm works with NGOs as both a sales channel and a partnership. The importance is described by the following quote:

“An NGO is a very good partner. People know the local NGO, and they know that if the NGO is involved and says something is a good product, that they can trust it.” (Head of Programmes, SME #1)

The manager of SME #2 states the importance of local partners or teams:

“We strongly believe that the whole is greater than the sum of its parts. So, if you can work with partners on the basis of contracts combined with trust, we think that will only benefit you in your whole business model. For our business model, it is most definitely a solution. Only together we can do more.”

(Co-Founder and Financial Director, SME #2)

All the other SMEs point out using partners for distribution purposes. More interestingly, the manager of SME #4 and #6 refer to the use of local entrepreneurs, who are responsible for their own community. By doing that, they can create buy-in at the community. An SME manager states the importance of doing academic research on the impact of products, this is illustrated by the following quote:

have a lot of information, for instance: 4 million people die from this problem and we suspect that when using this device in a correct way, you will not die from this device. So, we think the impact is large, but we need to know exactly whether it’s the case.” (Commercial Director, Co-Founder SME #3)

The experts describe a clear role for partnerships in general, these are judged essential for SMEs to be able to reach to BoP market. This is best illustrated by the following quotes:

“I think hardly any of our members are trying to do it completely on their own. Except for maybe MNEs. But, everyone needs partners, you would need an existing distribution channel, or you would need to work with MFIs, you would need to tap into social networks, NGOs, whatever is out there to get into the market.” (Expert #3) “It is about the combination of on the one hand commercial and on the other hand doing good. That’s the essence for me. As a result, of doing good, you need to work with different actors, others forces in the field, which requires you to work with governments or NGOs, instead of only commercial parties.” (Expert #2)

Comparing the manager’s perspective with the perspective of experts, it is stated that there is a requirement for non-traditional partnerships for Dutch SMEs targeting the BoP. However, whether this always leads to, a from a SME perspective, desired outcome of buy-in and trust of people and the community they live in, cannot be concluded with absolute certainty. Therefore, WP1b is partially supported.

5.1.4 Institutional voids

The challenge Dutch SMEs face when entering the BoP in EM are institutional voids. Voids are described as absent physical, sociopolitical, and/or economic infrastructure, resulting in the market not functioning properly (Khanna & Palepu, 2010).

Managers point towards a multitude of institutional voids they face when active in BoP markets. Most frequently mentioned are government regulations. SME #1, #3, and #6