Identifying Key Success Factors for Social Enterprises Serving Base‐of‐Pyramid Markets through Analysis of Value Chain Complexities

• Author: Nezih Altay,Raktim Pal
• Date: 01 June 2019
• DOI: http://doi.org/10.1111/jbl.12212
• Published date: 01 June 2019

Identifying Key Success Factors for Social Enterprises Serving

Base-of-Pyramid Markets through Analysis of Value Chain

Complexities

Raktim Pal

1

, and Nezih Altay

2

1

James Madison University

2

DePaul University

There are people in this world who have little or no access to basic needs and they struggle financially, living on less than a handful of dol-

lars a day. A better understanding of how to supply/serve the world’s poor is needed. In this paper, through the lens of Porter’s value

chain framework we investigate the challenges and opportunities social enterprises face in base-of-pyramid (BoP) markets based on secondary

data on 23 organizations. Our contribution is twofold: First, we analyze value chain complexities for the social enterprise based on the value

creation role (consumer, coproducer) and income level (poverty, extreme poverty) of the local population. We find that nature of customers’

requirements varies across customer segments in the BoP markets and social enterprises face unique challenges in fulfilling such differentiated

demand patterns. Second, we develop an affordability–accessibility framework that helps to identify the situations that may be favorable/unfa-

vorable for social enterprises to meet the challenges in BoP markets. We make four propositions that social enterprises may use to cope with

difficulties in affordability and accessibility. Our findings will be useful for such organizations to understand and design better supply chains for

the base of pyramid.

Keywords: base of pyramid; supply chain; value chain; social enterprise

INTRODUCTION

In September 2000, member states of the United Nations adopted

the Millennium Development Goals, a set of eight time-bound

targets—with a deadline of 2015—to reduce extreme poverty

and improve the lives of billions. Since then, coordinated efforts

of national governments, international community, civil society,

and private sector have led to significant progress in poverty alle-

viation. For example, between 1990 and 2015 the number of

people living in extreme poverty has declined by more than half

(UNDP 2015). However, still more than 800 million people

across the globe live in extreme poverty. Consequently, at the

UN Sustainable Development Summit on September 25, 2015, a

follow-up plan with 17 sustainable development goals and

another 15-year timeline was adopted.

No doubt, there are many reasons for this progress. Two sig-

nificant factors that stand out are the involvement of large corpo-

rations through corporate social responsibility (CSR) programs

and the emergence of social entrepreneurship. Prahalad and

Hammond (2002) had called upon the business world to view

the people at the bottom of the economic pyramid living with

less than $2,000 dollars a year as constituents of a potentially

large market. For example, if 800 million people would earn

approximately $2,000 a year that would make this market the

13th largest economy in the world, or roughly equivalent to the

economies of Sweden, Denmark, Norway, and Finland, com-

bined. They argued that multinational corporations (MNCs)

could profoundly improve the lives of billions by stimulating

commerce and development at the base of the pyramid (BoP).

London and Hart (2004) reframed this “consumer”view of BoP

markets with a “coproducer”strategy. They cautioned MNCs that

accessing BoP markets is not so straightforward and success

comes with developing “a global capability in social embedded-

ness”(p. 350). Base of the pyramid markets differ from the mar-

kets of the developed world. Products and services for BoP

markets need to be designed, produced, and delivered in innova-

tive ways aligned with the local specificities in mind, consumers

need to be educated and encouraged to modify certain behaviors,

while economic benefits would need to be balanced with social

welfare (Simanis and Duke 2014). Collaborating with the people

in the BoP rather than simply selling products/services to them

requires a completely different mindset (Calton et al. 2013).

Social entrepreneurs play a significant role in BoP supply

chains (Rodr

ıguez et al. 2016). For social entrepreneurs, social

value creation is the primary objective, while profit is often a by-

product that allows them to achieve self-sufficiency (Seelos and

Mair 2005). Social enterprises merge the risk orientation and

market efficiencies of MNCs with the last mile capabilities and

local knowledge of the NGOs to create and deliver value in BoP

markets (Goyal et al. 2016). There is a real need to better under-

stand the roles that social enterprises play, challenges they face,

and values they offer in BoP supply chains. What makes some

flourish while success eludes others? How do they cope with the

challenges in the BoP markets to become successful? Although

the literature discusses a wide range of topics on social enter-

prises, we have not come across studies that systematically

examine different stages of the value chain and identify the key

success factors. We intend to fill this gap.

This article examines operational complexities of various

social enterprises and identifies the underlying success factors for

capably serving the BoP markets. For the purposes of our study,

we define a successful social enterprise as an economically sus-

tainable organization positively impacting the lives of the people

Corresponding author: Nezih Altay, Department of Management,

DePaul University, 1 E. Jackson Blvd., Suite 7000, Chicago, IL

60604, USA; E-mail: naltay@depaul.edu

Journal of Business Logistics, 2019, 40(2): 161–179 doi: 10.1111/jbl.12212

© 2019 Council of Supply Chain Management Professionals

it serves. When we critically analyzed the reports, we looked at

these aspects of success. By analyzing secondary data on multi-

ple organizations through the lens of Porter’s value chain frame-

work, we investigate the challenges and opportunities the social

enterprise faces in BoP supply chains. Our contribution is two-

fold: First, we identify value chain complexities for the social

enterprise based on the role (consumer, coproducer) and income

level (extreme poverty, low income) of the local population. Sec-

ond, we organize the results to develop a framework that helps

us identify the sweet spots or recipe for success of social enter-

prises in BoP supply chains. We make propositions that should

inspire future research in this area. Our findings will be useful

for social enterprises and local governments to understand and

design better supply chains for the BoP.

The remainder of the paper is organized as follows. In the

subsequent section, we define the boundaries of BoP markets for

the purposes of this study and review the relevant literature to

understand its unique challenges. Next, the research methodology

is presented. An introduction of the value chain framework guid-

ing the study is provided, followed by a description of the

exploratory approach adopted. Subsequently, we discuss our

findings and organize the results to develop a framework that

categorizes the key success factors for social enterprises in BoP

supply chains. Finally, we conclude the paper with discussions

on contribution of the study, limitations, and future research.

UNDERSTANDING THE BASE-OF-PYRAMID MARKETS

Defining base-of-pyramid markets

The conventional measure of poverty considers only income,

adjusted by purchasing power parity (PPP) across regions for

similar products and services. Thus, low income level indicating

poverty is often used to identify the population in the base of

pyramid (BoP). Although BoP scholars generally agree on what

income level defines the poor, finding these data are not that

straightforward. World Bank publishes PPP GDP figures on their

website data.worldbank.org and explains that “PPP GDP is gross

domestic product converted to international dollars using pur-

chasing power parity rates.”However, income inequality in

countries, especially in developing countries, means that despite

PPP GDP figures much higher than $3,000, there are markets in

these countries where the local population survives on couple of

dollars a day. Hence, the degree to which a market is classified

as BoP depends not upon country boundaries, but rather upon

market characteristics (Webb et al. 2010).

In addition, operationalization of BoP based on income levels

has been somewhat imprecise, which has led scholars to study

different populations under the same rubric (Kolk et al. 2014).

For example, Prahalad and Hammond (2002) point out that four

billion people or 65% of world’s population earns less than

$2,000 per person per year, that is, $5.50/day approximately.

Sodhi and Tang (2014) use $5/day as their threshold, while the

World Resources Institute (2007) defines BoP as markets of con-

sumers with an average annual income of $3,000, scaled to 2002

US dollars, that is, slightly over $8.00 per day. However, a sig-

nificant number of scholars define BoP consumers as people liv-

ing with less than $2.00 per day (Prahalad 2004; Whitney and

Kelkar 2004; Karnani 2007; Viswanathan et al. 2010; Webb

et al. 2010; Weidner et al. 2010; Arnold and Valentin 2013),

while Rodr

ıguez et al. (2016) focus their attention on the people

living on between $2 and $3 a day. Furthermore, UNDP’s

Human Development Database also defines working poor who

live under $2/day as a population in extreme poverty. Thus, fol-

lowing the general inclination in literature to use $2 per day as a

threshold to distinguish extreme poverty from poverty, we also

follow the same benchmark.

Challenges in BoP markets

Webb et al. (2010) and Calton et al. (2013) describe the chal-

lenges of BoP markets as follows: No formal capital market

exists; for financing, businesses and individuals rely on family

connections, limited personal savings (if any), and informal,

high-cost sources of credit; majority of the workforce is

unskilled, unorganized, and uneducated; public infrastructure

either does not exist, or inadequate and undependable; markets

are dominated by informal governance mechanisms related to

reputation, group norms such as shaming, and social power; pro-

tection of property rights is little to not existent; and a history of

colonialism and/or corruption leads to distrust toward formal

market enterprises.

It is clear that BoP markets demand reinventing the business

strategies that have been developed to serve the traditional cus-

tomers (Fawcett and Waller 2015). According to London and

Hart (2004), “business strategies that rely on leveraging the

strengths of the existing market environment outperform those

that focus on overcoming weaknesses”(p.350). For example,

since development aid organizations usually operate in the very

poor regions of the world, they already have an understanding of

the local dynamics and the intricacies of the local consumer

behavior. Consequently, MNCs should consider developing rela-

tionships with these nontraditional partners. This, however, is not

a straightforward task as large corporations and development aid

organizations do not have similar organizational structure, objec-

tive, or mission. Another strategy is to build local capacity and

include the people living at BoP in the cocreation of custom

solutions (London and Hart 2004). For this, organizations should

be educating their workforce to see the potential in BoP markets

and to collaborate with the poor to coproduce products and ser-

vices (Prahalad and Hammond 2002).

Literature on addressing the challenges

Schrader et al. (2012) analyzed seven case studies of MNCs

operating in BoP markets and found that integration of local

partners was key to success. All seven companies had local part-

ners that took over production, marketing, and distribution

responsibilities. The MNCs on the other hand focused on train-

ing their partners and educating the customers. Schrader et al.

(2012) also reported that in several of the cases they analyzed,

the MNC in question lowered capital intensity and increased the

share of labor to benefit from low local wages and improve

affordability of their products.

London et al. (2010) is a notable contribution in understanding

how the two main types of constraints, namely productivity and

162 R. Pal and N. Altay