The BoP Markets:

mba.berlin.de

The BoP Markets:

The BoP Markets:

e

The Question of the BoP as Producers versus the BoP

as Consumers in the Context of Sustainability

Author: Paul Dittmann

Module: International Economics

Lecturer: Prof. Dr. Gert Bruche

Date of Submission: Wednesday, September 1st 2010

Department of Chinese European Economic and Business Studies

Berlin School of Economics and Law – Institute of Management Berlin

Abstract

The following term paper examines the relationship of transnational enterprises towards India’s

rural ‘Bottom of the Pyramid’ market in the light of sustainable agriculture. For the purpose of un-

derstanding the ‘Bottom of the Pyramid’ market criteria, as well as the term sustainable agriculture,

both will be briefly presented. Furthermore, in order to have a discussion on how multinational

companies relate to organic farming, a distinction between producers and consumers will be made.

The results of the discussion will reveal that although sustainable agriculture possesses business

potential, the current situation is risk-wise still too uncertain

1


Table of Contents

ABSTRACT 1

TABLE OF CONTENTS 2

LIST OF ABBREVIATIONS 2

1. INTRODUCTION 3

2. BOP MARKETS 3

3. SUSTAINABLE DEVELOPMENT 4

4. PRODUCER MARKET 5

5. CONSUMER MARKET 6

6. CONCLUSION 6

REFERENCES 8

List of Abbreviations

Abbreviation Term

BoP Bottom of the Pyramid

ITC Indian Tobacco Company

MNE Multinational Enterprise

NGO Non-governmental Organisation

PPP Purchasing Power Parity

2


1. Introduction

This term paper examines the ‘Bottom of the Pyramid’

(BoP) markets in light of sustainable development from

the perspective of multinational enterprises (MNEs).

Since this topic is of a very broad nature, the author limits

the discussion in its scope and scale to the region of rural

India and to the industry of agricultural goods and ser-

vices, as it is the BoP individuals’ primary source of

spending (see Chapter 2 for details). Furthermore, as the

BoP individuals can be producers or consumers, as well

as both for MNEs the author discusses both phenomena

separately.

The research question, which this paper tries to answer, is

the following: Are MNEs encouraging the usage of sus-

tainable farming practices at the BoP and are MNEs

offering goods and services which promote and improve

sustainable farming? In order to answer this question the

author of this paper first examines the BoP markets as a

whole with a special focus on the characteristics of these

markets. In the second part of his paper the author takes

up the topic of sustainable development in the agricultur-

al sector with a focus on the three pillars of ecological,

socio-political and economic development. Afterwards

India’s BoP producer and consumer market will be dis-

cussed in the context of which MNEs use the BoP as

producers for organic farming, as well as targets the BoP

as consumers for supplementary goods and services to

organic farming. At last the author will conclude this term

paper with presenting the reader with the findings of the

discussion, as well as provide a recommendation to

MNEs seeking business potential in India’s agricultural

sector.

2. BoP Markets

This section of the paper provides an overview over the

various BoP markets and furthermore describes the

unique characteristics of such markets.

Regarding the BoP markets there is some dispute over the

exact amount of people who fall under this category,

which ranges in its estimation from 600 million to four

billion people (Holtbruegge & Schuster, 2009, p. 1338).

Furthermore is there also a dispute on the upper bound of

the annual purchasing power parity (PPP) for a BoP

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individual. While Prahalad (2009) estimates the annual

PPP to be limited to 750 US Dollars (p. 35), Hammond et

al. (2007) estimate this amount to be around 3,000 US

Dollars (p. 13).

Concerning the potential of BoP markets for MNEs, a

study from the year 2007 shows that the large BoP mar-

kets in Africa, Asia, Latin-America and Eastern Europe

combined have a total purchasing power of 5,000 billion

US Dollars per year. Out of this annual purchasing pow-

er, BoP individuals expend 58 per cent for food, 8.7 per

cent for energy, 6.7 per cent for building materials, 3.6

per cent for transportation, 3.2 per cent for health care,

one per cent for communication and 18.8 per cent for

other unallocated purposes. The biggest BoP market in

this study is Asia with 83 per cent of the Asian population

and 42 per cent of the overall purchasing power (Ham-

mond et al., as cited in Holtbruegge & Schuster, 2009, p.

1338).

BoP markets are defined to have certain characteristics,

which are unique towards other markets. These charac-

teristics reflect themselves in six distinguishable criteria,

with the first criterion being the low purchasing power of

the BoP markets. This criterion requires MNEs to be

aware of high price sensitivity in the market, and that

overall, the BoP does not purchase products at a frequent

basis and if it does only in low quantities. This results in

MNEs to implement a design-to-cost strategy, in which

the development of a product is tailor-made to the BoP

purchasing constraints. The second criterion is the lack of

information concerning the BoP markets. If an MNE

wants to enter a BoP market it requires certain infor-

mation on its size and structure. However this kind of

information can be difficult to obtain as there is hardly

any data available on the market itself. An answer to this

problem can be potential partnerships with governments

and non-governmental organizations (NGOs), which

possess rare data on the size and structure of BoP mar-

kets. The third criterion is the almost absolute absence of

skills and knowledge in the BoP markets. The BoP indi-

viduals regularly do not know what advantages certain

products have and what needs are covered through the

usage of certain goods and services. This has the effect

that MNEs first have to conduct awareness training in the


BoP markets, in order to create the demand for certain

products. The fourth criterion is the limited access to

financial resources in the BoP markets. As the BoP indi-

viduals rarely have the ability to receive loans from banks,

more expansive products are not affordable. Although,

some financial institutions have specialized themselves in

lending out microloans to the BoP, its majority is still

missing financing options for the more expensive prod-

ucts. The fifth criterion is the precarious legal framework

of the BoP markets. As there is a lack of protection to-

wards intellectual property rights in these markets and

furthermore an overall missing ability to sense right from

wrong, the only opportunity MNEs have to safeguard

their products is to integrate BoP individuals into social

networks, which have the effect to pressure individuals to

act in adherence with the whole network, as otherwise a

misconduct would have a negative effect on both the

individual and the network. The sixth and last criterion is

the absence of proper infrastructures in the BoP markets.

In most rural areas there is no connection to the public

mains supply and there is a prevailing non-existence of

normal communication channels. This has the effect that

MNEs’ development and marketing of BoP products

cannot be done in the usual manner. The missing infra-

structure also influences the logistics and distribution of

products, by causing difficulties for the MNEs of keeping

product shipment costs low, which would otherwise result

in higher output prices. A solution for the missing infra-

structure is to produce the goods and services locally with

having small local distribution networks (Holtbruegge &

Schuster, 2009, pp. 1338-1340).

3. Sustainable Development

This section of the paper introduces the theoretical as-

pects of sustainable development and explains its dimen-

sions in the case of sustainable agriculture.

Sustainable development is based on the three pillars

deriving from the interaction of economic, sociopolitical

and environmental sustainable development. This rela-

tionship was first brought up by the United Nations

‘Brundtland Commission’, in the year 1987 and was

further developed at the United Nations ‘2005 World

Summit’ (Bayley & Strange, 2008, pp. 24-28).

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Concerning developing countries’ agricultural sectors

one has to differentiate between various methods of farm-

ing techniques, such as traditional production systems,

conventional modern agriculture and sustainable agricul-

ture. In the case of sustainable agriculture, the ecological

component, as one of the three pillars, has to be made

sustainable in the sense that there is a rethinking in how

to use natural capital. As agriculture is a significant con-

tributor to global climate change, greenhouse gas emis-

sions can be lowered through the usage of non-artificial

fertilizers. Moreover, by using organic fertilizer the water

quality used for irrigation and consumption is not im-

paired and the water availability is improved as the top-

soil, richer in organic matter, can retain and store water

more efficiently. Furthermore an appropriate usage of the

farming land is vital in order to avoid erosion, flooding

and landslides. An improved usage of land can lead to

higher productivity, conservation of nutritious soil and

the preservation of rural jobs. Another sustainable change

is the mixing of crops which increases the diversity of

crops produced on the one hand and on the other hand

raises the diversity of insects, animals and plants in and

around the fields, which can act as a substitute for haz-

ardous pesticides (GTZ Sustainet, 2006, pp. 3-4).

Another component of agricultural sustainability is the

economic pillar. It requires an equal emphasis given to

both exports and local orientation, as if there was merely

a focus on exports, local food security would not be guar-

anteed. Employment is another vital factor as farming is

the main source of employment and income in the rural

areas. Through small-scale and labor-intensive farming,

employment rates in rural areas can be kept relatively

steady. The higher costs, which are inevitably incurred

through this kind of farming, could be substituted by the

quickly rising demand which organic products currently

enjoy (GTZ Sustainet, 2006, pp. 4-5).

The third and last component of sustainable agriculture is

the sociopolitical pillar. One of its aims is to reduce pov-

erty through the means of organic farming, as it targets

the poor to gain benefits from sustainable agriculture and

not the intermediaries and end-consumers. However, this

requires the technology which is used for organic farming

to be in conformity with the local social customs, norms


and traditions, in order for the local farmers to trust and

believe in those technologies. This would furthermore

have the benefit that indigenous knowledge, which fea-

tures traditional knowhow and local innovation, can

potentially complement the technologies, which are

brought in from the outside. Another factor is that sus-

tainable agriculture fosters participation of both genders

and targets especially those groups with a low PPP. This

participation results in the sharing of burdens and bene-

fits more equitable between men and women, as well as

that the rural poor can organize themselves and promote

a dialogue with other members of society. At last, the

farmers also benefit through sustainable agriculture as

they can become more self-reliant concerning their diet,

due to the fact that their produce offers a wider range of

goods throughout the year and therefore is to a large

extent self-supporting (GTZ Sustainet, 2006, pp. 5-6).

4. Producer Market

This chapter of the paper gives a brief overview over the

current level of organic farming in India and furthermore

examines which MNEs use India’s rural BoP as produc-

ers in the context of promoting sustainable farming.

According to Narayanan (2005) India’s organic farming

has been present since the early 1980s. Three different

interest groups pursued this method of farming. The first

group consisted out of “urban educated technocrats” (p.

45), which did not last long, whereas the second group

was made out of educated farmers, who through scientific

knowledge had acquired the knowhow for sustainable

farming. Farmers who tried to master organic farming by

trial and error formed the third and last group. He fur-

thermore states that out of those groups only the ones

that had sufficient natural resources on their farmland

available succeeded in organic farming without affecting

the yield and their income. However, compared to other

countries, India’s organic farming sector is still in the

fledging stages, as the area used for sustainable farming

is tiny with 41,000 hectares compared to Australia’s

massive 10.5 million hectares used for organic farming.

The majority of India’s organic produce is exported (85

per cent in 2002), with only a small percentage remaining

in the country for local consumption (Narayanan, 2005,

pp. 45-46), which has a customer base not larger than

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three million people (GTZ Sustainet, 2006, p. 21). Most

organic farming initiatives are spearheaded by various

NGOs such as the ‘Himshikha Development Project’,

which observed that with introducing organic farming to

rural farms in India, the farmers have increased their acre

yield by 50 per cent and that overall, higher prices are

offered for their produce. Furthermore, the NGO states

that through organic farming the cost of production for

the farmers has dropped significantly as they use cheaper

and even free bio-fertilizers such as compost, cattle dung

and organic sprays on their fields. However, it has to be

mentioned that the NGO has also agreed to buy the farm-

ers’ produce for at least three years and that a premium is

paid when irrigation facilities are installed on the fields

(HDP, n.d., pp. 7-8).

Coming to the case of MNEs in India’s agricultural sector

that foster the BoP as producers, Karnani (2007) can only

identify one MNE who is currently pursuing this kind of

undertaking (p. 93). The Indian Tobacco Company (ITC),

India’s second largest exporter for agricultural goods,

introduced a system in the year 2000, which enables

farmers to sell their produce directly to ITC instead of

having to sell it to a middleman at state-sanctioned

wholesale markets. At these markets the farmers used to

have the dilemma that they had to transport their produce

over long distances, as these markets are functioning as

hub for rural areas. At these markets the farmers were

offered prices for their produce on an individual basis and

had often no bargaining power, due to the fact that they

had no idea what the prevailing market prices were. ITC

responded to that dilemma with introducing an IT sys-

tem, called ‘e-choupal’ , which provides the farmers with

the ability of receiving real-time market prices of their

produce, forums in which they receive advice in farming

techniques and other relevant information relevant to

farming, as well as an alternative selling channel in which

they can sell their produce straight to ITC. For the latter

purpose, ITC established procurement centres in proximi-

ty of these ‘e-choupal’ terminals, in order to minimize the

transportation distances for the farmers (Vachani &

Craig-Smith, 2008, pp. 59-62). Recently ITC has also

started to introduce special mobile phones in the rural

areas in order to allow farmers to communicate with one

another on market information concerning their produce


(Business Today, 2009, p. 81). However the ITC’s system

does not support organic products, yet. Although it covers

the procurement of soya beans, coffee, wheat, rice, pulses

and shrimp (Vachani & Craig-Smith, 2008, p. 60), some

of which are produced by organic farming (GTZ Sus-

tainet, 2006, p. 22), the majority of ITC’s produce is still

harvested from conventional farms.

ITC’s lack of interest in procuring organic produce may

be the result of certain difficulties, which India’s organic

farming sector currently must cope with. As for one, one

of the biggest challenges is the creation of bio-fertilizers

and organic manures. Although cheap or even free of

charge in its production, the knowhow for creating those

supporting agents is still absent in most rural areas. This

has the effect that by measuring the input costs for creat-

ing organic fertilizers; it is often cheaper to acquire chem-

ical fertilizers. Furthermore, many commercially available

organic manures lack the required quality standards,

which means that soil quality suffers tremendously. An-

other difficulty is that most seeds in circulation for farm-

ing purposes are hybrid seeds, which are designed to be

most efficient with chemical fertilizers and pesticides. The

remaining difficulties lie with the Indian government and

the lack of supporting infrastructure for sustainable agri-

culture. Up to the year 2002, there were only four agen-

cies for accreditation purposes and all of them charged a

yearly fee for each farm that had to be certified as an

organic goods producer. Furthermore, until this point

there is no proper promotion for organic goods in India

through agricultural policies (Narayanan, 2005, pp. 57-

62).

5. Consumer Market

This section of the paper examines which MNEs offer

goods and services to India’s rural BoP that compliment

and support organic farming.

There are two MNEs that offer large quantities of prod-

ucts for consumption to India’s rural BoP. One of them is

again ITC. After ITC introduced its e-choupal system it

went on to create ITC Mini-Malls which are small shop-

ping malls located near ITC’s produce procurement cen-

tres. These malls offer a variety of products, including

packaged consumer goods, white goods, fuel and agricul-

tural inputs, as well as various services, such as insurance

6

and banking. The e-choupal system in addition also offers

the farmers the option of ordering products from the

malls, which then later will be delivered by another farmer

visiting the mall. Concerning the prices of these products,

some of them are 30-40 per cent less expensive than

comparable products in large cities (Vachani & Craig-

Smith, 2008, pp. 63-64).

The other MNE offering such goods and services is Hin-

dustan Lever through its project Shakti by Unilever. The

company hires women who sell Unilever products in their

villages. One Shakti entrepreneur covers around 4,000

potential customers in three to eight villages. These en-

trepreneurs invest a total of 220-330 US Dollars in goods

through microloans and then resell those items in the

villages with making a monthly profit around 15-22 US

Dollars. Items being sold include packaged consumer

goods, health products and agricultural inputs, etc.

Through an IT system similar to the e-choupal, the villag-

ers can also inform themselves, amongst other things, on

fertilizer usage as well as pest control (Unilever, 2005, pp.

2-3). Furthermore Unilever, together with the Indian

government, is funding irrigation projects in order to

increase water supply for farms producing tea. This how-

ever can be regarded as self-interest, as Unilever, with its

brand Lipton, produces around 12 per cent of the world-

wide volume for black tea (Unilever, 2009, pp. 19-20).

Both companies offer agricultural inputs in the form of

goods and services to the farmers. However, it remains

unknown as to how specific some of these inputs are

towards organic farming. It can be speculated that agri-

cultural inputs are merely a by-product of offering pack-

aged consumer goods to the farmers as they are products,

which in their production cost are rather inexpensive.

6. Conclusion

The author of this term paper concludes that with regards

to the case of sustainable agriculture in India, the MNEs

have until today not tapped the business potentials of this

sector, as he expects that the risks of moving into this

market are still too uncertain in India.

In the case of the BoP as a consumer for products being

supplementary to sustainable agriculture, is it unknown

which kinds of agricultural goods and services are being


offered to the farmers. It can however be speculated that

the agricultural inputs that are being offered are a matter

of chemical fertilizers and pesticides. Moreover, it can

also be speculated that services containing knowhow and

recommendations for using farmland more effectively are

also on the basis of non-organic agricultural input, as the

majority of the farmers still use this kind of input in order

to enhance their harvest.

In the case of the BoP as a producer for MNEs in the

organic farming sector, it can be said that until today no

MNE has made any investments directly targeting sus-

tainable agriculture. Although ITC has started a program

which fosters the farmers as producers, directly produc-

ing for the company, the company has refrained itself

from directly promoting organic farming. This however is

connected to the difficulties that this sector still experi-

ences, which in return are largely matters that have to be

addressed on a the state level. Yet, this might be subject to

change in the near future as there are currently many

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NGOs, which are carrying out preparatory work in this

sector.

The author recommends to the industry that although the

current situation concerning organic farming seems dire

in India, the market for using the BoP, both as producers

and consumers, could be a promising business potential,

due to the fact that organic farming gains in popularity

and it is more effective in the long-run than other meth-

ods of farming. However, in order for this to be viable it

requires the government of India to take an explicit posi-

tion towards promoting the idea of sustainable agricul-

ture, even though it may in the short-run abut with the

profitability of conventional farming. Yet, seen from a

long-term perspective the shift towards the strong promo-

tion of organic farming could lead to higher profitability

for MNEs conducting business in the agricultural sector

and as well alleviate poverty in India’s rural BoP.


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