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
3
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).
4
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
5
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
7
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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