The BoP Markets:

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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 services, 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 sustainable 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 agricultural 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 markets 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 power, 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 characteristics 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 information 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 markets. The third criterion is the almost absolute absence of skills and knowledge in the BoP markets. The BoP individuals 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
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