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to be involved in the evaluation of results. As such, the firm had to learn to cope with the differing priorities, time scales, decision cycles, and perspectives of both the causes of the problem and the nature and efficacy of the solution. The reactions of the various groups can vary from open hostility toward the MNC to a willingness to cooperate. At the end of the day, however, MNCs learn how to transform their ideals of good corporate citizenship and social responsibility into their core business of delivering value on a day-to-day business basis. Social sector organizations learn how to scale their still-marginal efforts at social enterprise into viable business models serving a mass market.
BOP markets represent 80 percent of humanity. It is reasonable to expect that 4 billion people in search of an improved quality of life will create one of the most vibrant growth markets we have ever seen.
Private-sector involvement in development can be a win for both the BOP consumers and the private sector. All of us can learn. The flow of ideas, knowledge, and innovation will become a two-way street—from the developed countries to the developing and the reverse. MNCs can
help BOP markets to develop. They can also learn from BOP markets.
6. The Ecosystem for Wealth Creation
The need for building an ecosystem for wealth creation and social development at the BOP.
Traditionally, the focus of both business and social developmental initiatives at the BOP has been on one aspect of the ecosystems for wealth creation at a time—social capital or individual entrepreneurs (the focus of so much of the microfinance efforts), small and medium enterprises (SMEs), or large firms (market liberalization or foreign direct investment). There have been few attempts to focus on the symbiotic nature of the relationships between various private sector and social institutional players that can lead to a rapid development of markets at the BOP.
Market-Oriented Ecosystem
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A market-based ecosystem is a framework that allows private sector and social actors, often with different traditions and motivations, and of different sizes and areas of influence, to act together and create wealth in a symbiotic relationship. Such an ecosystem consists of a wide variety of
institutions coexisting and complementing each other. We use the concept of the ecosystem because each constituent in the system has a role to play. They are dependent on each other. The system adapts and evolves and can be resilient and flexible. Although there will always be distortions at the margin, the system is oriented toward a dynamic equilibrium. What then are the constituents of the market-based ecosystem? We can conceptualize it, as shown in below figure-7.
Figure – 7 (Components of the market-based ecosystem)
Every developing country has the components of this portfolio. However, the relative importance of the various components of the ecosystem is different across countries. For example, the extralegal (those who exist outside the legal system) vegetable sellers in the slums of Sao Paulo or Mumbai coexist with global firms such as Ford and Unilever. The chicken cooperatives and processors such as Sadia in southern Brazil and a local fast-food chain such as Habib‘s coexist with Kentucky Fried Chicken and McDonald‘s. Whether it is Brazil, Mexico, South Africa, or India, a portfolio of these constituents of various ecosystems exists. Needless to say, if the portfolio is totally skewed toward extralegal entities, the economy cannot advance, and the private sector cannot contribute to poverty
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reduction. If it is skewed toward large local firms and MNCs, then it probably is a well-developed economy with a well-functioning private sector but is not oriented toward the creation of wealth among those living at the BOP. Historically, the evolution of the large firm was a symptom of a maturing economy focused on system efficiencies through scale and scope. For example, the development of the large firms in the United States at the turn of the 20th century fueled by electricity, the telegraph, refrigeration, and the railroads is well documented. There is a paucity of similar studies that document the evolution of ecosystems in developing countries. We do not have good studies on the underlying driving forces that create different compositions of private-sector firms in various countries. Further, we lack systematic evidence of triggers that shift the composition of an ecosystem in any direction. It should be clear that a focus on any one component of the ecosystem to the negligence or detriment of others is not desirable. The dilemma for public policymakers is clear: If we can‘t pick one sector for special attention, how do we mobilize the whole ecosystem? Alternately, how do we move the composition of the ecosystem toward large firms? Both are legitimate questions. This is the state of the debate. I believe that the debate must shift toward building market-based ecosystems for broadbased wealth creation. Only then can we tap into the vast, dormant, and trapped resources, purchasing power, and entrepreneurial drive at the BOP. This will allow for new growth opportunities for the large corporations and a better quality of life for those at the BOP.
Ecosystems for a Developing Country
The evolution of the U.S. economy during the late 19th and 20th centuries might not be a good basis for prescriptions on how Brazil or South Africa should evolve. The competitive conditions, the availability of new technologies, the nature of resource endowments, and the educational infrastructure are vastly different. Are there new models of ecosystem development that public and private policymakers must focus on?
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Let us start with an understanding of a private-sector ecosystem by considering the fast-moving consumer goods (FMCG) industry in India. The largest FMCG firm in India is HLL, a subsidiary of Unilever. HLL is a Rs. 100 billion ($2.3 billion) company with a wide portfolio of personal care and food products. The ecosystem of HLL consists of six components:
1. HLL (MNC) operates 80 manufacturing facilities.
2. A dedicated supplier base of 150 factories (SMEs) that employs anywhere between 30,000 and 40,000 people.
3. Exclusive stockists (7,250) who distribute HLL products nationwide.
4. Wholesalers (12,000) and small retailers and shop owners (3 00,000) who are either SMEs or microenterprises.
5. A growing direct distribution system (HLL net) and a rural direct distribution system called Shakti that cover 25 0,000 individual entrepreneurs in urban and remote villages who sell HLL products. This number had grown to 1 million by 2005.
6. An advisory relationship with the government of the Indian state of Madhya Pradesh to help it brand local produce from villages and tribal areas, such as natural honey collected from forests in the state. It touches 35 ,000 to 40,000 tribals.
The ecosystem that this represents is shown in below figure-8.
Figure-8 (HLL Ecosystem)
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62 Source : Fortune at the bottom of Pyramid, C.K. Prahalad
HLL does not have legal control over the entire ecosystem, nor does it have direct influence on all the elements of the system. However, HLL provides the framework, the intellectual direction, and the processes by which the system is governed and operated. The Shakti Ammas are independent, but they must follow simple rules to be part of the system. In this sense, HLL is a nodal firm that facilitates the entire functioning of the network. Ownership is not the issue. Access and influence without ownership are more important factors, as are quality standards, mutual obligations, commitment to contractual relationships, and a shared set of values. As a nodal firm, HLL provides expertise and establishes technical standards for a wide variety of private-sector enterprises, from supplier factories to individual entrepreneurs in remote villages. Quality levels in the system are prescribed by HLL and are consistent with global standards and local needs.
What is the value of a private-sector ecosystem? Who benefits from the standards and quality requirements demanded by the nodal firm from the constituents to participate in the network? How does this transform the basis for commercial transactions within a developing economy?
Learning the Sanctity of Contracts
Underpinning this ecosystem is education across all levels. The individual entrepreneur in the
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village—the Shakti Amma, for example—is being educated to be a responsible entrepreneur. She is a wealth creator in her village. She learns about products, prices, returns, and being an advisor and helper to her customers in the village. The training she received from the representatives of the company on products and business certainly helped her. This type of relationship in the ecosystem creates a win for all. Better informed, educated, and financially successful, these independent entrepreneurs seek the same type of transparency and access to information on products and features (what is unique about these compared to similar products from other firms operating in the same market, with similar prices, promotional schemes, and advertising). Market-based ecosystems can be a source of informing the poor of the benefits of transparency in transactions. She is also learning to respect contracts, be they implicit or explicit with the company. The mutual obligation between her and the parent company, HLL, which is just a concept for her, is real. Respect for contracts binds her to the company and allows her to make a profit. She recognizes that violating the contracts will dry up the source of her economic and social success. Transparent transaction governance is an integral part of the ecosystem. She is a local entrepreneur. She is a one-person company, but she does not operate as an extralegal entity. She is bound to the national and global system and is less beholden to the local system of moneylenders and slum lords. The social collateral of open and honest entrepreneurship that the market-based ecosystem provides will be significant. The ecosystem can provide the tools for the poor and the disadvantaged to be connected seamlessly with the rest of the world in a mutually beneficial and nonexploitative way. It provides them with skills and opportunities that are often denied by the informal sector.
Reducing Inequities in Contracts
Consider ITC‘s initiative, the e-Choupal (literally, the electronic village meeting place). ITC is the Indian subsidiary of British American Tobacco. ITC has branched out of its traditional and primary focus on tobacco to include hotels, paper, and food. The International Business Division (IBD) of ITC was concerned about its capability to source soybeans from widely scattered and subsistence
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farmers in Madhya Pradesh, India. The traditional system focused on the mandi, the place where the farmers brought their produce to be auctioned. The buyers in the mandi aggregated the produce and sold it to firms like ITC for further processing. The farmers got a raw deal in the mandi, and the large processors like ITC were beholden to the intermediaries. ITC decided to use advances in digital technologies to reduce the inefficiencies in the system and to ensure a steady supply of good-quality soybeans for its processing plants. The approach depended on building a network of PCs in villages around the soya belt. ITC picked a successful farmer called the sanchalak in each village. He was given a PC that could be used by all the farmers in the village. The sanchalak took a formal oath in the village to be impartial and make access to the PC available to all the farmers in his area. The farmers could check the prices of soybeans in the neighboring mandis and decide when and where to sell their crops. ITC decided to build a system that changed many of the existing practices. The farmers could check prices and decide at what prices they wanted to sell.
They were not at the mercy of the auctioneers at the mandi on a particular day. The produce was weighed accurately, unlike the previous practice with the traditional aggregators in the mandi.
Under the old system, farmers lost about two to three kilograms per ton in inaccurate weighing.
Under the old system, farmers were also expected to pay for the bagging of their produce, about Rs.
3 per bag. IBD‘s system allowed for better and accurate weighing, immediate payment, and reduction of transportation and bagging costs for the farmer. The new system efficiencies compared to the traditional mandi system resulted in savings of Rs. 270 per ton for the farmer. The composition of the savings is shown in below figure-9.
Figure-9 (Savings in ITC eChoupal)
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ITC also saved Rs. 300 per ton. This is a win-win situation for both the farmer and the company.
The real benefits of the e-Choupal are more than cost reduction in the system. There were four sources of friction in the system:
1. There was significant asymmetry in the access to information between the farmer, the traders in the mandi, small local processors, and the large processors such as ITC. By providing the farmer access to information about prices not only in his mandi but also around the world, the e-Choupal system dramatically eliminates the asymmetric information that confines the subsistence farmer to a helpless bargaining position.
2. There was an asymmetry in choice between the farmer and the trader under the old system.
The new system reduces the logistical problems of moving soybean crops from the village to the mandi and the costs incurred by the farmer in doing so. The farmer also had to deal with the procedural requirements imposed on him by traders, such as paying the costs of bagging the produce. The inaccuracies in weighing the product are eliminated. These logistical and procedural inefficiencies (as seen from the farmer‘s perspective) were built
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into the traditional system. It reflected the lack of choice for the farmer. He was for all practical purposes a semi-indentured supplier to the mandi close by.
3. There was an asymmetry in the ability to enforce contracts under the old system. The moneylenders and traders had the upper hand. The farmer could not alienate them.
Therefore, the traders could take advantage of their strong bargaining position and delay payments. The farmers had no official recourse. The current system changes this dramatically.
4. Finally, under the old system, there was an asymmetry in the social standing of the farmer (the producer), the buyer, and the trader. Although all social inequities are unlikely to be solved, farmers do not have to face the indignity of a rigged auction in the mandi. They can be assured that what they get paid for their work is a fair market price that can be verified by them without any distortions. ITC‘s e-Choupal takes the idea of explicit contracting and transaction governance capacity a big step forward. By providing access to information that the farmers can independently obtain, the system changes the inequities that the extralegal and the quasi-legal systems impose on BOP consumers and producers in developing countries. ITC still pays the taxes due to the government as if the trade did take place in the mandi. The government is happy with revenues. The traders are likely to be unhappy, as their ability to coerce farmers into selling at the price that they decided in the auction is getting eroded. The most telling comment was from a farmer captured on video by the researchers: I did not even know how to hold a mouse. Four months later: Even if they take away the computer, we will buy one. We need Net connectivity. That summarizes it all.
Building Governance Capabilities Among the Poor
There is a third phase of building transaction governance capacity. This entails building the capacity for self-governance. The Bank of Madura initiated a model of village development in
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southern India that has shown great promise. It was based on three assumptions:
1. Microsavings must precede microlending. BOP consumers must learn to save, and there were no institutions to support microsavings.
2. BOP consumers must start trusting themselves. They must be actively involved in solving their problems. Outside help (financial and other) can go only so far. The village must break its cycle of dependency built by more than 40 years of subsidies and government handouts, NGO interventions, and the like. Privatesector development (in this case, banking based on commercial principles) and subsidies do not mix.
3. There is no dearth of latent leaders in the villages. Given the opportunity, they will emerge and will influence the start of a transparent and commercially viable system. This group will then become the custodians of transaction governance instead of lawyers or the local slum lords.
These were bold assumptions, but the work started with a clear position. Dr. Raj Thiagarajan, who was the CEO of the Bank of Madura, initiated this project in the rural areas of Tamil Nadu, India.
He had difficulty, initially, getting the best managers to work in the area of rural development.
When it became obvious to the bank employees that he was personally involved and it was going to be his initiative, the perceptions of the value attached to this work changed. There is a lesson for large firms here: Unless BOP work is seen as central to the firm, the best managers are unlikely to sign up. Carefully selected bank employees were assigned to villages where their primary focus was to build confidence and trust among local groups. They interviewed and picked a woman in each village who could be a potential leader. The SHG consisted of 20 women in each village who formed the core group. They had no prior familial relationship, no formal participation or experience with the financial sector, and no incentives to trust each other. All were from the same village but could be strangers. The officers of the bank continued to visit these SHGs, organizing them and creating a sense of cohesion. The women who formed the SHGs were taught the
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disciplines of holding a meeting, developing an agenda, writing the minutes, keeping records, and saving. The team had to jointly guarantee any financial dealings with the bank. The SHGs understood the basic dimensions of transaction governance capacity—transparency, access, explicit contractual obligations, penalties for violating contracts, the connection between the cost of capital and the track record of performance of contracts, and most important, the need to take charge of their community and protect their newfound access to capital at reasonable rates.
The Bank of Madura paid a lot of attention to the maturation of the SHGs. As they matured and became a working group with a clear understanding of each other‘s obligations and the process by which conflicts of interest and ideas would be settled, the bank progressed them to the next stage, making capital available as microloans for building a common village facility (for example, a toilet in the village) or expanding a member‘s agricultural operations.
The maturation model for SHGs is shown in Figure-10. The first three steps often took more than a year.
Figure-10 (Maturation model for SHGs)
Source : Fortune at the bottom of Pyramid, C.K. Prahalad
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As SHG leaders became more confident and capable of articulating the basic premise of the approach and could demonstrate how SHGs had helped their own communities, they became evangelists. They went to adjoining villages and recruited other women to form SHGs, providing both the motivation and the training. At the time of the merger of the Bank of Madura with ICICI, the second largest retail bank in India, there were 1,200 SHG groups. During the next two years, the
As SHG leaders became more confident and capable of articulating the basic premise of the approach and could demonstrate how SHGs had helped their own communities, they became evangelists. They went to adjoining villages and recruited other women to form SHGs, providing both the motivation and the training. At the time of the merger of the Bank of Madura with ICICI, the second largest retail bank in India, there were 1,200 SHG groups. During the next two years, the