Becoming trusted at the base of the pyramid

Strategies for the Base-of-the-Pyramid Becoming trusted at the Base-of-the-Pyramid Master thesis M.Sc. in Organization Studies 2007/2008 Tilburg University Author Peter Grootveld ANR: s577220 Tel.: 06 52 30 7700 Email: p.grootveld@uvt.nl Supervisors Dr. Patrick A.M. Vermeulen Prof. Dr. Jac L.A. Geurts Abstract Numerous academics and business managers believe that western MNCs can create new markets and help eradicate poverty at the same time, once they recognize the poorest of our world, the so-called “base of the pyramid” (BoP) as novel consumers and innovative producers. To be successful in this bipartite mission, MNCs are dependent on successful collaboration with local parties in the developing countries. However, collaboration with western partners is based on other grounds than collaboration with local parties, often living in remote communities. Trust appears to be the key word in the latter and BoP literature provides quite some propositions on trust building activities. However, despite the acknowledgement of the necessity of trust building with local partners, there is no empirical research specifically aimed at MNCs trust building processes with people in the remote communities. Hence, this master thesis sets out to explore how western multinational companies build trust with local communities in developing countries. Departed from present BoP and trust literature this thesis studied a BoP case in Tanzania and confirmed five variables causing trust: outset manifestation, reciprocity, consistency, adaptation to institutional framework and communication. Moreover the results of this thesis show that the relation between the variables and the actual processes that account for the relationship between the concerning variables are determined by the context of the BoP. 2 “Cooperation is sustained by the shadow of the future” (Axelrod, 1984) 3 Preface This master thesis presents the results of an inductive research on “strategies for the base of the pyramid”. I conducted the preparing and concluding parts of the research at Tilburg University and the field research in Tanzania. The finished thesis brings along ambivalent feelings. On the one hand, it means the successful ending of a fruitful period of studying. On the other hand, it means the end of working on a subject that inspired me increasingly, day after day. However, as Jac Geurts spoke to me reassuring: “it’s just like a boomerang, it will return to you once again”. The thesis has its origins in the strategy classes of Patrick Vermeulen and Jac Geurts. Their enthusiastic introduction of the Base of the Pyramid made many hearts beat faster, and “Strategies for the Base of the Pyramid” became a very interesting thesis subject. Hence, I want to thank both Patrick and Jac for their impassionate classes. More specifically, I want to thank Patrick for his professional supervision. His feedback was always quick, clear and to the point. It was not only helpful to conduct better research, but also taught me to sharpen my vision in general. Furthermore I want to thank Harrie Hendrickx from Unilever, who supported me in studying the Allanblackia case - which was perfect for my thesis - and connected me to the right people. One of these people was Fidelis Rutatina from NDTL. Fidelis introduced me to the real world of Allanblackia and to Tanzania in general. He is the best host in Tanzania one could imagine. Next, I want to thank Godfrey Nkongolo who not only helped me translating the interviews, but also guided me during the trips across Tanzania. Of course, I owe the results of this thesis to all the interviewed people. Hence, I thank all the community members I interviewed and their villager leaders. I also want to thank, Maria and Tom from FaiDa Mali, Ndanshau from SNV and Doris from ICA. I admire them for their dedicated work to create a better life for the people in Tanzania. I am also very grateful to all the people that have read my thesis and thought along with me, with special thanks for their critical feedback to Michel Bachmann and Chris van der Schoor. Peter Grootveld Nijmegen, January 2009 4 Table of contents 1. INTRODUCTION 5 2. THEORETICAL BACKGROUND 10 2.1 Organizing the trust literature 10 2.2 Trust defined 11 2.3 Antecedents of trust 11 2.4 Trust in BoP studies 17 2.5 Insights from other studies 20 2.6 Comparing visions on trust building 21 3. METHODOLOGY 24 3.1 Research design 24 3.2 The case 25 3.3 Data collection 26 3.4 Data analysis 29 4. RESULTS 32 4.1 Introduction 32 4.2 Build trust incrementally 32 4.2.1 Outset manifestation 33 4.2.2 Manage reciprocity 36 4.3 Consistency 41 4.4 Manage communication 42 4.5 Adapt to institutional framework 44 4.6 An overview of the results & a BoP trust building model 49 5 DISCUSSION AND CONCLUSION 51 5.1 Introduction 51 5.2 The suitability of prevailing trust literature 54 5.3 Comparison with the BoP literature 55 5.4 Conclusion 57 5.5 Limitations 58 5.5 Further research 59 6 REFERENCES 59 5 1. Introduction “If we stop thinking about the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up”. (Prahalad, 2004, p.1). This proposition is illustrative for the increasing signs of interest in the possibility of doing business in developing countries and alleviating poverty at the same time. The websites and annual reports of fortune global-500 companies show that nearly all of them are to a certain extent serving the poorest of our world, the so-called “base of the pyramid” (hereafter: BoP). Wal-Mart, for example, moved into the Mexican retail banking sector. According to themselves, not only to ‘sell more stuff’ but also to compete against the entrenched domestic businesses that are not fulfilling local demand. And as the New York Times (2006) stated affirmatively: “Poorer Mexicans have been largely shut out of traditional banks by minimum balances, high fees and intimidating paperwork. Community banks barely exist”. Another illustrative example is Unilever. It notifies on its website that their deep roots and early engagement in BoP markets gave them valuable experience in meeting the needs of BoP consumers. For instance, one of Unilevers oldest brands is “lifebuoy”, once launched in the UK as an affordable soap. Today it is mainly consumed in BoP countries. Nearly half of the sales take place in rural Asia, where hygiene issues such as hand washing are of vital importance for whole communities. Another ‘BoP-aware’ company is DSM. This multinational proclaims they started three concrete ‘Base of the Pyramid’ projects in India this year. According to their website these projects will focus on the topics: increased production of milk, better nutrition and the development of sustainable construction materials. Like this, numerous other examples of companies entering the BoP can be found. Strategies to enter the BoP are also increasingly subject of interest in Academia. In 2002 an article named the fortune at the bottom of the pyramid caught not only the eye of the corporate world, but attracted also many scholars of different disciplines. In this article Stuart Hart and C.K. Prahalad capture the division of the worlds purchasing power parity in a pyramid with four consumer tiers. They sketch the top tier as a saturated market accommodating about hundred million people earning more than $20.000 a year. The bottom tier consists of more than four billion people with an annual per capita income of less than $1500. Thereupon, they 6 state that although these bottom tier people are poor, they represent an underserved multi- trillion dollar market. Hart and Prahalad continue in their article with quashing the prevailing assumptions why these people should not be seen as potential consumers for western companies and subsequently they draw attention to a few crucial elements to create a commercial infrastructure in developing countries. For instance, they assume that the poor can afford and do have use for the products and services in developed markets and they argue that it is crucial to pay special attention to improvement of access to these products. Considering the scholars innovatory train of thought, it is not surprising that many colleagues reacted on Prahalad and Hart by publishing articles in line with The Fortune at the Bottom of the Pyramid. Some of them primarily in a critical way (e.g. Jenkins, 2005; Crabtree, 2007; Karnani, 2007) and others elaborated on Prahalad’s and Hart ‘s ideas by studying certain aspects of the BoP proposition, or by approaching it from a specific angle. For example, it is studied how to create successful business models for entering the BoP (London, 2007; Seelos & Mair 2007), how corporations and NGOs can partner successfully to learn from each other (Brugmann & Prahalad, 2007), how a BoP perspective can complement other poverty reduction programs (London, 2007), alternative perspectives on BoP concept are explored (Jaiswal, 2007) and there is even a BoP protocol, helping organisations step by step to launch a BoP venture (Simanis & Hart, 2008). It seems convincing that the BoP philosophy receives increasing and mainly positive attention by both academics and business managers. However, it is not all roses in the BoP markets. Among the high number of organizations that entered the BoP, there are also many examples of failed initiatives. A typical example is the Word Shoe project of Nike. In its attempt to supply low priced shoes to the low-income-populations in China, it failed in meeting its sales goals. According to McDonald et al (2002), Nike was unsuccessful in reaching the target consumer because its business model was not based on an emphatic understanding of the context. Stuart Hart (2007) has put forward that if Nike had started with a pre-commercial period of engagement, deep listening and building trust with local parties, it would have had a greater chance of being successful in resolving the contradictions between its used business model and the one required to serve the low-income-populations of China. And even if a BoP venture seems to have success in the beginning, it can still easily fail to meet its targets. The detergent product ‘Wheel’ of Unilevers subsidiary Hindustan Lever Ltd. (HLL) perfectly illustrates this failure to make a BoP initiative grow. The business model was based on single serve packaging, low-cost production, and distribution through small local companies. 7 Although rapid growing sales figures were visible in the beginning, the business model was not suitable to reach 500 million potential customers in rural villages. After a few years HLL’s rapid growth began to stagnate. In 2004, the HLL share price ended up in a downward spiral, and shed over 25 percent within 3 months (Financial Express, 2004). HLL became aware that it had to integrate deeper into the local communities to reach the 500 million people. Hence, “Project Shakti” came into existence: through women’s self help groups, HLL trained thousands of entrepreneurial women in building a local HLL micro-franchise. This project has resulted in both income creation for the female micro-entrepreneurs and the possibility of reaching the 500 million previous unreachable customers. The interested reader has probably considered what might be essential if a MNC wants to be successful in entering the BoP. Consulting the BoP literature to explore this matter, results in finding many factors that influence the consolidation in the alien BoP market. London and Hart (2004) make a fundamental point with respect to becoming successful: “Business strategies that rely on leveraging the strengths of the existing market environment outperform those that focus on overcoming weaknesses”. All of the BoP scholars seem to comply with the proposition that it is necessary for MNCs to become integrated in the concerning context and hence they have to collaborate with local governments, local NGOs, local firms and local individuals. Furthermore, literature suggests that MNCs have to develop a learning process with the local people in order to create relevant ideas for products or services that the people really need and to obtain other needed knowledge about the local context. Frequently mentioned is the importance to have local companies and individuals taking over a part of the MNCs activities and include them in supply chains. Logically, this creates income generation in local communities and hence eradicates poverty. And indeed, also the earlier described examples of BoP initiatives leads one to suspect that involving local communities in BoP ventures calls for special attention and even determines the success of the venture. Unilever brings its soap hand in hand with education on hygiene and according its website, it “visits each village several times, engaging all parts of the community”, Nike failed because it didn’t engage with the local community and HLL began to meet its objective not before it started to collaborate intensely with rural women. It might be clear that collaboration with diverse local parties plays a major role in becoming successful at the BoP. Consequently, the next question would be: how to collaborate with local parties in this new market? Also this question is broadly discussed by BoP scholars and 8 the ever returning key word in this discussion is “trust”. For instance, Stuart Hart (2007, p.213) states: “unleasing the wellspring of innovation at the BoP(…) requires developing a personal relationship of trust, understanding and respect through which new possibilities for locally-embedded businesses can emerge”. In the same line, his colleague Simanis et al. (2008) mentions that the corporate team will depend heavily on the trust they have to obtain, because it will enter the local community as an outsider. Some imminent phrases in BoP publications attach even more weight to “trust” because they could have the reader presume that trust building in a developing country brings along more barriers than just differences in cultural background. For example, Prahalad (2004, p.20) notices that “Both sides- the large firms and the BoP consumers- have traditionally not trusted each other. The mistrust runs deep. Private sector firms approaching the BoP market must focus on building trust […}.” , and Hart (2007, p.213) emphasizes that “the key to success in the BoP is trust […] because the poor are frequently exploited by predatory lenders and unscrupulous vendors.” The importance of collaborating with local partners and the striking statements about trust in the BoP literature raise undeniable inquisitiveness about the way in which trust is build in the BoP. Surprisingly, there is no empirical research aimed at a MNCs trust building process with the people in the remote communities. Statements are mainly conceptual or derived as side effects from other studies. To the best of my knowledge, not even one of the BoP articles refers to the mature field of organisational trust research. Trust is, after all, recognized in several scholarly disciplines as a crucial element in business partnerships. McEvily et al. (2006) designate various viewpoints. Referring to Arrow (1974) they mention that economics argue that trust is an essential ‘lubricant’ necessary for even the simplest forms of economic exchange. Strategy researchers believe that trust is a strategic resource providing a source of sustained competitive advantage (Barney & Hansen, 1994) and other organisational researchers describe trust as a governance form which helps organisations to coordinate its economic activity (Powell 1990). It could be well conceivable that findings in general trust research are applicable in BoP ventures and help MNCs to become successful in their mission to create new markets and eradicate poverty at the same time. Hence, departed from the mature field of trust research this thesis sets out to explore: how western multinational companies build trust with local communities in developing countries. 9 The importance of trust building is obviously discussed in the BoP literature, but it falls short when it comes to the actual process of trust building with local partners. Consequently, answering the research question will contribute to closing this important gap. Besides closing the gap, it will also hold the proposed methods for launching BoP ventures in general against the light. An interesting question is if these methods, for instance the ones elaborately discussed in the BoP protocol by Simanis and Hart (2008), are fostering the trust building process as well. But there is even more theoretical relevance. Also within the mature field of trust research is the context of the BoP unknown. Hence, answering the research question will provide insight in the applicability of the long standing trust antecedents in the context of the BoP. Then there is the more practical point of view. The outcome of this thesis is valuable for MNCs in search for the crucial relationship with local people in the yet untapped new market. It will provide a model that can be used by MNCs as a guideline to build a trusted relationship with local partners at the BoP. The theoretical framework will first expound on the mature field of organisational trust research. Subsequently, the conversely juvenile field of BoP research will be turned inside out to make an inventory of ideas on trust building living in this academic domain. Also the literature from the development field and on cross cultural collaborations will be shortly visited to derive potentially important insights for this thesis. 10 2. Theoretical background 2.1 Organizing the trust literature Many interesting but not always convergent streams of trust research have developed among scholars (Bachmann and Zaheer, 2006). Already for decades, but especially at the moment of writing (2008), trust in economies is a much discussed topic. Also trust in (groups within) societies is studied a lot (Bachmann and Zaheer, 2006) and even within organisations trust is studied on various levels. Why is trust that interesting to study? It was already discussed in the introduction that trust is a key factor in collaborations. McEvily et al. (2003) pointed out that economics define trust as an essential ‘lubricant’ necessary for all forms of economic exchange, strategy researchers believe that trust is a strategic resource providing a source of sustained competitive advantage and other organisational researchers describe trust as a governance form which helps organisations to coordinate its economic activity. In addition, Larson (1992) claims that trust reduces the extent of formal contracts needed. Furthermore, trust determines the likelihood of future cooperation (Williamson, 1993), lowers transaction costs (Gulati, 1995), induces desirable behaviour (Madhok, 1995) and facilitates dispute resolution (Ring & Van de Ven, 1994). Trust appears to be a broadly discussed concept, so it is important to be clear about the context in which trust is studied and what is meant by the concept of “trust”. This thesis explores how companies can become trusted by people within developing communities. Hence, this theoretical background will go more deeply into how companies can become trusted by individuals. However, trust in a company appears to be closely connected with trust in an individual. For instance, Zaheer et al. (1998) conducted empirical work on the relationship between trust in a specific individual dealt with, and trust in that individual’s organisation. They found that there is a significant relation between these two levels of trust. Trust in the organisation is a result of trust in individuals from the concerning organisation. With respect to this relation, McEvily et al. (2003) found evidence that negative experience with individuals from a collective have even more impact on the trust in the concerning organisation. Hence, the focus will be on both trust building between individuals and between organizations and individuals. [...]... be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party” (p.712) In the second part of their definition, Mayer et al explicitly mention the irrespective relation between trust and the ability to monitor the other party In this thesis, monitoring... in publications about strategies for the BoP Already the first article speaking in terms of BoP, the fortune at the bottom of the pyramid (Prahalad & Hart, 2002), notices the importance of building a personal relationship with the poor”, or as they describe, to “build a local base of support” They exemplify this proposition with the situation in which a sunflower-seed company threatens the existing... participation and co-created with those at the BoP, that connect BoP producers of goods and services to non-local markets” The second kind of criteria had to indicate that there is a relationship of trust between the MNC and the local people within the BoP communities The definition of trust, as outlined in the theoretical framework (p.11) is used to determine the actual presence of trust in the case... insight in the behaviour of the trusted partner “knowledge-based trust” There is a willingness to rely on the other person because of direct knowledge about this persons behavior Knowledge-based trust is grounded in the predictability knowing the other party sufficiently well so that the other’s behavior is anticipatable Knowledge-based trust relies particularly on information about the other Part of reciprocity... activities, but the other party must also be acquainted with this capability In other words, the performative acts of self-presentations influence the effect of the trust enablers Bacharach and Gambetta call the signals that form the empirical basis from which the trust-giver makes the decision for the first move in the development of trust ‘manifesta’ Hence, communication in the form of manifesta can... from the literature: the found willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor Hence, the first questions were about the way in which village members turned out to be vulnerable to the actions of Unilever and what particular action Unilever would perform that was important to them... for the central collection and payments of the nuts In one of the communities, farmers mentioned that they didn’t trust this person, which indirectly influenced the relationship with Unilever The quotes below, typically point out the importance of collaboration with trusted parties Outset manifestation: collaborate with trusted parties NGOs “so normally there is this tendency of believing that private... private organisations are always for maximizing their profits Then how are they sure that farmers are not going to be exploited? That’s why we have the NGOs in the partnership, these are civil society organisations, whom they’ll believe will be there for the benefits of the village members” “we went with the representative from the forest conservation so we were even more trustable, the guy was already... with the characteristics of independent variables The first factor to create the necessary base for trust building is the outset manifestation This relates to the first impression Unilever made with the communities they approached Some essential steps in making the first contacts, created a trusted atmosphere for building a structural relationship The second factor is reciprocity This means that the. .. as a moderator variable between other precursors and trust Creed & Miles (1996) describe the function of communication in a way that perfectly fits in the point made by Bacharach & Gambetta They state that communication facilitates the process of proving trustworthiness and credibility to each other Not only communication between the trustor and the trustee influences the trust within a relationship . Strategies for the Base-of -the- Pyramid Becoming trusted at the Base-of -the- Pyramid Master thesis M.Sc. in Organization Studies 2007/2008 Tilburg University. framework and communication. Moreover the results of this thesis show that the relation between the variables and the actual processes that account for the relationship between the concerning variables. The thesis has its origins in the strategy classes of Patrick Vermeulen and Jac Geurts. Their enthusiastic introduction of the Base of the Pyramid made many hearts beat faster, and “Strategies