Sustainable Business Models for Base of the Pyramid: The Role of Customer Participation and Cross-Sector

Collaboration
Eugenia Rosca1, Julia Bendul1
1
Jacobs University, Bremen, Germany
e.rosca@jacobs-university.de
j.bendul@jacobs-university.de

Abstract: Business models represent the main innovation focus for companies that aim to expand their
markets at the Base of the Pyramid. So far, one of the most critical challenges Base of the Pyramid business
models face is sustainability. Different literature streams advocate that in order to achieve economic, social
and environmental sustainability while contributing to local development, collaborative and participatory
approaches known as value co-creation are needed. Additionally, two groups of stakeholders, namely
customers and non-business actors, are the most relevant for the sustainable value co-creation mechanisms in
Base of the Pyramid markets. In this sense, the overarching aim of this doctoral thesis is to investigate how co-
creation mechanisms with customers and cross-sector actors affect the sustainability of business models at the
Base of the Pyramid. The research process is guided by the theory of co-creation and borrows insights from
several research streams, namely development cooperation and policy, sustainable business model and BOP
innovation. The research design follows a deductive approach where hypotheses are formulated based on the
review of the literature, case studies and expert interviews and tested through a large scale empirical study.
This paper brings together insights from the aforementioned research streams and presents preliminary
findings in the form of a conceptual framework based on literature review, expert interviews and case studies.
Additionally, the design for the empirical testing of the framework through a large scale survey is described as
research outlook.

Keywords: base of the pyramid, sustainability, business models, co-creation

1. Introduction
More than a half a century has passed since the influential essay of Milton Friedman (1962) who argued that
profits are the main purpose of businesses because if a firm does not make profit it loses its competitive edge.
As a result, in their quest for growth and innovation, firms adopted an approach to strategy which perceives
communities as ‘target markets’ and ecological systems as “natural resources that supply raw materials and
waste sinks” (Simanis and Hart, 2008). Analogous to this approach employed by firms, development
cooperation efforts followed a top-down, donation based approach to growth in developing countries for
decades (Chambers, 1997). Today, development economists largely acknowledge the failure of top-down
donation based approaches and support the emergence of market-based approaches (George et al., 2015;
Roxas and Ungson, 2011). From a corporate perspective, Porter and Kramer (2011) argue that the corporate
legitimacy has fallen ‘to records not seen in recent history’ and the results of the lost trust and increasing
pressure from society as a whole might lead to a policy agenda set to undermine competition and corporate
growth. In order to avoid this, firms have to increase the value not only for their owners, but also for the
society in general (Ahlstrom, 2010).
In order to reconcile both the failure of donation-based approaches and the need for companies to start
connecting their value creation activities and economic progress with sustainable development goals, the
business model perspective as a market-based approach for sustainable development is gaining momentum
both in literature and practice (Londom, 2007). This perspective suggests that business models need to be
integrated into development projects, but also adopted by the private sector for the low-income consumer
markets in order to ensure sustainable poverty alleviation efforts in least developed and developing
economies (London et al., 2010). The motivation for the private sector to employ this approach is the promise
of untapped potential of the large low-income markets also known as the Base of the Pyramid (BOP) (Prahalad,
2008). Although there are several success stories of enterprises operating in BOP markets which manage to
successfully create economic value and local human development, most ventures still fail to be self-sufficient
in the long-run (Gradl and Jenkins, 2011).
In order to develop sustainable business models which ensure sustainable outcomes at the BOP, the literature
suggests the adoption of co-creation mechanisms in order to overcome institutional barriers and constraints,
build legitimacy and local capabilities and therefore enable bottom-up approaches to poverty alleviation
(London and Hart, 2004). The process of joint, collaborative, peer-like process of creating and distributing
value is known as value co-creation. In the value co-creation perspective, sustainable business models are
driven by involvement of customers into the value chain as designers, producers, suppliers and partners.
Working together with local people enables deep understanding of local context, constraints and barriers
(London, 2007) and help develop trust, legitimacy and dialogue with local stakeholders (George et al., 2015).
The involvement of customers in value creation activities is often mediated by non-business actors such as
NGOs and local associations who have valuable local knowledge, trust and legitimacy (Dahan et al., 2010).
Therefore, customers and NGOs seem to be crucial for sustainable value creation activities at and with the
BOP.

This study investigates sustainable value co-creation and business models from the perspective of the Small
and Medium Enterprises (SMEs) for several reasons. Firstly, empirical findings show that most enterprises
operating at the BOP are SMEs (Kolk et al., 2013). Secondly, Multi-National Corporations (MNCs) often
penetrate the BOP markets through local established SMEs (Seelos and Mair, 2007). Thirdly, SMEs entail fewer
internal resources and are more likely to acquire external resources through co-creation mechanisms in order
to compensate for this (Perks et al., 2012). These considerations make SMEs a very interesting unit of analysis
for this study.

The overarching aim of this thesis is to develop a toolkit of recommendations for SMEs on how to develop
sustainable business models for the BOP by employing co-creation and what type of business models are more
likely to create sustainable value. The overall doctoral thesis is structured in three research stages following a
deductive positivist approach where theoretical framework with main variables and causal relationships are
developed based on extensive literature review, case studies and expert interviews and tested through a large
scale empirical survey. This paper presents first insights from literature review, expert interviews and case
studies and proposes a theoretical framework which attempts to depict value co-creation activities at the BOP
which lead to sustainable performance of the business models of SMEs.

This proposal is structured in five main sections. After this introduction, an extensive literature review with the
formulation of the research gap follows. The third section describes the theoretical framework developed
based on literature and case studies. Section four outlines the research question, aims and the proposed
research design adopted. Section five contains the conclusion and next steps.

2. Theoretical Background
In order to provide a strong theoretical background for the dissertation at hand, insights from several research
streams are borrowed. The review of the literature aims to underline the main research gaps and develop the
research question supported by solid conceptual and empirical findings in the relevant literature (Figure 1).

Figure 1: Overview of relevant research streams and main insights

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2.1 Development Cooperation and Policy - Market-based approaches as a new direction for poverty
alleviation
As the Millennium Development Goals (MDGs) agenda expires at the end of 2015, there is a widespread
agreement that the fulfilment of targets is incomplete, and there is still significant amount of work to be done
(Brown and Beattie, 2015; Chopra and Mason, 2015). In recognizing this, the UN General Assembly formulates
the post-2015 agenda in the form of Sustainable Development Goals (SDGs) which contains 17 goals related to
ending global poverty and hunger, improving health and education, making more sustainable cities, combating
climate change and protecting oceans and forests (UN, 2015). The transition to the SDGs emphasizes a more
participatory and bottom-up approach for the required approaches, for example the goal 6b specifically
targets the local participation and local communities’ empowerment and engagement. The SDGs agenda
emphasize a multi-stakeholder, participatory and integrated approach to development efforts.
Whether and how much the MGDs have helped or hindered the development agenda worldwide remains
actively debated (Chopra and Mason, 2015; Kenny and Sumner, 2011), but what is certain is that there is
significant work to be done in the area of global development (Kaplinsky and Keynes, 2011). There are still
more than one billion people living on less than 1.25$ per day as of 2011 (The World Bank, 2013) and this
refers only to global poverty eradication. In this regards, it is crucial to learn from the past limitations and
develop better operationalization of the post-2015 agenda SDGs. Scholars along with internal UN agencies
have come to realize that the main shortcoming of MDGs, similar to previous efforts, has been the top-down
approach to development which does not focus enough on establishing favorable local conditions, local
capacity building and engagement of local communities (Bond, 2006).
As the policy agenda but also society as a whole has increased the pressure for the private sector to become
part of the solution to global sustainability challenges, the BOP approach has been proposed in the literature
and practice. BOP is a market-based, bottom-up approach to poverty alleviation which enables the private
sector to get involved in poverty alleviation efforts while providing potential for profits given the untapped
market at the BOP. The core of the BOP proposition is that poverty can be alleviated through financially
profitable business models. As such, the BOP perspective as a poverty alleviation approach entails several
important principles which distinguishes it from other market-based approaches (London, 2007). Firstly, the
profit motif emphasizes the importance of local solutions to fit local constraints while ensuring a self-financed
growth. Secondly, co-creation and external participation in the form of MNC, local companies or NGOs are
combining efforts during the design phase in order to enable the incorporation of local voices into the product
or service design while benefiting from external knowledge base.

2.2 Sustainable development through business models with the BOP

2.2.1 BOP, frugal and inclusive innovation

BOP markets are defined as people living on average with less than 3000 $/year purchasing power parity
(Kistruck et al., 2015; London et al., 2010). London et al. (2014a) define BOP markets as informal markets
where most transactions take place in informal settings. Therefore, the classification of a market as BOP does
not depend on geographical country boundaries but rather on market characteristics (Webb et al., 2010). As
such, these informal markets also known as BOP markets are characterized by largely underdeveloped formal
institutions and the socioeconomic activities are largely guided by informal structures (Webb et al. 2010).

Prahalad and Hammond (2002) in their seminal article, emphasize the ‘doing good and doing well’ feature of
market entry at the BOP. They suggest that seeing the poor as consumers provides profit opportunities for
private enterprises through economies of size and scale and it is a very effective way to fight poverty mainly
through the increase in standard of living and provision of basic services at low cost. Yet, this consumer-based
approach has been highly criticized (Shrivarajan and Srinivasan, 2013). As a result of these criticisms, recently a
growing consensus has emerged that local economic development can be driven by alternative models where
BOP markets are actively involved in the value creation process as service providers, parts suppliers,
employees, entrepreneurs and owners. Aligned with the consumer-view of BOP approach, the frugal
innovation discourse emerged. Frugal innovation is defined by The Economist (2010) as not only the process of
redesigning products but it also ‘involves rethinking entire production processes and business models’, while
Bhatti et al. (2013) emphasize that frugal innovation does not necessarily involve new technologies, but it does
involve new business models. The academic discourse on frugal innovation focused largely on the consumer
based approach since it mainly explores how to design and develop products and services which can be
affordable for low income consumers. So far, it is open for discussion if and under what conditions do frugal

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innovation really contribute to local development efforts. As Knorringa et al. (2015) put it, ‘frugal innovation
proposes profound changes to the innovation value chain’ and these changes might have important
development outcomes, yet, further empirical research extended to Africa and Latin America is needed to
better understand under what conditions frugal innovations address power inequalities on global and local
levels.

Consequently, the BOP 2.0 model has been proposed in the literature to emphasize the mutual value creation
and net-positive social returns (London et al. 2010; Simanis and Hart, 2008). BOP 2.0 is more robust
perspective which focuses on the questions ‘how can we create a fortune with the BOP rather than at the BOP’
(London et al, 2014b). The idea pf BOP 2.0 emphasizes this multi-stakeholder shared-value perspective
suggested by Porter and Kramer (2011) as well as the inclusive innovation discourse because actively involving
the local BOP actors in value creation activities enables increased income, higher skills and expertise, access to
technology, increased productivity and access to affordable products and services. BOP 2.0 evolved into the
inclusive innovation discourse which aims to decrease the trade-off between inequality and growth because of
the involvement of poor into value chains as customers, employees, owners, suppliers and others (George et
al. 2012). Strategies for inclusive growth and innovation include fair relationship between the value chain
stakeholders and also a fair distribution of economic returns between the relevant actors (Matos and
Sylvestre, 2013).
A key debate within the BOP discourse relates to the role of non-business/cross-sector partners which are
defined as non-profit actors such as local or international NGOs, cooperatives, professional unions, local
community associations, religious organizations, education institutions or governments. Hahn and Gold (2014)
suggest that in traditional supply chains, MNC and SMEs tend to adopt central positions, while in the case of
BOP networks non-business partners such as NGOs are usually in focal positions and act as intermediaries
between the enterprises and the BOP customers.

2.2.3 Sustainable business models with the BOP

A business model describes how a firm creates value through the exploitation of business opportunities (Zott
and Amit, 2010; Chesbrough, 2007). The business model construct has been proposed as a framework for
analysis for sustainable innovation and development, and thus, the concept of sustainable business model
emerged in the literature (Boons et al., 2013). The sustainability agenda is congruent with the emergence of
the ‘triple bottom line’ approaches which argue that companies should equally measure their financial
performance with their social and ecological impact (Calton et al. 2013). Therefore, the integration of
sustainability in economic development in developing countries is especially needed since economic, social
and ecological considerations are closely intertwined there (London and Hart, 2004; Chambers, 1997).
The definition and operationalization of sustainable business model construct involves three main dimensions
of sustainability - economic, social and ecological aspects (Stubbs and Cocklin, 2008). Sustainable outcomes of
BOP business models are measured based mostly on economic and social indicators (Kolk et al., 2013). From
an economic perspective, BOP business models create increased and stable income, lower debt levels,
employment opportunities and infrastructure development (London, 2009). From a social perspective, BOP
business models enable capabilities creation such as skills and knowledge, improved health, decreased
morbidity, access to institutions and collective aspirations (Arnold and Valentin, 2013). Rosca, Bendul and
Arnold (2015) investigate the sustainability outcomes of BOP products and services regarding different
directions of innovation and found out that indeed sustainability outcomes in industrialized countries
frequently involve ecological aspects such as material and energy efficiency, while in social aspects dominate
the sustainability outcomes for BOP and include improved health services or education. BOP literature has
largely focused on social aspects and neglected the ecological dimension (Kolk et al., 2013), ecological aspects
are equally important for BOP business models since raising the economic condition of developing countries
requires a new model of development, rather than following the one of the developed world where 20% of the
population uses 80% of the world’s resources (Hart, 1997).

2.3. The Theory of Value Co-Creation

Experiences in development studies and initial BOP and frugal innovation pinpoint to the importance of
involving the local beneficiaries/customers into the product and business model development from the early
stages in order to create local capabilities. In this sense, the theory of co-creation offers valuable insights,
however, so far there is no formal application of the theory of co-creation to BOP research. Therefore, in order
to advance the rigor of the BOP discipline, the theory of co-creation guides this empirical study.

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Co-creation emerges as a new paradigm in management science which emphasizes the role of customers in
the firm-centric value creation process and a growing body of literature exists already starting in the early
2000s (Galvagno and Dalli, 2014). The core proposition of the theory of value co-creation is that by engaging
with consumers and other local actors in the value creation processes, companies are able to better balance
the bottom (costs and investments) and top (revenues and growth) line objectives in the short run and create
sustainable competitive advantage in the long run (Prahalad and Ramaswamy, 2004 a,b). In general terms, co-
creation refers to the joint, collaborative, peer-like process of creating and distributing value. The growing
body of literature and adoption of other disciplines created a proliferation of definitions, perspectives and
operationalization approaches to the theory of co-creation (Saarijärvi et al., 2013). There are numerous
interpretations to what constitutes the ‘value’, the ‘co’ and the ‘creation’ within the main proposition. In order
to underline the concept’s complexity, Saarijärvi et al. (2013) develop an analytical framework which
distinguishes three fundamental issues – the value, the co and the creation from both the customer and firm
perspective (Table 2).
Table 1: Analytical framework for value co-creation (Saarijärvi et al. 2013)

‘VALUE’ - What kind of value for
whom?
Customer Customer benefits through
involvement in value creation
Firm Firm benefits through customer
involvement in value creation
‘CO’ – Who are the actors involved and
deployed resources?
Which firm resources are integrated
into the customers’ value creation
processes?
Which customer resources are
integrated into the firm’ value creation
processes?
‘CREATION’ - Through what type of
mechanisms?
Which types of mechanisms are used to
integrate firm resources into the customer’s
processes?
Which types of mechanisms are used to
integrate customer resources into the firm’s
processes?

Additionally, the depth of co-creation activities between the companies and other actors is debated in the
literature (Prahalad, 2005; Krämer and Belz, 2008). Scholars distinguish the outcome differences between co-
creation at most basic level where customers take part in product testing activities and co-creation at highest
level as transformational co-creation where relationships between stakeholders are built on sustained
collaboration, dialogue, humility and trust (Simanis and Hart, 2008; Krämer and Belz, 2008). Empirical studies
on value co-creation emphasize a two-step mechanisms. Firstly, co-creation mechanisms refer to behavioral
features such as the extent to which co-creators provide/share information, make suggestions and are
involved in the decision making (Chan et al., 2010; Lau et al., 2010), and secondly to the actual integration of
co-creators at different stages of the value chain (Zhang and Chen, 2008).

3. Theoretical Framework: Co-Creation as a key driver for sustainable business models at the BOP
Empirical evidence of value co-creation in BOP settings is scarce, however, there is significant conceptual
support of value co-creation contributions for BOP business models development (London, 2011; Simanis and
Hart, 2008a, b). Based on the literature, case studies and expert interviews, a theoretical framework
underlying this study is proposed. Preliminary findings of the exploratory research stage which support the
theoretical framework proposed in this study are found in Rosca, Arnold and Bendul (2016). A schematic
representation including the main actors and the types of co-creation relationships in BOP contexts is found in
Figure 1. The figure illustrates the constraints and barriers at the BOP acting as drivers for value co-creation
activities which in turn results in sustainable outcomes. The constraints and barriers existing in BOP markets
refer to lack of effective legal and regulatory systems, weak infrastructure, and weak financial markets, low
levels of education and training and differences in terms of socio-cultural systems BOP (Webb et al., 2010;
London et al., 2010; Rivera-Santos and Rufin, 2010). In order to overcome the gaps posed by these local
constraints, foreign as well as local firms need to work with local agents which have significant experience and
legitimacy in BOP markets. These agents can be the BOP actors themselves or intermediary cross-sector
partners such as local or international NGOs, cooperatives, professional unions, local community associations,
religious organizations, education institutions or governments. Some firms directly engage customers in their
operations since the early stages of the venture development in order to better understand the local
structures and systems and to build up to them (London and Hart,2004). Since most transactions at the BOP
are based on social norms rather than formal rules and regulations (London et al., 2014b), customer
participation and engagement is very important in order to develop trust and legitimacy and overcome
information asymmetries. This understanding and integration with the local communities enables the creation
of what the literature calls ‘social embeddedness’ or ‘native capability’ which in turn leads to sustainable
competitive advantage of BOP business models (London, 2007; Hart and London, 2005). Yet, since very low

5
education levels of BOP as well as high commitment of the firm to engage with customers in value co-creation
activities pose important challenges to firms, local and foreign firms choose to work together with cross-sector
partners in order to understand local context, constraints and barriers (London, 2007). These collaboration
between the SME and the cross-sector actor can take various forms, such as joint product innovation efforts,
joint production, promotional, distribution and customer service actives. Close collaboration between such
non-profit actors and the SMEs results in similar ways of thinking and beliefs in regard to strategic and
operational aspects (Hahn and Gold, 2014; Webb et al., 2010) which is also known as realigned contributions
and gains (Le Ber and Branzei, 2010). NGOs in their relationships emphasize the social impact due to their
nature and bring in in the shared goals and thus push SMEs towards higher social impact. Van Tubergen et al.
(2014) in her survey of motives and actions for successful partnerships found that building trust and mutual
interest objectives are the most important aspects of successful partnerships. Therefore, we suggest that firms
working closely with nonbusiness partners will involve a stronger normative orientation. A normative
orientation can be found in a company‘s values and policies, value proposition of offered products and
services, employees motivation and incentives for sustainable practices, sustainable supplier practices, full
accountability for the firm‘s social and ecological impact (Boons et al., 2013; Gold et al., 2013). As a result of
this normative orientation, SMEs are more likely to invest in customer education, training and capabilities
development.
In order to develop sustainable business models and impacts, value co-creation within the BOP ecosystem
takes place in different forms and intensities at various levels of the business model and value chain, and the
sustainability of the business models depends highly on the careful implementation of each stage. As a result
of this value co-creation ecosystem, sustainable economic value is created for the SMEs as well as local
development and environmental preservation achieved.

Figure 2: Value Co-Creation at the BOP.

4. Research Question, Aims and Proposed Research Design

This thesis aims to close the research gaps mentioned above and generate recommendations for SMEs, NGOs
and local governments on how to co-create effectively with the relevant stakeholders at various value chain
stages in order to develop sustainable business models at the BOP. Therefore, the guiding research question is:

How do co-creation activities with customers and cross-sector partners impact the sustainability of SMEs
business models at the BOP?
As shown in Table 2, this research question is broken down in three research stages and several sub-questions.
The main objective of phase I involves the conceptualization and operationalization of the main variables of
interest, namely value co-creation and sustainable business models. The research phase II evaluates how
collaborative approaches with different stakeholders affect the sustainable value creation at different business
model development stages and involves the testing of the theoretical framework by employing a structural

6
equation modelling approach. Phase II aims to integrate the survey insights and develop recommendations on
how to develop business models at the BOP for SMEs and NGOs.

Research Sub-question Methods employed Expected outcome

stage
Stage I Definition and operationalization of main Literature reviews, Theoretical framework,
variables and associated relationships interviews, case studies Hypotheses development

Stage II Evaluation of the impact of co-creation Data collection: online survey Quantification of relationships,
on sustainable business models Data analysis: structural Testing of hypotheses
Evaluate trade-offs between the thee equation modelling, cluster Sustainable business model
sustainability dimensions analysis patterns/archetypes
Analysis of emerging sustainable
business model patterns
Stage III Development of recommendations and Literature review, interviews Pratical recommendations
strategies
Table 2: Proposed Research Stages

The stated research question is of high relevance both for theory and practice. From a theoretical perspective,
the largely held assumption on the link between co-creation and sustainable business models at the BOP need
to be tested in order to advance the knowledge in the BOP stream and open avenue for further research
investigation into the causal link and develop models for practice. From a practical perspective, the large
investments needed in transformational co-creation activities need to be justified and based on solid empirical
findings.

5. Conclusion
This paper presents preliminary findings of a PhD thesis and first insights on value co-creation between SMEs,
customers and cross-sector partners operating at the BOP. From a theoretical perspective, the findings are
critical since firstly they can provide support or counterarguments for the co-creation hypothesis in BOP
studies and therefore open new avenues for empirical research and theory building; and secondly provide
insights on which business models are more likely to employ co-creation and create sustainable value. From a
practical perspective, unravelling whether and how the co-creation affects the sustainability of business
models can provide insightful recommendations SMEs on how they can employ co-creation during their
business model development and implementation stages in order to ensure sustainability of their projects.
Therefore, the main goal is to derive recommendations and toolkit for SMEs primarily and MNC and NGOs
secondarily on how to develop sustainable business models at and with the BOP.

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