Kevin Denney: What is the mission of The Next Practice?
Jeb Brugmann: I have a background in development, and my career is driven by the objectives of development in terms of providing improvement to people's quality of life. I have gone through an NGO phase, and a government phase where I worked with mostly city governments in public sector strategy. In both phases I saw that there was an opening up of markets due to liberalization policies and that there was a unique opportunity for enterprise-based strategies to achieve development objectives. As an executive director of an international non-profit organization, I found that we increasingly relied on enterprise-based strategies to achieve our own objectives.
Global Legacy was set up to experiment with different enterprise-based strategies, where business is used as an agent of development. The point of view at Global Legacy is that in order to be sustainable, business has to first be profitable. A business has to sustain itself through a relationship with the customer, as well as to be optimized for developmental impact. One of the questions that came up, and that led to two or three years of experimenting with different approaches, was, what is the role of the multi-national corporation? And this is where C.K. Prahalad and Craig Cohon of Global Legacy and Yann Risz and I came together.
The Next Practice was set up specifically to understand how the basic business imperative of growth confronting multi-national companies (MNC's) can move into this under-served segment of base-of-the-pyramid (BOP) consumers - a large portion of that growth imperative being due to the saturation of markets in the affluent part of the world. The challenge of serving BOP consumers could fundamentally reshape the role MNC's play as agents of development. Companies have to be highly responsive to that consumer, and figure out how to be a more robust agent of development for the BOP world. The BOP customer is not a standard, market-based consumer, so they have to be socialized into a relationship with MNC's. In effect, they have to be transformed into a consumer, and the MNC has to be hyper-responsive to their unique requirements if they're going to grow in that segment.
What's exciting to me is to see how these large companies, the old dogs who aren't supposed to be able to learn new tricks, do in fact learn new tricks. The reason a lot of these companies haven't gone into the BOP market in a serious way yet is because it's easier to do the old tricks. A number of people have said to me, "C.K.'s book is great, but I don't see enough companies making the commitment to actually do it," and I think they're quite right. It's been really hard to get companies to make that commitment. Companies pay lip service to the need to enter the BOP as a market, and this is driven by public policy, but are they really seriously trying to get into it? It's not clear.
KD: How does the Next Practice differentiate between BOP and emerging markets?
JB: I think of the BOP as referring to someone who is not a modern consumer. Someone who does not participate in a formal employment relationship, is not a formal consumer, and is not served by the formal business sector. They're largely in an informal income-generation mode, an informal trading mode, and have a very low level of income. Then there is a second group, which is the one that our clients are most interested in and where we have the most opportunity today, which is what we call the emerging consumer. That's a person whose income mobility and evolution into economic formality is such that they're moving very quickly from being a BOP person to being a middle-class consumer, or at least having the aspirations of a middle-class consumer - a top-of-the-pyramid (TOP) consumer. Then of course there are all of us, who are already totally socialized, whose lives are totally organized around being consumers and who have the income to support that. Every time an advertisement is thrown at us we make a decision about whether or not to purchase that product.
The "BOP" therefore refers to a large pool of some hundreds of millions or billions of people, who don't as yet have that kind of economic mobility. That's a population being served these days, probably rightly, by development, aid, and charity-type activities. That's not to write them off or to dismiss them in any way, but their needs right now are basic infrastructure, basic health, basic micro-finance to maintain a subsistence living. But there is this other group of people at the top end of what has been called the "BOP", who are moving into quite a different segment, who have savings, access to finance, access to connectivity. These people have found a way to accelerate their evolution in terms of income, education, and access to market infrastructure, and may have even started a small business serving the BOP customer.
The true BOP customer is more difficult for the MNC to serve, because there's less of a revenue pool there and the challenge of profitability is more complicated, if not impossible. But on the other hand, they are a more predictable consumer. The emerging consumer is interesting, though, because they're in this transition or "emergence" phase. Here one finds a high level of heterogeneity and a high level of dynamism, along with a significant revenue opportunity. The challenge to the MNC is one of customer responsiveness. Their business model must change and grow with the consumer as the consumer evolves. It must know where the consumer is headed. I've been saying this to clients:; what we've come to realize is that customer relationship management is at the core of strategy for MNC's when moving into emerging markets.
KD: So you believe that the hundreds of millions without mobility, at the real BOP level, are still best served by development aid?
JB: We can think of a number of areas where development aid, charity, and what I would call social enterprise is supported by a business model, but the total pressures of the market is not on their shoulders - where there's a mix between private finance and foundations or charitable finance. On the one hand the delivery model is a business, with a customer, and they're making money; on the other hand it's a social organization, and everything is being subsidized for low-income consumers. That's a great model; it's using the technology, the knowledge, the message of business to figure out how to provide a developmental benefit to the BOP - but that's not where an MNC is going to see an opportunity to make money.
KD: When you develop a business model for a client, how do NGO's fit into that business model?
JB: NGO's are the pioneers, or what I sometimes call the first-generation entrepreneurs. They've been experimenting for a decade or two, trying to figure out how to improve a product or to provide access to infrastructure or finance for a particular demographic. They've done the research on this consumer, including extensive qualitative research and household surveys. I'm currently doing market analytics for a client, and the first place we're turning to is World Bank household survey data. This is in contrast to the traditional method of hiring a bunch of market research firms to ask the questions. We're doing this because we're looking at big geographies, like China. The World Bank is not really an NGO, but what I call a social sector organization. Peter Drucker was the first one to coin the term social sector organization. Social sector organizations have been the first to have taken a business-like approach to thinking about this consumer, and their work is really the starting point for understanding the business opportunities and challenges. MNC's have to decide, if there's an existing NGO knowledge-base and infrastructure, whether they copy that infrastructure and compete with it, or co-opt it and bring it into their system. I would argue the most likely scenario with micro-finance in India, for example, is that it's going to be co-opted, and that NGO micro-finance will be the small player in five years time, even in southern India. At The Next Practice, we're advocates of a third approach, co-creation, because we think that the NGO's, although they can be looked at as being inefficient through traditional private sector market performance metrics, are efficient in terms of core know-how and responsiveness in a localized consumer environment. This competency is very costly for MNC's to develop. So, why would they imitate it and spend a lot of money trying to figure it out themselves? How do they instead involve the NGO as a business partner? They're both thinking about enterprise, so the question for our clients is, how do you evolve this into new infrastructures and capabilities together?
KD: How should MNC's think about developing multi-stakeholder approaches in the BOP?
JB: I think MNC's have become very familiar with multi-stakeholder approaches through Corporate Social Responsibility (CSR) activities. It's about legitimating the company, and as Stuart Hart would call it, reading those weak signals, or what Prahalad would call intelligence networks. So, accessing the intelligence, the expertise, the core understanding of the NGO, is from a CSR perspective all about learning and public relations. MNC's are increasingly confident and competent in stakeholder management from this perspective, although I think when the process moves into strategic business decisions, analytics and product development, multi-stakeholder relations don't get them very far. Developing a business opportunity requires a shift away from the multi-stakeholder consultation approach, into what we call nodal partnership relationships.
In The Future of Competition, Prahalad talks about the nodal company. The nodal company, rather than re-inventing the wheel and re-producing the competencies and infrastructure of people who are already out there in the market, patches those competencies together and coordinates among them to create value. This requires all kinds of protocols around confidentiality and information sharing, and intellectual property, and new kinds of contracts. This is what we're experimenting with through The Next Practice: how you operationalize these relationships and still have something that's responsive to the consumer. Because at the end of the day, the consumer is going to be changing, and if all of those nodal players don't change together and figure out how to continue to serve them as they evolve, then the business isn't going to carry on.
Anjali Kelkar: NGO's seem to feel very proprietary about the people they work with. They work at the grass roots level and have this impression that MNC's are always out to cheat their people. MNC's in turn feel frustrated in gaining NGO's trust in order to reach the BOP consumer. Does any of your work involve advising companies on how to address this issue?
JB: Yes. A lot of the work I did with one client in India was helping people create a common language, strategic intent, and a framework for co-creation. The second step is to translate this framework and formalize the relationships into Memoranda of Understanding (MOU's), and then translate those into contracts. One of the main things I've been doing within TNP is to evolve relationships through these stages.
I use the term social sector organization rather than NGO because I think the term NGO elicits something in the MNC's mind, that certain types of non-profit organizations are more important than others. I think we need to understand there are a wide variety of players in that space, some of whom are more delivery oriented and others more policy oriented, some more experienced in dealing with business and more strategically aligned with business approaches. They don't have an ethical problem with the idea of generating a profit through delivery of products or services to a "poor" person. And if you don't carefully select whom you're relating to in the social sector, you're going to spend a lot of time just helping people get comfortable.
Our protocol is designed to first understand how we can all support one another and avoid slinging mud as we address the BOP challenge, the vast challenge of the underserved. Then, to allow us to figure out how to move from strategic intent into a framework of co-creation, to a memorandum of understanding, to a contracted relationship within a nodal company, where there are a number of private sector entities managing a relationship with a dynamic, heterogeneous customer - which is an entirely different kind of challenge. Many of the NGO's we are working with have now incorporated a private company.
AK: Can you tell us who these NGO's are?
JB: I'll give you the names of two of them. One is a Maharashtra-based NGO called Swayam Shikshan Prayog. Its origins were in disaster relief and reconstruction. Through the deep insight and trust-based relationships it established through this work, it then got into micro-credit and self-help group formation. Another one is called the Covenant Center for Development in Tamil Nadu. It has also been in a micro-credit/self-help group space, but has taken the next step of establishing a handful of community-based enterprises that are growing in scale. Their interest has been, how do we develop business models that allow traditional rural livelihoods to evolve with the market into greater business opportunity for those people, so they don't have to give up their existing knowledge and practices.
KD: Development Alternatives had been doing work with Shell for years; is The Next Practice working with Development Alternatives?
JB: They've been working with Shell, actually, the Shell Foundation in particular. Shell has been very smart and their foundation has been a mechanism through which they have developed an incredible intelligence about this space. Now the question is, what is the business strategy related to it. We're all waiting to see.
KD: How do you advise companies to deal with the informal economy?
JB: The first challenge that arises is how to measure it. A rupee doesn't ask itself when it wakes up in the morning whether it's formal or informal sector rupee. So the first thing you need to do is decide how you're going to measure your business opportunity and partners. You need to decide whether it's worth allocating resources to go after the informal entrepreneur as a potential business partner. Informal sector entrepreneurs aren't dogmatic about being informal, it's just the operating conditions of the market they're operating in.
I've spent some time in slums understanding businesses that are sort of half formal and half informal. They are evolving into becoming formal, and formality for them means integration into a global supply chain and distribution infrastructure. I think it's implicit in their relationship with a large company that there's an opportunity for them to evolve into formality, and reap the benefits. Without that relationship, they don't have access to the benefits, so why should they bear the costs of formality? An example of this might be a relationship with a large company that is going to supply them with a product to distribute or process into something else. The company provides them with an input through an integrated, legal, formalized supply chain with quality control; it provides them with stability of supply. It provides a bunch of things that will allow them to grow their business.
But the quid pro quo for those benefits is that they become legally registered and report their earnings to the government - that they behave like a formal organization. They have to deal with government anyway, often in the form of making payoffs, but with formality they now have to deal with tax issues, and without the scale and infrastructure of a large formal organization. Or, if they want to get into export activity to access a global market, that also requires formality.
To come back to your question, what do you say to MNC's about people in the informal economy: The saavy MNC sees them as entrepreneurs, as the people who are going to be among their teachers if not their partners, and MNC's have to help them move to formality and secure the benefits of formality.
KD: How inclusive are MNC'S with BOP residents and the small entrepreneurs in the BOP?
JB: What do you mean by inclusive?
AK: For instance, when you go into Dharavi, or rural India, or basically any of these under-served areas, you never see a dearth of entrepreneurship. Entrepreneurship is everywhere. How inclusive are MNC's when they enter these markets where business already exists?
JB: You're talking about displacement.
AK: Yes, I mean do they support it, do they want to include these entrepreneurs?
JB: That varies a lot from company to company, and whether they are a competitor, a co-opter, or a co-creator. And that has to do with the mentality of the company and who is advising them. At least some of the companies who go in as a competitor and start displacing large numbers of people are going to get chewed up in the court of public opinion.
AK: One of the issues that keeps coming up is that even if the CEO of an MNC agreed in principle that there was a potential market in the BOP, the culture of the company and the company itself needs enough champions to take it through many different tiers. So having the directive come from the top does not necessarily mean that the company is going to change.
JB: I should first say something about our business model. On the one hand we are an advisory firm, that supports and coaches managers to define the opportunity in this space. On the other hand, we are a business development partner, taking a risk in developing a business model and organization on the ground. The ideal relationship for us is one where advising evolves into this latter kind of co-creation effort.
With some companies we've had extensive conversations, meetings, and interactions involving, say, the 20 most senior people in the company - multiple interactions, ranging from workshops to every other day phone calls - to try to support an organization towards making a commitment. Two-fifths of them, say, even with that level of interaction, just cannot develop a coherent focus on this strategic opportunity. There's too much else going on. Maybe they had a bad quarter, or the head of Latin America got fired. There's some other crisis that's urgent in their existing business and they have to resolve it because they've got existing core stakeholders and business models to tend to. Some of our clients, after some initial advising, decide to go to the market and try to do it on their own.
KD: What are your thoughts on the role of design and innovation for the BOP?
JB: We've developed a bit of a process at the front end, to help get to a product concept. The first thing is that whoever starts with the responsibility for the project needs to immerse themselves in the space of the consumer. They need an experiential, direct, person-to-person set of reference points. That keeps people in place as they move into an analytical frame of mind, to understand the opportunity from a technical and financial point of view. For us, that depends on the environment. They have to go live in a house for a while. One might say this can create a biased point-of-view, because they are thinking about the one hut they lived in rather than the ten other huts in the next village. But I think there's something about creating respect for the people served, and I've found that in working with people in the BOP, they always remember some individual. They have a picture of that person on their desk and they say to themselves, sure, I'm developing a business opportunity for my company, but that's the lady whose life has to change at the end of the day. So there's a kind of a moral contracting with the consumer that comes out of that.
The second thing is about understanding the price/performance challenge. You need to understand the existing product functionality, the performance of the existing products and how to compare their performance to each other. With energy, it was, per a rupee spent, how many gigajule equivalents does the end user get, for boiling water, for example? You need to understand the desired and required functionality improvements, the consumer budget and the activities they do. So that comes from direct observation, interviews with local experts, the evolution of the product in those kinds of communities, focus groups, surveys, etc. There are a bunch of other tools, too, in terms of ethnographic observation and videotaping and all that kind of thing, but the idea for us is to define the existing price/performance ratio and then to figure out what defines a new category. What's the highest performance you want to deliver to somebody at what price?
By throwing down that gauntlet, we're going for a new category. We're not just trying to find something that fits on the existing industry curve; we try to drive innovation. Based on that, you can develop the design parameters: "don't come back to me with anything that doesn't comply with new category criteria." Then scoping out alternatives in terms of technology, configuration, all of that sort of stuff. This is not necessarily a linear or even logical process. It is a creative process and becomes quite iterative. At some point when you're thinking about your technology options, working on product concepts that comply with your criteria, you begin to distill the strategic concept behind the product that this consumer needs, the core concept that will allow us to deliver a new category of price/performance - that's your secret code. What we've found is that that secret code is the thing that allows the company to integrate its ideas about product, about the consumer offering, the marketing of that product, and about the business model, operationalizing production and delivery into a competitive position in the market. Everything gets built around that core concept. So developing a product can be the process that divines the core strategic concepts.
Understanding price/performance for the consumer, with the onunderpinning of a "moral contract" or emotional commitment, on delivering them something way above what exists in the market today, leads you to the core idea that defines your whole business. And then from there it moves into nailing down the product functionalities and specifications and starting to work with all the technical people to design the thing and to bring works-in-progress back to consumers, and ultimately get to a prototype test in the market and seeing how it flies. That front end of the process is more of what we do, and at some point we turn it over to people who are trained in the more traditional aspects of design.
KD: How important is sustainable development to the work done by The Next Practice with its clients?
JB: Very important, and it's tricky. Sometimes we look at an opportunity, or a target company or industry, and we apply sustainable development as a criterion in deciding whether we want to go there or not. Sometimes we do it the other way around, we say, you know what, this is an important industry, let's not make current sustainability performance a prerequisite of exploring together; we need to engage with this company or industry and trust that the people in that company have strong enough values that we can bring the sustainability issues into the picture.
We've selected four target industries for us that we believe are critical to sustainable development: health, connectivity, finance, and energy. And one can say that education is another one, though it's not an industry that we can sell our services to necessarily. Those four are of particular interest to us, because we think they're the four empowering industries in terms of helping the emerging consumers and entrepreneurs achieve greater productivity, and access to global markets. One way you might look at sustainability and sustainable development, which is really my background, is to look at it from the point of view that unsustainabilityle is when the benefits of globalization are only accessible to rich people in certain parts of the world. A big challenge of sustainability is how to provide wider access to the opportunities of a global society. Environmental sustainability is something that has just come along, with the performance values that companies have to have, so in this way I guess their public-relations view of the world had informed how they approach this opportunity as well.
KD: Is there anything that I haven't asked that you thought I should have asked?
JB: I think there's space for more conversation about how the informal BOP entrepreneur meets the formal global businessperson. Because there are really two economies who have to sort out whether they're dying to merge with one another, or if it's going to be one at the cost of the other. And that may likely happen. I think in the economic history of the Europe and the USA, it was one at the cost of another. Our grandparents and great-greandparents had to be re-socialized, to learn new ways of generating income, to stop doing things they used to do. One might consider this to be the a natural evolution of a society, but the dislocation and displacement of evolving through displacement on a global scale is so large, one has to ask whether even the world's richest organizations, the MNCs, can absorb that cost. The "BOP", or managing relations between the two big global economies, formal and informal, is wreally a big social experiment. This takes a certain amount of humility. How do you keep yourself accountable to society and to a set of moral values and principles, when your primary driver isn't social responsibility, when your primary driver is making a lot of money? How does one govern that situation from a corporate perspective? This is a question to which C.K. Prahalad is currently giving a great deal of thought.
Jeb Brugmann for 20+ years has been a leading practitioner in devising localised solutions, at scale, for business, government and international development agencies. Brugmann's current work in The Next Practice focuses on supporting large corporations with consumer research, high-impact product, business model and distribution channel development, and customer relationship management approaches for very diverse local base-of-the-pyramid markets. Most recently, he led TNP's work in India to develop rural distribution channels, marketing concepts, and partnership management frameworks.
Anjali Kelkar is Project Lead of the Design for the Base of the Pyramid Project at the IIT Institute of Design. Kevin Denney is a Master of Design Methods candidate at IIT-ID.
