Inclusive Networks for Building BOP Markets

Filling Institutional Voids

Market exchanges can take place only in the context of a functional institutional environment, which is often taken for granted as a passive background at the TOP. To flourish and function properly, markets need an appropriate institutional fabric (North, 1990). If that fabric is weak of absent, market development is hindered (Easterly, 2001). The importance of an enabling institutional framework for market development has been noticed by development agencies: “building effective institutions is critical to . . . fighting poverty” (United Nations Conference on Trade and Development, 2005, 2006; World Bank, 2001, p. III).

Usually, this enabling institutional context is provided by the state, and when government fails, synergies among different units of diversified business conglomerates may provide a second best (Khanna & Palepu, 1997). The problem emerges when both the state and the market have weak or null presence. Such a scenario creates institutional voids, “a situation where absent and/or weak institutional arrangements prevent those excluded by poverty from participating in market activities” (Mair & Marti, 2007, p. 494; in press). Institutional voids hamper economic value creation, by increasing the cost of doing business (Khanna & Palepu, 1997). For companies engaging the BOP commercially, filling this gap individually can be cumbersome and costly, at best. Thus, companies may resort to specialized intermediaries, who are able to bring down the cost of transacting. (Khanna & Palepu, 2000) In the context of the BPO, those intermediaries are often social entrepreneurs (Mair, Martí, & Ganly, 2007) or NGOs (Arnould & Mohr, 2005), which help constitute company-led inclusive networks.

The settings where BOP initiatives unfold are usually fractured and opaque, with prevent resources and information from flowing seamlessly (Reficco & Vernis, in press). In the case studies examined, inclusive networks functioned as connecting channels that enhanced the flow of information, skills, and resources, making possible the connection of supply and demand. The situation of poor farmers in Bolivia exemplifies this point. Traditionally, funding entities (government and NGOs) transferred resources to local peasants through implementing entities (both for profit and not-for-profit) in technical training and infrastructure. Storage and processing companies were not engaged, nor were distributors or retailers. The unstated assumption was that once peasants improved the quality of their produce, the market’s invisible hand would take over, and economic agents would demand that output. The model did not work, and supply could not connect with demand. On one hand, the implementing agencies were not aware of the quality the market was demanding; on the other hand, processors, distributors, and retailers had not made the required investments that would allow them to handle the peasants’ increased output. That shortcoming was overcome through an inclusive network led by a small company. Irupana, a firm dedicated to storage, processing, and retail, devised a collaborative scheme to work with peasant farmers and develop their technical skills, in partnership with ProRural, a local NGO. Irupana committed to buying pre-established quantities of grain at a price premium, provided that its quality standards were met. Through the establishment of an inclusive network Irupana was able to bridge the information gap and close the market loop, communicating the attributes that its customers were demanding to both the implementing entities and the peasants.

The dynamics at play in the traditional scheme and in the BOP networks are summarized in Figure 2. In the network, all decisions were coordinated— as shown in Figure 2 by the high number of arrows, linking previously unconnected players. Policies were created on the basis of consensus rather by dictum of funders—as shown by the various bilateral arrows in the network; the traditional scheme, on the other hand, only shows unidirectional decision flows, from giver to recipient. Irupana coordinated with other network members its own investment decisions, making sure the soft funds coming from development agencies reached the farmers in time, and allowed all to move forward in unison. In the network scheme, Irupana not only was aware of what was being produced by farmers and how, it also had direct stake in their success, as it contributed to their funding, next to NGOs.

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Figure 2.

Traditional Assistance to Bolivian Farmers and Irupana-Led Inclusive Network

Stabilizing Turbulent Environments

Entering the BOP often entails making a new market; as Christensen and Hart (2002) noted, firms engaging this segment often compete against “nonconsumption.” In turn, market-building entails investing at various points in the value chain. Those decisions can hardly be made unilaterally, as they are interdependent with actions taken by different members of the business ecosystem. This is particularly hard in BOP contexts, characterized by substantial transaction costs, poor information infrastructures, and lack of market intermediaries (Rufín & Rivera-Santos, 2008). Empirical research showed that engaging low-income consumers or producers usually increase transaction costs substantially compared to TOP markets (Austin et al., 2007; Bruni Celli & González, in press). In BOP environments companies find it difficult to aggregate and channel demand, as they do in mainstream markets (Weiser et al., 2006, p. 23).

High transaction costs and scarcity of market intermediaries impair coordination: Agent A may be interested in expanding production, but this would only make sense if Agent B, a member of the extended value chain, would also expand capacity. Yet Agent B will not move forward until Agent A takes the first step, because otherwise its investment would not make any sense, and it does not want to take any risks. The situation resembles the prisoners’ dilemma: On their own, the parties make suboptimal decisions that go against their own interests; they could only come up with an optimal solution if they coordinated their decisions.5 Irupana’s experience, as explained in the previous section, showed how a network contributed to the stabilization of an otherwise complex environment, by facilitating coordination among different players. As noted by Moore (1996), “there can be a tremendous economic advantage in coordination when it comes to shaping the future—in terms of focusing investment, avoiding dead-ends, and finding a role in the center of a powerful community” (p. 61).

Operating in BOP environments may imply a tour de force toward institutionalization, that is, toward the construction of structured system of conventions shared by all participants. Inclusive networks serve a useful function by giving partners a sense of predictability. When successful, such systems can bring about in months what the invisible hand had failed to deliver in decades. By “markets” we do not mean a point of convergence between supply and demand but rather a setting where successive interactions between participating individuals, organizations, and companies that spark economic activity. The Irupana case shows how an inclusive network became a landmark for participants, which stabilized an otherwise uncertain environment through the creation of agreed upon norms, roles and conventions.

Leveraging Social Capital

The importance of social capital for Latin America’s economic development has long been established (Kliksberg, 2000, 2001; Kliksberg & Tomassini, 2000). In his seminal work on social capital, Putnam (1993, 2000) examined how people shape a network’s social capital by contributing trust, which the network stores and employs as a signal. Fukuyama (1996) held that the cultural feature with greatest influence on the prosperity of nations is the level of trust and cooperative behavior based on shared norms. However, the BOP context has a number of characteristics that make the leverage of social capital available in poor communities, particularly important for companies operating in that segment.

Networks Facilitate Access to Key Inputs

Given the environments where they operate, characterized by low levels of institutional development, high transaction costs, instability, and uncertainty, inclusive networks need to mind about parts of the production process that would otherwise be provided by external suppliers in mainstream markets. Some of the networks analyzed were able to intermediate successfully between participating members and the open market, thus giving access to critical inputs, such as financial capital and qualified labor, which were not available to individual members.

Redefining Contours of Business, Internalizing Tasks

Networks at the BOP tend to have a wider scope of activities, because complementors cannot be taken for granted. This means that corporations will tend to resort to greater vertical integration and horizontal diversification than in mainstream markets (Rufín & Rivera-Santos, 2008). Our case sample shows that becoming the hub of these networks at times often implied redefining the contours of the business, and developing new skills. Cativen’s decision to deal directly with producers implied moving from a business-to-business model, in which it dealt with specialists selling finished products, to a model in which it assumed the role of developer. To carry it out successfully, Cativen had to develop internally the technical expertise to nurture agro-business ventures, in partnership with the School of Agronomy of the Universidad Central de Venezuela. As part of the training offered, Cativen taught farmers to add value to their produce through packaging and other services. In a similar vein, Colombia’s Colcerámica was forced to develop a financial arm, which would offer credit to BOP customers and facilitate purchases. This is something that it had never felt compelled to do dealing with clients from mainstream markets, whose financial needs were well served by banks.

The impact of a weak institutional setting on inclusive networks is apparent in cases where the same company carried out similar experiences in different countries. The weaker the institutional environment surrounding the corporation, the stronger the incentives the company had to intervene in it through an inclusive network. Let us compare similar experiences in two pairs of countries, with different levels of market development: France and Venezuela, on one hand, and Costa Rica and Nicaragua, on the other. As mentioned earlier, starting in 2002 Cativen decided to engage low-income suppliers, organizing them in independent cooperatives and setting a series of multifunctional “proximity platforms,” that fulfilled commercial and social needs—more on this next. By that time, Cativen’s controlling group, Casino, had left the business of developing agro industries in France after farmers reached a critical size and sophistication in the early 1990s. In the words of Jean Marie Hilaire, Cativen’s CEO, “once a given country has developed enough, we go back to our business and focus on retail, letting producers mind the quality of produce. By the time we left the French agricultural cooperatives they knew about the agro-business industry much more than our people.” In France, Cativen could rely on independent suppliers and complementors; no gap threatened its commercial needs, as the market was sufficiently developed. A few years later, an opposite situation led Cativen to lead the construction of a BOP network in Venezuela.

Hortifruti, the agribusiness division of a multinational group of large retailers, runs a similar initiative called “Tierra Fértil.” Hortifruti’s parent group is the Corporación Supermercados Unidos (CSU), in turn controlled by Walmart. Tierra Fértil was born out of the company’s frustration in finding reliable independent agricultural suppliers. It started in Costa Rica in 1973, where the company was able to deal directly with farmers in beefing up their productivity. In 1998, the program was extended to Nicaragua. In that country, however, the gap to be filled was larger than in Costa Rica: The agricultural sector was highly fragmented in microproducers, who worked through rudimentary processes, with no planning, subpar technology, and poor logistics. Understandably, they could hardly meet the quality and price needs of a multinational retailer. The agricultural farmer in Nicaragua is poorer than its Costa Rican counterpart. ⁶ Although most of Costa Rica’s farmers had completed their primary education, only a few of their Nicaraguan counterparts had gone to school.

To compensate for such a gap, Hortifruti refrained from intervening unilaterally. Instead, it sought to lead the creation of an inclusive network that relied heavily on the work of NGOs as “supporters.” Integrating Nicaragua’s low-income farmers into a modern market-based value chain took a longer term view, intense mentoring and training, and financial support than it had been the case in Costa Rica. To qualify as a Hortifruti partner, they were asked to change to diversified seeding and year-long scaled harvesting, using modern inputs (fertilizers and pesticides), and meeting pre-established quality standards. The inclusive network in the Nicaraguan case included more actors from the nonprofit world, as well as government agencies offering greater technical and financial assistance. Here, too, the link between institutional weakness and inclusive networks emerges. Although the company intervened unilaterally in Costa Rica, the magnitude of the gap found in Nicaragua compelled it to engage in the construction of a network, which could facilitate access to critical inputs that the open market was not providing.

Becoming Business Friends

Building inclusive networks implies a willingness to go beyond a transactional model (“one-time deal”) and project the relationship into the future, educating, empowering, and accompanying the BOP partner along the journey. In most cases it also implies a readiness to invest resources in developing the alliance. An existing literature has researched the emergence of interfirm networks around closely knit value chains, in which exchanges between partners depart from the ones prevalent in market relations—characterized by impersonal ties, motivated purely by self-interest, with actors ready to switch to new buyers or sellers to capitalize on new price opportunities—and rely instead on embedded ties. In embedded relationships, the economic component is only part of the exchange among partners, who sometimes become “business friends” (Uzzi, 1997, p. 35). Inclusive networks appear to be founded upon embedded relationships. As the CEO of Irupana, Javier Hurtado, put it, “In our vision, our low income suppliers are partners; our relationship with them is both commercial and human.” Or, in the words of a manager from Construmex, a CEMEX housing initiative targeted at the BOP, “We seek to become friends with our clients.”

The idea of business friendship can be related to the concept of “business intimacy,” advanced by Simanis and Hart (2008), who considered it a prerequisite for the private sector to “co-create” value with nontraditional actors. This intimacy is built when companies and communities view each other interdependently, developing mutual commitment to each other’s long-term growth. The focus on the long term and the cultivation of humanized relationships that go beyond the purely commercial is not the exclusive domain of inclusive networks. Some leading companies do consider their portfolio of relations with suppliers as “relational capital”: an asset in itself, which needs to be nurtured and actively managed for the long run (Gulati, Huffman, & Neilson, 2002). However, the context of inclusive networks puts a premium on this dimension, as per the characteristics already mentioned: the prevalence of direct ties, with frequent and dense interaction; the weak institutional context which make difficult the enforcement of legal contracts, and the strength of informal social institutions coupled with mistrust/animosity towards outsiders. In this regard, embeddedness may diminish “relational risk”–the consequences of not having satisfactory cooperation (Das & Teng, 2001).

Some readers may legitimately wonder whether it may not be too naive to expect “friendships” or “intimacy” to emerge in contexts marked by deep inequalities. The point being made here is that BOP markets initiatives require building a new kind of relationship, one that looks beyond a purely commercial dynamic. Take the case of Gas Natural, a public utility that distributes piped natural gas in the northern outskirts of Buenos Aires, Argentina. Since 2003, Gas Natural has been developing an ad hoc model that seeks to engage the BOP as viable customers. The ad hoc model differs from its standards procedures in various regards (Table 2), but the thrust of the model is that it entails partnering with the community from the outset. The first thing the company does when it approaches a community is to seek for local leaders, private or public, who might be interested in partnering in a consensus building exercise. The dialogue may include grassroots organizations, churches, NGOs, or local governments. Interestingly enough, when Gas Natural disembarks on a poor community, it is not only with their sales team; they also bring along their community relations people, who roll out a battery of training programs around the concept of responsible and sustainable energy consumption.

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Table 2.

Gas Natural: Traditional Processes Versus the Ad Hoc, Targeted Toward the Base of the Pyramid

Traditional Model	Managing With the Community
Relation with neighbors intermediated by independent licensed installers	Direct relation with neighbors, nongovernmental organizations, grassroots organizations, and local governments from the outset
Dialogue limited to individual customers	Holistic approach that considers the needs of the entire community or neighborhood
Technical advise given to customers upon requests on technical aspects of the installation	Proactive advise given to community on a broad range of issues, not limited to technical expertise
Investment in massive consumer-oriented advertising campaigns	Investment in the development of solutions tailored to specific needs of each community
Energy savings not an issue in relations between company and customer	Education on concepts such as “energy substitution” and “sustainable consumption”
Enrollment and installation carried out by external installers	Training of community members as installers
Collection of installation costs carried out via automated processes	Collection of installation costs carried out via ad hoc, closely monitored arrangements

Source: Adapted from company documents.

The presence of business friendships in inclusive networks is facilitated by the fact that in those initiatives the commercial drive often coexists with other motivations. Network leaders seek to device win–win arrangements that create value for all partners. Irupana pays its suppliers 20 to 25% over the prevailing market price. Although part of that premium has to do with the value added to the produce purchased, the price is higher than what a purely power-based negotiation would have granted, according to venture protagonists. Irupana is in that business to make a profit, but its founders are also cognizant that their long-term well-being is inextricably linked to that of its BOP suppliers. Self-interest is at play, although blended with a social component which creates synergies and competitive advantage.

At times, developing and embedded relation may imply refraining from short term profit maximization. This, of course, is not the exclusive domain of the BOP. Previous research on the subject has established embedded partners tend to “satisfice” (“satisfy” + “suffice”) rather than maximize, on price, and they shift their focus from short term gains, and exploiting dependency, to cultivating long-term, cooperative ties (Uzzi, 1997). As previously mentioned, Gas Natural actively promotes training programs around the concept of responsible and sustainable energy consumption—which in essence show prospective customers the benefits of not consuming beyond their possibilities. Why would a private company care to do that? The reason why Gas Natural undertakes those activities has little to do with charity, and a lot to do with managerial experience.

In 1997, Gas Natural had launched another initiative, Gas for Everybody (Gas para todos), which sought to create a purely commercial relation with the BOP. Gas for Everybody did succeed in adding substantial numbers of new customers: Between 1997 and 2001 it enrolled about 100,000 of them. However, most of those enrollments were short lived: After a few months, the new customers stopped honoring their bills, and in 2001 the initiative was discontinued. After some research, the company discovered the roots of the problem.

Gas for Everybody did not bother to invest time or resources to build a relationship with the poor. That interface was delegated in independent installers, who cared little about the long interests of the new BOP customers, or those of the company. They were simply seeking short-term financial gains; thus, they maximized the installation of new outlets. Houses that had done well with one or two so far were given five or six. The increase in consumption was such that the monthly bill ended up the same despite having a product that was seven times cheaper. Many of these BOP customers could not cover the costs of installation and defaulted. The company realized that it had sought growth as an end in itself, without giving it any direction. It was all about quantity, not quality. The company kept the strategic decision to expand in BOP markets but realized that it could not do so only from a commercial perspective: The relation had to be broader. Adding a customer who will default in 6 months is bad business. Gas Natural decided to build an ad hoc process what would allow to initiate a long-term relationship with the BOP, one that will be rewarding for both ends and sustainable. They concluded that the BOP was a viable profitable segment, but only long term—not a “quick buck.” The construction of this long-term relationship in their case entailed helping to think long term to individuals that lived hand to mouth, in unstable conditions. In the words of Fabian Chamadoira, Gas Natural Operations Manager, West Region: “If we as a company do not lead in the relationship with the community, if we allow that relationship to be purely commercial, sooner than later there will be all kinds of problems for the sustainability of the relationship and the replication of the project.”

The maximization of long-term profits is of course the goal of any business, regardless of embeddedness. However, two characteristics of the BOP environments enhance the long-term orientation of inclusive networks. The first is the scarcity of alternative bidders: Very often, the community will not have many other private sectors to resort to, and conversely, the company will not have other “community partners” to engage. Second, the inherent asymmetry of power between partners will create incentives to self-restraint and patience. Pushing too hard a power-maximizing agenda will result not in defection to an alternative bidder but in the failure of the network-based initiative, which runs against the interest of all participants.

Sound Business, Not Charity

As suggested in the previous paragraph, social sensitivity is part of the equation in many of the networks studied. In practice, this implied a willingness to accompany, to invest time and resources in training and empowering weak partners—what has been called an “active assistance approach” (Perez-Aleman & Sandilands, 2008). For example, to develop a business relationship with a sufficiently large pool of small farmers, Cativen found it necessary to organize and incorporate 10 additional producers’ associations. To engage them in a cost-effective manner, the company established a network of multifunctional “proximity platforms” in each of the producing regions, were their production was aggregated, stockpiled, sold, and distributed. Each of these centers served as community nucleus, where producers congregated and exchanged best practices between them. Members of Cativen purchasing team participated in weekly meetings with farmer groups to follow through and assist them through the training process. In return, Cativen committed to purchase quantities and prices as long as farmers met its quality standards, and helped them get there. Trading was not “spot” but rather focused on the long term.

Although some of those expenditures were carried out through the companies’ CSR divisions—witness the case of Gas Natural mentioned in the previous section—they were not disinterested donations. On the contrary, these were targeted investments meant to make viable profit-seeking businesses. As opposed to philanthropic relations—where benefits flows are sporadic and mostly unidirectional, from to the giver to the receptor—in inclusive networks, benefits flow in an ongoing basis, to all participants involved. In inclusive networks, partners give and take on a balanced fashion, much as it happens on any value chain: Participants are summoned to join the network because they have something valuable to contribute to the enterprise, and are rewarded for it.

Where the poor are integrated as producers, insofar as they increase their income, they have to gain that through their own efforts. That apparently simple concept is not always easy to be agreed upon. Irupana managers recount that, after so many years of working with development NGOs, Bolivian farmers had grown accustomed to receiving donations, not investments. Irupana’s owners were determined to make a positive impact on the life of those peasants but considered that giving away something for nothing “would only prolong dependency.”

The discipline instilled by market competition serves to show that the social dimension in these networks is no excuse for inefficiency. The “business-friend” relationship is simultaneously about generating new personal ties and developing a sustainable market based initiative. This may entail some dose of “tough love” for underperformers, enforced by the network leader. By that it is meant the kind of committed care found in friendships, which may entail saying or doing things the interlocutor would rather not hear, but which will work in her own interest, often through a behavioral change. In the context of inclusive networks, this often entailed enforcing accountability and personal responsibility and steering away from a paternalistic outlook, which gives away something for nothing. This finding is in line with CK Prahalad advice, urging businesses not to view the poor as objects of pity but as resilient and creative entrepreneurs and value conscious consumers (Prahalad, 2005).

Ad Hoc Governance Structures

Assuring effective collaboration in BOP initiatives sometimes involve designing ad hoc governance structures, which will take into account the interests of all relevant stakeholders and facilitate cooperation at the strategic level. In this context, governance refers to combinations of legal and social control mechanisms for coordinating and safeguarding partner resource contributions, administrative responsibilities, and division of rewards from joint activities (Todeva & Knoke, 2001). Previous research suggests that “functional fragmentation [in the value chain] requires securing technological compatibility and complementarity . . . in an effort to co-ordinate for quasi-reintegration and effective production on a now decentralized basis . . . . Effective action is not feasible unless governed by a coordination mechanism that can deal with increased complexity.” ⁷ Governance in the context of BOP initiatives presents particular challenges, given the essential asymmetry between the parties. For companies engaging in an inclusive network the questions become, How to ensure long-term commitments? Who gets to decide what?

In Social Enterprise Knowledge Network’s case studies sample, those organizations that interacted with their ecosystem and engaged the BOP without establishing a network, maintained a hierarchical control over decisions, both at the strategic and operational levels. ⁸ An example would be Construmex, a housing initiative by CEMEX aimed at U.S. immigrants, who are given to possibility of funding the construction of a house in their kinsmen hometowns. To reach its clients effectively, Construmex leverages a dense network of organizations (including local and stage governments, Mexican consulates, immigrant associations, etc.), but retains complete vertical control over all aspect of the business.

On the other hand, those initiatives that did establish formal networks approached the BOP in a more horizontal spirit, in most cases relinquishing some measure of control over decisions, at least on the operational level, and coordinating action through incentives. In the most “horizontal” and participatory schemes, a “neutral” decision-making forum was created with the assistance of an “honest-broker” respected by all parties (NGO or social entrepreneur). Two reasons appear to help understand this fact. The first is the need to build confidence through transparency, which later resulted in commitment by all parties involved. The second would be the need to capture “tacit knowledge,” which only the community possesses, for the scheme to work. Trial and error is inevitable in any market venture, but when it comes to what Milstein, London, and Hart (2007) have called “previously ignored markets,” learning is more intense and vital. The context that prevail in those markets differ so much from mainstream markets, that “needs, suppliers, customers, technologies, product requirements, service demands, distribution channels, marketing approaches, manufacturing realities, sourcing, and production methods will all differ from the known and familiar” (Milstein et al., 2007, p. 90).

The initiative led by Colombia’s Colceramica is a good example of how the collaborative arrangements with nonprofit organizations and grassroots organizations can facilitate the capture of tacit knowledge, relevant to developing an effective business model. Colceramica’s BOP initiative “Your house like new, step by step,” aimed at making tiles available to BOP. From the outset the company decided it would not manage the initiative hierarchically. Instead of going it alone, the company first sought the participation of Haidy Duque, a social entrepreneur and an Ashoka (NGO) fellow, recognizing that “we both have a lot to learn: we know little about community dynamics and you know little about how to run a successful business.” In 2004, Carlos Espinal, the company’s Marketing Manager, and Duque, carried out 3 months of in-depth fieldwork research in Usme, a low-income neighborhood. They concluded that the model required the creation of a set of cooperatives, which would serve as formal interlocutors between the company and buyers. However, community leaders confronted them on the grounds that they already had well-respected grassroots organizations. “Why reinvent the wheel when we have tested institutions that worked just fine?” they reacted. Existing community organizations were known to have strong local leadership, high credibility vis-à-vis their constituencies, a team orientation and a culture of collective decision making. With this knowledge, the business plan was reformulated, to create a Community Organizational Nucleus (CON) which would manage a local sales force of women. The CON served as a forum to design collectively the modus operandi of the value-chain and for community organizations to learn from each other. The economic compensation for each component of the network was established by negotiations, in an open and transparent manner. Community organizations operated following the guidelines established by consensus in the CON and were compensated on commission (3% of profits). Community organization also administered sale revenues, supervised sales personnel, and showcased Colcerámica product line.

Where BOP citizens were engaged as producers, the network leader in different cases encouraged the creation of producers’ associations or cooperatives, which could function as a valid interlocutor in the negotiation table. The Agropalma Group is Latin America’s most important oil producer. In 2001, the company led the creation of a sophisticated network, the Family Agricultural Project, in the country’s northeast, its poorest region. This initiative engaged a number of public agencies at the federal, state, and local levels; the company; and the local BOP farmers, so as to integrate the later as viable partners in the company’s value chain. In this network, decisions are taken by consensus among all participants: the state government (Pará), the local government (Moju), the bank that financed the enterprise (Banco da Amazônia), the company (Agropalma), and the BOP farmers. But for the workers to have a real voice in the decision-making process, they needed an institutional framework that could articulate and channel their interests in the multilateral forum. Thus, the company encouraged and supported the creation of the Association of Community Development Arauí. This was a forum in which all BOP farmers shared their views on the benefits of the alliance, monitored results, and exchanged best practices. Articulating their demands behind a clearly stated agenda, vigorously defended by a single voice, increased their bargaining power, and allowed for real dialogue with other interlocutors. The multilateral decision making meets monthly to take on strategic issues. Day-to-day issues are handled bilaterally by the company and the farmers association. Although the company does not stand in complete parity with its partner, it constantly strives to reach consensus in all decisions made.

Another importance dimension of governance in any network is the handling of conflicts among partners. As mentioned earlier, the weak institutional context of the BOP determines that the capacity to enforce laws and regulations tends to be low. This places a premium on the possibility of assuring buy-in and fulfillment of respective obligations through participatory governance structures, which often build on existing informal social institutions. In Colcerámica-led initiative, the CON was also charged with mediating and resolving disputes.

To sum up, the drivers to create structures of shared governance are (a) the need to break the cycle of indifference and mistrust, through structures that facilitate a deep connection between partners; (b) the need to secure commitment and buy-in through active participation; and (c) the need to capture “tacit knowledge” from the community—that nonwritten body of knowledge that is often a make or break factor in the success of the initiative. However, those drivers depreciate over time: Once commitments are respected; trust is built; and, most important, the BOP becomes a familiar terrain for the company, the incentives to operate through a horizontal network will probably tend to wane.

Colcerámica’s experience confirms this view. The network just described was put in place in Usme, a region from Bogotá city, where the company implemented its first pilot. A year and a half later, the company felt confident enough to replicate and scale up the experience in other regions: It launched similar experiences in regions of Cali and Medellín, major Colombian cities. But this time around, the company had other priorities. For Colcerámica, the BOP was not altogether unknown terrain. Thus, the emphasis was not in building trust, transparency, and consensus: The success of the Usme pilot, which had received plenty of attention nationwide, preceded them. Instead, the company focused on capturing economies of time, lowering costs, and gaining scale—in short, applying a business rationality to the enterprise. This was no accident: All along the Usme experience, Colcerámica had sought to learn through trial and error, identify best practices, and systematize the new ad hoc processes. Thus, the networks built in the new cities had no CON. The horizontal components were scaled down, in favor of a more vertical, command-and-control style of decision making.

Risk Taking

Operating in network appears to have diminished perceived risks and enabled investments. Networks seemed to have contributed substantially to the stabilization of unstructured environments, bringing a modicum of predictability. They brought down the governing costs of the ventures to manageable levels. Most important, it provided a second-best alternative to weak contract enforcement, through the construction of highly personalized ties. As embeddedness increases expectations that noncontractual, nonbinding exchanges will tend to be reciprocated. In risky investment situations, these factors increase an actor’s capacity to access resources and take risks. Previous research has established that the expectations of reciprocity and cooperative resource sharing generate investments that cannot be achieved through arms-length ties that are based on immediate gains (Uzzi, 1997).

For many of the companies studied in this sample, these partnerships were pilots, designed to “test the waters.” The fact that all pilots are being replicated and scaled up, suggest that they were successful in bringing down perceived risks. In Cuartel V, near Buenos Aires, Gas Natural joined in a partnership with the nonprofits FPVS and Mutual El Colmenar. These NGOs helped organized around 45 various grassroots organizations in an umbrella council called “Organized Community,” which served as a forum to build consensus around priorities for local development. According to a company employee, “in Cuartel V we did well incorporating the community as co-manager of the initiative. It was a radical change. From a commercial perspective, it was a real headache in the beginning. We had to let community members do the talking and persuade fellow neighbors to join in. It took us longer to get things done, but the end result was much better, because of the trust that this methodology built in the community.” The company has drawn an important lesson. Partners like FPVS and El Colmenar may not be available in all BOP communities it will do business with. However, the company will always seek to leverage the existing social capital in the community, and build on it taking into account the specific characteristics of each community: “You need to identify the organization able to span across the entire community. These organizations aren’t that hard to find; the question is how do you activate this social tissue? You really need that web.”

Competitive Advantage

Institutional voids are not just constraints; as it has been noticed, filling up those gaps can be a source of opportunity (Mair et al., 2007). According to Rufin and Rivera-Santos (2008), BOP networks are characterized by the presence of structural holes, more so than their counterparts at the TOP (p. 19). In network theory, structural holes are ties that bridge sections of the network which otherwise would remain unconnected (Burt, 1997). In our case sample, structural holes were connected by “bridging organizations” (Brown, 1991; Sharma & Westley, 1994; Westley & Vredenburg, 1991) spanning the gap that exists between the formal/developed sectors of the economy with those informal/underdeveloped, the for-profit world with the nonprofit, the large corporation with the small and medium enterprise, the cooperative or the social entrepreneur. It has been posited that organizations that bridge disconnected clusters may use these connections to obtain advantages over others (Burt, 1992). Competitive advantage is created when an organization is able to position itself in the center of a powerful economic ecosystem (Moore, 1996, p. 61).

In our sample, inclusive networks did appear to have improved the competitive position of its members. The experiences analyzed showed that inclusive networks consume time and resources to be built, but once in place, they create synergies that expand the limits for each of the participating organizations. As explained earlier, BOP networks filled institutional voids, performing functions usually served by intermediaries in TOP markets. By doing so, networks facilitated access to key inputs, such as financial capital, soft-funds, or skilled labor. Organizations that invested time and resources in building these networks could appropriate these hard-to-find assets to their benefit, creating a first-mover advantage in the process. This is valid both for networks that engaged low-income citizens as consumers and producers, as we show next.

Engaging consumers through networks allowed Gas Natural to overcome historical barriers to access to a significant market segment, which it had been unable to tap so far. Since the low-income sector initiative was launched in 2003 (and up to 2007, when data were collected) Gas Natural managed to enroll almost 3,000 new low-income customers—almost 5% of all new enrollments. This is significant, because although penetration levels in wealthy neighborhoods are around 100%, in low-income areas it remained well below 50% on average. If Gas Natural wants to expand, it will have to be toward the base of the income pyramid. The initiative is profitable; the company does not subsidize rates and keeps the same rate charged to all other segments. Profitability has been helped by the fact that default rates among low-income clients were much lower than expected (similar to more affluent customers). At the same time, this segment is not as profitable as others. Although it takes about 4 years to recoup the initial investment made in a regular customer, it takes 5 years with the low-income one. Plus, it costs more to enroll them, and they do not consume as much middle-class consumers: Their consumption level is about one third of that of mainstream customers, on average. For poor families, access to natural gas has implied a 3% to 5% increase in annual disposable income because of the lower costs of energy bills.

Inclusive networks were at least as successful when used to engage low-income citizens as producers. Working through an inclusive network has allowed the palm oil producer Agropalma, to expand output substantially, in what is already Latin America’s largest producer: It has increased production 6%, and by the time the project is completed, output will have expanded 44%. This gain in production was done in a manner that is more efficient than the alternative path of vertical integration. First, it spared Agropalma from substantial capital investments—the environmental regulation of Brazil’s Amazonia mandates that only 20% of new land acquisition can be devoted to productive ventures, with the remains being left to conservation. Second, according to Agropalma the overall cost of expanding output through independent BOP producers so far has been of US$2.4 million, whereas the cost of producing the same 1,500 hectares through vertical integration would have been US$3.2 million. On the other hand, participating in this network has had a major impact on the community. Low-income farmers have been able to increase their monthly income from US$27 to US $345—a remarkable increase of 1278%, in just 4 years.

The possibility remains that eventually these newly empowered producers or consumers may eventually defect to competitors—with the obvious exception of natural monopolies, such as utilities. However, data gathered during interviews suggest that the embeddedness and loyalty amassed during the process of network building will constitute a lasting asset. For example, participants in CSU’s Hortifruti initiative with low-income farmers consider that the empathy generated by these embedded relationships generate a loyalty that will prevent them from defecting. At the same time, there are limits to that empathy. For instance, when BOP suppliers see the prices of their products go down, loyalty will not always prevail above short-term gains. Costa Rica’s CRES has faced this situation: Butterfly producers have multiplied driving down the prices of pupae in the global market. Some CRES suppliers have begun to sell wherever they can. Some network members are supplying “under the table” to competitors less concerned with product quality and environmental standards.

Broader Information Exchange

Information exchange in embedded relationships goes beyond price, quantity, and quality data and tends to include information that is difficult to obtain otherwise, such as tacit information acquired through learning by doing. Trust has the effect of giving access to difficult-to-price resources such as information that enhance competitiveness and are difficult to get in arms-length exchanges (Uzzi, 1997). The availability of information stemming from interconnected actors is crucial, as there are difficulties in obtaining useful knowledge about the BOP (Austin et al., 2007). In BOP markets standard consumer research may not offer reliable information about poor consumers. Store audits, for example, may not survey retail outlets in low-income communities such as the barrio or the favela. Thus, having direct access to information through strong ties could mean an increase in efficiency and productivity and may in fact be a vital input, as the experience of Gas Natural showcases. According to a company spokesman, “The information we handle is, so to say, ‘from the gas meter out’; what happens ‘from the gas meter in’ is handled by the Organized Community and FVPS. We know how much each family owe us, how much it consumes, how many gas appliances they have; what we do not know is what happens inside their house walls: why they owe us money. This is the type of information that they provide us with. We had no way of knowing why they owed us, and that was something we needed to know.” Having access to this type of date may make the difference between doing away with a chronic bad debtor and losing a loyal customer who is going through a rough patch. That type of intelligence can be crucially important in environments were information is opaque (with no traceable credit records), institutionalization is low, and contract enforcement is weak.

Joint Learning and Problem Solving

Instead of the exit-or-stay response of the market, members of inclusive networks set routines of negotiation and mutual adjustment that flexibly resolve problems. Informal problem-solving mechanisms enable actors to coordinate functions and work out problems “on the fly,” promote joint-learning, innovations and the discovery of new combinations of resources. The existence of a “business friendship” create expectations of “going the extra mile” for network members, as Colcerámica’s example demonstrates.

In the governance section, it was mentioned how Colombia’s Colcerámica was able to co-create with a social entrepreneur and a host of grassroots leaders an effective model to engage Colombia’s poorest citizens as untapped consumers. In the words of Carlos Espinal, Colcerámica’s marketing manager at the time, “after listening to community leaders, I wondered, ‘who are the experts here?’ We had failed to recognize the true value of the community’s contribution.” The business model was redesigned to leverage the social structures already on the ground. This fueled a joint learning process that, on one hand, changed the company’s culture and, on the other, strengthened the initiative’s ties with the community. The venture’s model evolved from a model in which the company did something for the community to a jointly developed business, dramatically increasing this innovation’s success potential.

Economies of Time

Earlier research had established that membership in embedded networks promotes economies of time (Uzzi, 1997). The finding appears to be relevant for inclusive networks. The concerted effort of private, nonprofit and public organizations, aligning their agendas to produce change, does seem to bring about changes that would have take much longer in traditional, arms-length market relations. In the words of Javier Hurtado, Irupana’s CEO, “The supplier development program has allowed us to reach in two years an exports volume that took other companies 10 to 15 years.”

Context-Specific, Nontransferable Assets

The ventures in our sample show tension between depth and breadth. The precedent pages showed that inclusive networks were built on the basis of highly personalized, embedded ties. Although the advantages of developing capillarity and strong local roots are clear, they certainly contradict the imperatives of geographical expansion, standardization, and scale. They constitute locale-specific assets and cannot be transferred easily: Once an organization has heavily invested in them, they become a sunk-cost that will generate incentives to exploit economies of breadth in the same area, as opposed to expanding the model to other venues. Despite the undeniable achievements captured through these networks, many of the initiatives studied are facing problems in creating reliable operating procedures through which the model can be replicated and scaled up. And this is not a trivial problem, as capturing economies of scale is essential both for social and economic reasons. It has been noted that BOP business model need to operate with thin margins per unit (Prahalad, 2005), which creates the imperative of reaching critical mass to generate profits. On the social side, it is clear only through scale will we be able to make a dent on poverty.

Nonmarket Burdens

When your business partner becomes a “business friend,” nonmarket considerations are to be factored in. That is precisely what makes the relation “deeper” than a standard market-type exchange among business partners. Although this may offer some advantages, it clearly has some risks associated to it. In the context of inclusive networks, where nontraditional partners occupy important roles, that may entail dealing with problems that historically have not been “the business of business.” What if the community leaders become fractionalized by jealousy and rivalry? Superimposing an economic logic on a social organization or a community of new customers may create problems. It may be akin to partnering with your block neighbors: some of them may be hard-working partners, and others may be chronic underachievers, but insofar as they live in the block they have a legitimate right to be heard. You cannot simply fire them and move on.

Another risk inherent in socially based relationships among different groups is opportunism by local leaders, who could eventually use their role in the network as a way to further an individual agenda, regardless of its juxtaposition to that of the collectivity. An entrepreneurial individual and respected community leader can be an effective informal sales agent for the electricity company. However, she can also use her enhanced stature with the community for her own ends, to the point of jeopardizing the success of the initiative.

Polemic Role of Profits in Poverty Alleviation

As we have seen, some of these initiatives have voluntarily chosen to limit profits. It is no secret that the BOP is a politically charged terrain. Being accused of “getting rich off the backs of the poor” is an ever-present possibility, particularly in regions where profits are under suspicion, as it is the case in Latin America. This self-imposed limitation may a double-edged sword: On one hand, it may be a short-term enabling factor; on the other, it may be turn out to be counterproductive for both shareholders and the cause of poverty. One of the critical innovations of the BOP approach has been to create a link between commercial success and social betterment. By raising the prospect of an untapped “fortune” to be found among the forgotten poor, it caught the attention of large multinational corporations. If profits are not substantial, these initiatives may be relegated to the “well-intended-but-irrelevant” pile, thus putting off the interest of dynamic organizations. The microfinance industry has pioneered this debate, triggered by the IPO of the Mexican microfinance institution Compartamos in April 1997 (Daley-Harris, 2007). Is it a good idea to charge a 60% interest rate to the poor? Some argue that this is an abusive practice, for individuals for whom each dollar spent has a huge opportunity cost in terms of foregone alternative uses. On the other hand, it is hard to deny that those returns have succeeded in mobilizing previously uninterested players to BOP markets. Demonizing profits made in the context of poverty alleviation may be akin to killing the goose that lays the golden eggs. At the same time, as with the development of any new market or product line, the productive potential of the poor can only be unleashed through “patient capital”: focused on the long run, willing to accept below-market returns at the beginning, and combined with assistance (London, 2008; Novogratz, 2007). The main innovation of the BOP approach has been to align the dynamism of the commercial world with the well-being of the disadvantaged; it would be important to keep that energy alive so as to distinguish it from the approaches of top-down development, philanthropy, or corporate social responsibility.

Overdependency

As our examples show, some of these networks rely on nontraditional partners for vital portions of their value chains. This can render the networks fragile, when market conditions are unfavorable to some network members. What if some among them, who usually live hand to mouth, have personal difficulties and renege from their commitments? What if they join a competitor? Unfulfilled expectations can create a backlash, and maybe a defection. Cooperatives can go bankrupt, community leaders may change. In most of the examples analyzed, this scenario created only short-term problems, as the bridging organization retained all core processes and skills and had alternatives to explore. However, it remains a distinct possibility. This can also happen to companies if the initiative is not yielding the expected returns or the challenges are more daunting than anticipated.