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95Santos & Laczniak The heritage and current status of the ‘Integrative Justice Model’

PART II

Marketing to the poor: A SWOT analysis of the Market Construction Model for engaging impoverished market segments1

Nicholas Santos, Marquette University, USA Gene Laczniak, Marquette University, USA

SCENARIO 12

KickStart, a Kenya-based company, develops and promotes technologies that budding entrepreneurs can use to establish and run profitable small scale enterprises. According

1 This paper was presented at the London Business School Conference on Corporate Responsibility and Global Business (July 2006), London, UK. It is © the Authors, and repoduced here under licence.

2 Robert S. Katz, “Base of the Pyramid: Sustainable Business from the Bottom up”, <www. greenbiz.com> (March 2006).

Abstract This paper examines, by way of a modified SWOT analysis, the significance of the “Market Construction Model” (MCM) for marketing to the poor. The MCM proposed by Harvard researchers Rangan and McCaffrey provides a preliminary blueprint for more equitable engagement by companies whose businesses involve impoverished market segments. The purpose of the SWOT analysis is to better understand how the MCM might be better modified and increasingly refined in order to make it a more actionable framework for better engaging impoverished markets with an eye to fairness and justice. In addition, the authors compare and contrast the modified MCM with other contemporary frameworks such as the “Services Dominant Logic” and the “Bottom of the Pyramid Protocol”.

Dr Gene R. Laczniak is the Sanders Emeritus Professor of Marketing at Marquette University, Milwaukee, USA. He currently serves as President of the Macromarketing Society. Over the years, Laczniak has published many scholarly journal articles and papers. In 2012, he received a lifetime achievement award from the American Marketing Association for his contributions to marketing ethics, corporate social responsibility and public policy scholarship.

Gene R. Laczniak, Marquette University, College of Business, 606 N. 13th Street, Milwaukee, WI 53201, USA.

E [email protected]

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to Martin Fisher, one of the co-founders, “appropriate technology is crucial to the creation of millions of small businesses and jobs”. Their technologies include oilseed presses, a stabilized soil block press for homebuilding, and a highly successful line of treadle pumps sold under the brand name MoneyMaker. As they sell these products to small businesses in developing Africa, they lay the foundation necessary for a better economy. According to the company, its pumps have created over 29,000 new jobs and $37 million in annual wages and profits to pump operators. Emphasizing sustainable irrigation practices as well as a flourishing local supply chain, KickStart exemplifies how poverty alleviation and profit generation can symbiotically co-exist.

SCENARIO 23

In contrast, a multinational German based pharmaceutical company, whose latest stroke-prevention drug was making its way through the clinical pipeline, approved a small hospital in the town of Sevagram in Central India as a trial site - one of 28. The regimen to be evaluated was tested for its ability to forestall a second stroke. For each person enrolled in the trial, the hospital would receive 30,000 Indian rupees (about $665). The trial was attractive to the patients, who were mostly poor and illiterate. The company guaranteed them two physicals during each of the three years that the trial would run and of course, they also got to use the trial drug free of cost. However, it seems the patients were not informed about possible side-effects. Furthermore, strokes (relatively speaking) are not a major problem in Sevagram, where deaths from malaria and snake-bites are far more rampant than strokes.

While the scenarios above both deal with engaging the impoverished market segment, the level of empathetic involvement by the sellers in each situation is markedly different. The question that arises from reviewing the two scenarios is: which of them might more likely exemplify a “win-win” situation for all participants? More will be said about these possible differences in approach in the paragraphs below. But we can be confident that as business organizations embrace the idea that the “bottom of the pyramid” (BoP) constitutes an economically viable market segment4, it becomes critical that exchange situations that are directed towards such segments be shaped in a manner that is “fair” and “just” to both parties (i.e. the business unit and consumer). This is particularly important in an impersonal economic marketplace that too often exploits the poor due to an “imbalance” of resources, information or financial leverage on the part of the less advantaged member (see scenario 2).

The Tomorrow’s Leaders group of the World Business Council for Sustainable Development acknowledged that the impoverished segment represent both an opportunity and a challenge for business organizations. While poor people constitute

3 Jennifer Kahn, “India: A Nation of Guinea Pigs”, <http://www.corpwatch.org> (March 1, 2006), originally published in Wired.

4 See C.K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits (Upper Saddle River, NJ: Wharton School Publishing, 2005); Allen Hammond and C.K. Prahalad, “Selling to the Poor”, Foreign Policy, 142 (May/June 2004): 30-37; C.K. Prahalad and Allen Hammond, “Serving the Poor, Profitably”, Harvard Business Review, 80:9 (September 2002); Stuart L. Hart and Clayton M. Christensen, “The Great Leap: Driving Innovation from the Base of the Pyramid”, MIT Sloan Management Review, (Fall 2002); C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid”, Strategy+Business, 26 (January 2002): 54-67.

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potential consumers, employees, and suppliers, there is a need to develop new social and economic models of doing business with this segment5. Present models of micro- marketing lack the specificity to effectively address this challenge, as impoverished market segments are typically evaluated as having little to contribute to the exchange process. Thought of in classic “definition of a market” terms, the poor may have the desire to purchase but they lack sufficient ability to buy. When the poor do have the ability to buy, they are commonly perceived to be a temporary “target of opportunity” and ripe for quick exploitation. In the U.S., it is sad to find some of the most intensive cultivation of impoverished markets to include the marketing of personal injury lawyers, the lottery and “pay day” loan stores. Of course, the poor, collectively at least, also spend millions of dollars on food, housing, clothing, transportation and many other products.

In this connection, the Market Construction Model (MCM) proposed by Harvard University researchers Kasturi Rangan and Arthur McCaffrey in 2004 has the potential of beginning to address this challenge6. Though the model they propose is thought to be most applicable to large infrastructure projects in developing countries, they maintain that their arguments would still be valid in dealing with the macro issues of global commerce7. In effect, Rangan and McCaffrey suggest that for traditional markets to be less exploitive of the poor, the interests of the impoverished must be better represented, more clearly understood, and that the poor must be further empowered to help shape the products and services that are provided. This paper will examine this claim in the context of business practice aimed at impoverished markets. Essentially, a modified SWOT analysis of the MCM will be conducted with a particular concern for whether the approach should be adopted by business firms involved with impoverished market segments in order to better promote distributive justice while maintaining an acceptable profit margin for participating organizations. As observed in the Corporate Social Responsibility (CSR) literature, much opposition to greater economic development worldwide stems from the perception that residents in developing countries, mostly the poor, are not being treated fairly. In this vein, business models that explicitly broach dimensions such as fairness and justice to consumers are particularly timely and welcome.

THE MARKET CONSTRUCTION MODEL

Rangan and McCaffrey’s starting point is that although trillions of dollars have been expended by way of investment and aid to developing countries during the last twenty-five years or so, it has hardly made a dent in global poverty8. This point is echoed by Prahalad, who points out that “for more than 50 years, the World Bank, donor nations, various aid agencies, national governments, and, lately, civil society

5 WBCSD, “From Challenge to Opportunity: The role of business in tomorrow’s society”, a paper from the Tomorrow’s Leaders group of the World Business Council for Sustainable Development, February 2006, <www.wbcsd.org>, pp. 11-12.

6 V. Kasturi Rangan and Arthur McCaffrey, “Globalization and the Poor”, in The Global Market: Developing a Strategy to Manage Across Borders, edited by John Quelch and Rohit Deshpande (San Francisco, CA: Jossey-Bass, 2004), pp. 335-360.

7 Ibid., note no. 4, pp. 383-384.

8 Ibid., pp. 341-43.

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TABLE 1 A market construction paradigm9

Market operation Market construction Functional

processes Exchange paradigm Selling and promotion

Interest representation Voice and advocacy

Aim Change choices Change lives (macro)

Outcomes Change behavior (micro) Reconciliation of values and interests

Business role Represent vested interests Represent unrepresented customer interests

Surrogate voice Serve clients Intermediator Sell client/customers to organizations

(public, private) Vision Lay foundation for prototype markets

organizations have all fought the good fight, but have not eradicated poverty”10. In Rangan and McCaffrey’s opinion, a major reason for this is that this investment has lacked an appropriate process for aiding the poor11. Based on their research, they propose a model of engagement, the Market Construction Model (see Table 1), which is “built around a heuristic of interest representation, voice, and advocacy”12. The pivot on which they build their framework is the poor client, who mostly does not have a voice and whose interests are often poorly represented in the exchange process. According to Rangan and McCaffrey, their proposed model operates under a different set of assumptions than the traditional market operation model. While marketing typically sells the organization to the customer, their new paradigm “seeks to sell the customer to the organization, using voice and advocacy to promote and represent the unrepresented interests of the poor”13. The difference of approach in marketing to the poor as embodied in this model is more than semantic and shall be elaborated below.

To begin with, as the global economy has grown and world logistics have improved, businesses are increasingly examining market segments that include large numbers of impoverished consumers. Their thought process is that while a single impoverished consumer has minimal economic potential, there is no shortage of poor persons. Thus, even with small profit margins, the collective of impoverished segments represents enormous economic value and perhaps tremendous profit opportunity. Prahalad estimates this market potential to consist of “4 to 5 billion underserved people and an economy of more than $13 trillion PPP”14.

9 Rangan and McCaffrey, op. cit., p. 358.

10 Prahalad (2005), op. cit., p. 3.

11 Rangan and McCaffrey, op. cit., p. 344.

12 Ibid., p. 357.

13 Ibid., p. 358.

14 Prahalad (2005), op. cit., p. 21. The dollar purchasing power parity (PPP) measure is a more appropriate measure than the traditional average per capital gross domestic product (GDP) method.

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The major functional process in the traditional Market Operation Model (MOM) is the exchange paradigm, where “knowledgeable customers are able to sort through the choices created for them, evaluate their consequences for their welfare, and then select the one that meets their private interests”15. In the exchange paradigm, selling and promotion become paramount as the customer has to be literally coerced into purchasing the company’s products or services. Thus, marketing under the MOM - the status quo - involves selling the organization to the customer16. In the MOM, the company aims at constantly providing a greater array of products and services to the customer so as to gain and retain customers. The business directives of the organization consist mostly of representing the vested interests of owners, investors, or other partners such as distributors and suppliers. While this paradigm works well in many circumstances, especially with affluent and well informed consumers, it cannot easily extend to the poor, who do not have a voice, whose interests are often very poorly represented, and who have little power in the economic negotiation process. Therefore, the alternate paradigm that is proposed is that of interest representation, voice, advocacy and the reconciliation of values. The underlying assumption is that it is in the long-term interest of the business corporation to draw out the concerns and involvement of that customer segment that is often powerless and excluded. Such an approach will help defuse some of the suspicion and animosity towards globalization that characterizes global trade today.

SWOT ANALYSIS

A SWOT (strengths and weaknesses, opportunities and threats) analysis (see Table 2) is a simple, straightforward approach that can “serve as a catalyst to facilitate and guide the creation of marketing strategies that will produce desired results”17. The primary objective of this paper is to evaluate how effectively the Market Construction Model (MCM) provides a practical, helping framework for business firms engaged with impoverished segments. Using a SWOT analysis, we examine the factors that comprise both the internal (strengths and weaknesses) and external (opportunities and threats) environments of the model. This allows us to better understand how the MCM might be modified and refined in order to make it a more actionable framework for better engaging impoverished markets with an eye to fairness and justice.

Strengths

There are several persuasive reasons that auger for the adoption of the Market Construction Model by business organizations. First, Rangan and McCaffrey rightly point out that much of the antagonism towards globalization has been caused by the fact that “economic globalization is far too removed and abstract to be useful to the poor, who are curiously enough, presumed [emphasis added] to be the beneficiaries of

15 Rangan and McCaffrey, op. cit., p. 358.

16 Ibid., p. 358.

17 O.C. Ferrell, Michael D. Hartline, George H. Lucas Jr., and David Luck, Marketing Strategy (Orlando, FL: Dryden Press, 1999), p. 65. See also Nigel Piercy, Market-Led Strategic Change (Oxford, United Kingdom: Butterworth-Heineman Ltd., 1992).

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much of the economic activity”18. Through a process of interest representation, voice and advocacy, it is their hope that much of this sometimes misinformed antagonism can be eradicated. This is particularly important in the present situation where there is a growing distrust of business19. At the core of the proposed model is an authentic engagement with the poor with non-exploitative intent. If profitability is the sole aim of the business enterprise, there is an increased possibility of exploitation, particularly if there is an imbalance of resources, information or financial leverage on the part of the customer. Thus, in the case of the aforementioned German drug company, the human clinical trials, although essential, exploit the disadvantages of poor patients in developing countries. Analyzing their strategy through the prism of interest representation reveals that there is an arguable exploitation of the poor patients due

18 Ibid., p. 350. The positions of Caufield, Hoffmann, Klein, and Stiglitz are used to arrive at this conclusion. For further reading of these positions see: Catherine Caufield, Masters of Illusion: The World Bank and the Poverty of Nations (New York: Holt, 1996); Stanley Hoffmann, “Clash of Globalizations”, Foreign Affairs, 81:4 (2002); Naomi Klein, No Logo: Taking Aim at the Brand Bullies (New York: Picador USA, 1999); Joseph E. Stiglitz, Globalization and Its Discontents (New York: Knopf, 1999).

19 WBCSD, op. cit., pp. 6-7. The Tomorrow’s Leaders group point out that it could take very little to turn the combination of distrust of business and concern over the world’s future into widespread anger.

TABLE 2 SWOT analysis of the Market Construction Model (MCM)

Internal Strengths Weaknesses Engages the poor with non-exploitive intent Implements Levitt’s global product idea

with “genuine” customer orientation Consistent with Vargo & Lusch’s product

co-creation idea Provides possible “first mover” advantage

for early adopters Shapes better brand equity by building

trust with skeptical customers Product co-creation as well as co-

production would lead to greater acceptance of the corporation by the local community

Does not consider possible corruption of local business partners

There are presently no proven metrics for measuring success using the model

Cedes too much control to customers (marketing mania)

May not meet company’s ROI targets or other short run financial measures

External Opportunities Threats Consistent with 21st century sustainable

economic development movement and the triple bottom line approach

Congruent with “socially responsible” investing

Similar to bottom of the pyramid business frameworks such as the BOP Protocol

Positive PR opportunity based on authentic engagement

Political risk of markets is considerable and not accounted for [nationalization, war, extortion]

Inherent pressure for ever greater local autonomy [loss of control]

Vulnerable markets are increasingly scrutinized and mistakes will become public [negative PR]

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to their apparent lack of information concerning possible side effects and the relatively lower risk of strokes among the population group being tested. In cases such as this, the client becomes a mere means to the financial end of the company. This is despite the fact that the company might flaunt itself as being socially responsible. Consistent with philosopher Immanuel Kant’s second formulation of his categorical imperative, Laczniak points out that “members of the human community, particularly those most subject to exploitation, should never be used as an expedient means to a financial end”20. The MCM with its core focus on more vigorously representing the interests of the poor client provides a framework that treats customers as ends and not merely as means to the profitability of the company.

Theodore Levitt in his seminal article, The Globalization of Markets21, argued that multinationals need to develop standardized products that could be produced and sold throughout the world, thus enabling them to gain economies of scale. However, in recent years, there is a growing awareness that global efficiencies alone do not sufficiently build nor sustain competitive advantage and that these initiatives need to be integrated with responsiveness to local situations22. In attempting to include unrepresented customer interests, the MCM advocates responsiveness to the poor client at a local level without sacrificing global efficiencies. Thus, the MCM implements Levitt’s global product idea but connected to a more palpable and genuine customer orientation.

In their path-breaking work involving the service dominant logic of marketing (or S-D Logic as it has become known), Vargo and Lusch argue that Marketing is evolving to a new evolutionary conception, “one in which service provision rather than goods is fundamental to economic exchange”23. According to Vargo and Lusch, “a service-centered dominant logic implies that value is defined by and co-created with the consumer [emphasis added] rather than embedded in output”24. The MCM with its focus on interest representation, voice and advocacy, not only upholds the dignity of impoverished customers, but also emphasizes that the route to sustainable business is through a co-creation process, whereby value is co-created with the customer25.

20 Gene R. Laczniak, “Distributive Justice, Catholic Social Teaching, and the Moral Responsibility of Marketers”, Journal of Public Policy and Marketing, 18:1 (1999): 125- 129.

21 Theodore Levitt, “The Globalization of Markets”, Harvard Business Review, (May/June 1983): 92-102.

22 Christopher A. Bartlett, Sumantra Ghoshal, and Julian Birkinshaw, Transnational Management: Text, Cases, and Readings in Cross-Border Management (New York, NY: McGraw-Hill/Irwin, 2004). The authors point out that in order to achieve sustainable competitive advantage, companies need to develop global-scale efficiency, flexibility, and the ability to develop innovations and leverage knowledge on a worldwide basis.

23 Stephen L. Vargo and Robert F. Lusch, “Evolving to a New Dominant Logic for Marketing”, Journal of Marketing, 68 (January 2004): 1-17, p. 1.

24 Ibid., p. 6.

25 The distinction between co-creation and co-production in Vargo and Lusch’s work is not very clear. In FP7 they state that “the consumer must determine value and participate in creating it through the process of coproduction”, Ibid., p. 11. We take a broader view of co-creation to include the customer’s contribution to the marketing transaction as a natural extension of all persons having a stake in the economic system.

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Thus, the MCM is consistent with the positions of Vargo and Lusch as well as of other academicians such as Prahalad and Ramaswamy26.

The MCM also provides possible “first mover” advantage for early adopters. The knowledge gained by drawing out previously unrepresented voices of impoverished customers enables the company to build a wealth of information capital. The company can leverage this knowledge base to gain synergies at a global level. For example, Hindustan Lever (HLL), a subsidiary of Unilever, in addressing the problem of iodine loss in Indian salt, developed a new technology called molecular encapsulation. This technology protected the iodine content in salt from harsh external conditions. Unilever was able to leverage this innovation to other countries besides India such as Ghana, Ivory Coast, and Kenya, where iodine deficiency is a problem27.

A major obstacle in the expansion plans of a company can be opposition from local communities and groups. For instance, giant retailer, Wal-Mart, discovered that its plans to open new stores were thwarted in many places because of the negative image it had built in driving local stores out of business28. Recently, in an attempt to boost its image, it has revealed plans for working with local small businesses under what it calls the “Jobs and Opportunity Zones” initiative as well as opening stores in socially deprived neighborhoods29. The MCM, with its focus on interest representation, provides a framework for companies to build trust with skeptical customers, thereby, shaping better brand equity.

Finally, if businesses embrace the co-creation and co-production process implied in the MCM, it will likely lead to an increased involvement of the local community and thereby, a greater acceptance of the corporation at the local level. This is in the long-term interest of both the corporation and the local community and of course is consistent with the stakeholder approach to the oversight of company operations. In the ideal, public suspicions about business will diminish with tangible evidence of corporations having a genuine customer orientation, that is, by involving customers in helping to shape the exchange process.

Weaknesses

Adopting the Market Construction Model is not without its inherent pitfalls. A major component of the MCM is the formation of “voice and advocacy”, whereby the unrepresented interests of the impoverished are better promoted and represented. Specifically, “voice and advocacy” imply greater communication between poor target markets and the seller. However, what is the guarantee that this better communication will result in a genuine representation of the interests of the impoverished? Even if the corporation is honestly committed to the interest representation of the impoverished, this objective could be thwarted by possible corruption of local business partners, vetoes of operational level decisions by top management and many other factors.

26 Ibid.; Robert F. Lusch and Stephen L. Vargo, eds., The Service-dominant Logic of Marketing: Dialog, Debate & Directions (M. E. Sharpe, 2006); C.K. Prahalad and Venkat Ramaswamy, The Future of Competition: Co-Creating Unique Value with Customers (Boston, MA: Harvard Business School Press, 2004).

27 Prahalad (2005), op. cit., p. 31.

28 Stephanie Armour, “Growing opposition frowns on Wal-Mart”, USA Today (Online edition), December 5, 2005, <http://www.usatoday.com/money/industries/retail/2005-12- 04-walmart-opposition_x.htm>

29 Jonathan Birchall, “Wal-Mart targets poorer areas in drive to boost image”, Financial Times, April 5, 2006, p. 19.

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Such exogenous factors are things that the model does not explicitly consider. The actual process of interest representation might not be as easy as it seems. The vested interests of local business partners as well as of presumed representatives of the impoverished segment might actually complicate the process. For example, during the 1980s, German and British pharmaceutical companies made good faith efforts to more efficiently make available and distribute over-the-counter drug products to Nigeria’s rural population. These efforts were muted both by government corruption and the incompetence of local distributors30.

Today’s business environment is being increasingly characterized by a sustainability approach that is better known as the triple bottom line (TBL) approach which focuses on economic prosperity, environmental quality, and social justice31. While uniform standards exist in financial reporting, there are no such comparable standards in social and environmental reporting32. This creates a problem for evaluating companies along these social dimensions. The lack of proven or standard metrics for measuring a business firm’s social impact using the MCM (or any other model imputing socially responsible approaches) can reduce its appeal to both the business and the investing community.

In attempting to achieve a more inclusive style of functioning, one that would bring “the voice and interests of poor customers to be included and represented at the table of policy planning and debate”33, the model focuses exclusively on an orientation towards impoverished customers. This would be tantamount to ceding too much control to the customers (“marketing mania”), which might not necessarily be in the best interests of the corporation. The MCM approach, in whatever form it is implemented, must also be realistic enough to take into consideration that while giving voice to impoverished segments is a noble goal, many of these markets consist of poorly educated and illiterate consumers. Without informed, independent guidance, they may be unable to articulate their needs in a helpful or productive manner. As Levitt pointed out, the global competitor should “never assume that the customer is a king who knows his own wishes”34.

Finally, while the concept of ‘interest representation’ enables the company to gain greater penetration in marketing to the impoverished, a preoccupation with it might distract the company from increasing its efficiencies which are important if it is to meet its ROI targets. For instance, during the 1990s, US business consultants serving American companies in Pakistan decided to offer their market research services to local organizations looking to ascertain the market potential of various ideas. While this venture looked at first glance to be a “win-win” situation, costs and problems mounted in conducting the research because the consultants did not anticipate the

30 Michael R. Pearce, “Nigerian Hoechst Limited”, in Kenneth L. Bernhardt and Thomas C. Kinnear, Eds., Cases in Marketing Management, 5th edition (Chicago, IL: Irwin, 1991), pp. 276-305.

31 For a fuller exposition of the triple bottom line approach see John Elkington, Cannibals With Forks: The Triple Bottom Line of 21st Century Business (Oxford, UK: Capstone Publishing, 1998).

32 See for instance Henry Schäfer, “International Corporate Social Responsibility Rating Systems: Conceptual Outline and Empirical Results”, The Journal of Corporate Citizenship, 20 (Winter 2005): 107-120.

33 Rangan and McCaffrey, op. cit., p. 357.

34 Levitt, op. cit., p. 94.

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complications of surveying illiterate consumers or in reaching female decision makers in a Muslim culture that shelters women from commercial contact35.

Opportunities

Opportunities, in the SWOT template, are favorable external conditions that might enhance a particular approach or venture. The MCM offers a framework for marketing to the poor that is consistent with 21st century sustainable economic development. According to the Tomorrow’s Leaders group, it is directly in the interest of the business corporation to avoid operating on a polluted planet in which billions are too poor to afford the products that are created36. This has two implications with regard to the poor: providing goods and services at prices which they can afford37; and empowering them so that they can fully participate in the process of economic development. In this manner, the MCM is also compatible with the triple bottom line approach. In the wake of the corporate scandals in recent years, companies are beginning to realize that investors are not interested solely in the financial performance of the company but that the social and environmental issues are also important. While businesses accept the need to embrace the societal and environmental dimensions of their business together with profitability, there is no target market development model (to our knowledge) that enables an integration of the three dimensions. As a result, businesses continue to focus on the profitability dimension and treat the involvement with the other two dimensions as part of their CSR. Integration of the three dimensions is possible with the MCM.

According to the Social Investment Forum, socially responsible investment (SRI) assets in the United States rose more than 258 percent from $639 billion in 1995 to $2.29 trillion in 200538. At the same time, there may or may not be conclusive evidence that suggests that socially responsible firms outperform those that are not39. However, the fact that SRI assets over a ten year period from 1995 to 2005 increased four percent faster than the entire universe of managed assets in the United States is indicative of a shift in investor preferences40. The MCM provides companies with a sustainable business framework that is bound to be attractive to socially and environmentally conscious investors.

In 2004, academics from Cornell launched the BOP Protocol project which was aimed at developing a framework for companies to engage the BOP market in a way that fostered a deeper understanding of the needs and perspectives of the BOP

35 William J. Carner, “AGT Pakistan”, in Kenneth L. Bernhardt and Thomas C. Kinnear, Eds., Cases in Marketing Management, 7th edition (Chicago, IL: Irwin, 1997), pp. 165-172.

36 WBCSD, op. cit., p. 6.

37 According to the Tomorrow’s group the “fundamental purpose of business is to provide continually improving goods and services for increasing numbers of people at prices they can afford”. WBCSD, op. cit., p. 4.

38 Social Investment Forum, 2005 Report on Socially Responsible Investing Trends in the United States: 10 year review, January 24, 2006, <www.socialinvest.org>

39 See David J. Vogel, “Is There a Market for Virtue? The Business Case for Corporate Social Responsibility”, California Management Review, 47/4 (Summer 2005): 19-45.

40 Social Investment Forum, op. cit. See also N. Craig Smith, “Corporate Social Responsibility: Whether or How?” California Management Review, 45/4 (Summer 2003): 52-76. In discussing the reputational risk in equity markets, Smith points out that the “growth in investing and listing of companies according to social responsibility criteria has led to a substantial increase in social and environmental reporting by firms”. p. 63.

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segment. This concept closely resonates with the idea of “interest representation” in the MCM. In general, there is a certain similarity between the MCM and the BOP Protocol in regard to their theoretical thrust and language although the scope and intended focus of each approach is somewhat distinct.

An additional opportunity stemming from the adoption of the MCM is the positive PR that an authentic engagement with a previously excluded sector can create. Business involvement with this impoverished sector has largely been philanthropic. This welfare driven approach has not really helped much in the eradication of poverty. A long term business perspective that involves the impoverished segment in a way that contributes to the development of that segment is bound to gain tremendous goodwill for the company. For example, Vikram Akula, who founded SKS Microfinance in 1998 has already made it to the Time’s 100 most influential people in the world list41. The company which has dispensed about $52 million in loans to over 200,000 people has attracted the attention of financial giants like Citigroup Inc., ABN Amro Holding, and HSBC Holdings; these firms have already provided incremental millions of dollars for SKS to lend out.

Threats

Threats, as understood in the SWOT context, are external factors that might diminish or suppress the successful utilization or implementation of a proposed concept. In terms of the MCM, the model does not sufficiently account for the political risks of markets which are considerable in the present business environment. Despite the integrative nature of globalization there is disturbing evidence of a growing nationalism. Take for instance, the recent hostility in France, Luxembourg, and Spain to Mittal Steel’s proposed takeover of Arcelor42. There is also an increasing amount of global terrorism that is evidenced in the 9/11 event and the situation in the ever perplexing middle-east. These strains could frustrate the good intentions of companies that honestly seek to create a more equitable market situation. Extortion by the local mafia can also jeopardize the company’s growth prospects. For example, SKS Microfinance lost about $300,000 when it had to pull out of Nizamabad, a town in India, on account of extortion pressures brought by local goons43.

Another threat is that greater empowerment of the local communities and increased collaboration with local business partners could give rise to an inherent pressure for greater local autonomy, which could result in a loss of overall control. This could be problematic if the company has to ensure a certain consistency in operations particularly in line with its core values. The negative impact of the unjust labor practices at Nike’s contractors’ workshops in developing countries is a case in point. Even as Nike strove to improve working conditions at its contract manufacturing sites, the onslaught of negative publicity continued.44 And a worse case business scenario when reaching out to impoverished markets - since so many are located in developing (and unstable) countries - is the possibility of having corporate

41 Julie Rawe, “Vikram Akula: Finding Novel Ways to Support India’s Poor”, Time, May 8, 2006, p. 147.

42 Philip Stephens, “A perilous collision between nationalism and globalization”, Financial Times, March 3, 2006, p. 13.

43 Eric Bellman, “Entrepreneur Gets Big Banks to Back Very Small Loans”, Wall Street Journal, May 15, 2006, p. A-12.

44 McAlister, D. T., Ferrell, O. C., & Ferrell, L. (2005). Business and Society: A Strategic Approach to Social Responsibility. Boston: Houghton Mifflin Company, pp. 253-254.

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assets nationalized. This situation is currently playing itself out in Bolivia under the government context of better serving the poor of that country45.

As vulnerable markets are increasingly scrutinized, there is the danger of negative publicity on account of mistakes made46. This negative PR not only affects sales but also dampens investor confidence, thereby adversely affecting the company’s operations. For example, in the US, certain Athletes Foot shoe franchises, in an attempt to create jobs for the hard core unemployable and to build empathy with their urban youth customers, hired ex-convicts as store sales reps. However, because the ex-cons hired as clerks were not given benefits (full time employee status was viewed as too risky) nor were they allowed to handle any money, the media characterized the situation as likely exploitive47.

IMPLICATIONS OF THE SWOT ANALYSIS

Our SWOT analysis reveals that the MCM presents a tremendous incremental value for firms that engage the impoverished market segment. However, there are certain areas that the model appears to imply but does not explicitly mention. In our opinion, these dimensions will enhance the attractiveness of the model to the business community and society at large. For one, an important functional process that the model implies (but does not state) is that of “co-creation of value” with impoverished consumers. Co-creating results in a “win-win” situation for both the firm and the impoverished customer. Further, the impoverished customer is actively engaged in the shaping of the economic process.

Changing lives at a macro level is not a sufficient aim from the perspective of the business firm. The success of the firm depends to a large extent on its ability to be profitable. The MCM takes this dimension for granted. However, the profitability dimension needs to be visualized differently in the MCM, not as short term profitability but long term profit management. We shall elaborate further on this point in the next section.

One of the outcomes for firms that follow the MCM will be a reconciliation of values and interests. However, there are other outcomes such as customer empowerment, building long-term relationships and creating sustainable business initiatives. These dimensions enable the firm to be successful over a longer period of time.

Under its business role, the MCM mentions a number of points which really may not add significant incremental value such as surrogate voice, serve clients, intermediation and so on. In our opinion, there are three main business roles that the MCM should play. These are: articulating unrepresented customer interests; facilitating value creation; and investing in future consumption.

45 Alvaro Zuazo, “Evo Morales defends nationalization of gas”, Miami Herald, May 4, 2006, <www.miami.com>; Vivian Sequera, “Venezuela aids Bolivia gas nationalization”, Mercury News, May 26, 2006 <www.mercurynews.com>; See also the interview with Bolivian President Evo Morales by Time’s Tim Padgett and Jean Friedman-Rudovsky, “A Voice on the Left”, Time, June 5, 2006, p. 37.

46 See the discussion on reputational risk in consumer markets in Smith, op. cit. pp. 60-63.

47 Lance Kidder, “Athlete’s Foot”, in Patrick E. Murphy and Gene R. Laczniak, Marketing Ethics: Cases and Readings (Upper Saddle River, NJ: Pearson Prentice Hall, 2006), pp. 161- 163.

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The vision of the MCM is to lay the foundation for prototype markets. As the MCM is meant to provide a blueprint for business involvement with impoverished market segments there should be further qualification concerning the prototype market envisioned that relates to this segment. In our opinion, the vision of the MCM, properly understood and developed, lays the foundation for prototype markets that empower the poor while simultaneously creating “win-win” situations for buyers and sellers.

THE SYMBIOSIS BETWEEN THE MARKET CONSTRUCTION MODEL (MCM) AND THE CORPORATE MARKET OPERATIONS MODEL (MOM)

In our opinion, the purpose of the MCM is not to replace the time tested model of typical market operations with its inherent and proven economic efficiencies. The Market Construction Model is not designed to be a corporate charity program. Instead, when organizations are addressing impoverished market segments, the MCM is overlaid on the normal MOM in order to help create a more sustainable exchange relationship that genuinely benefits both buyers and sellers over time but especially in the long run.

Like the market operations model (i.e. the traditional approach to market development advocated in most global marketing playbooks), the MCM aims to change buyer choices but unlike the MOM, it also strives to change customer lives. It clearly is intended to shape buyer behavior but to do so in a way that represents the values and interests of the impoverished segment. The MCM supplements the MOM in a substantial way but does not destroy it - long term profitability is still an important and non-negotiable part of the marketing equation. The MCM can be seen as modifying the MOM with an approach that emphasizes on-going partnership perspectives, consistent with Vargo and Lusch’s vision of customers as partners in the creation of exchange (see further discussion below). In this way, the MCM celebrates customer empowerment rather than defaulting to the short term exploitations of customers that too often occur when dealing with impoverished segments of the market that have limited power.

At its best, the MCM can be seen to be an investment in future consumption by poor market segments due to the sustainability perceived in having a long term, continuing exchange relationship. Certainly, investment by firms in the manufacturing capacity to deliver future production is not controversial. In fact, such future driven investment is usually perceived to be a wise business practice. When new investment in production capacity is announced, the share price of the company at focus often increases. Similarly, if implemented well, albeit with short term costs, the MCM can serve as a blueprint for enhancing future consumption by the poor. What minimally seems to be required by companies willing to explore the MCM is the following:

• A longer term financial view - not one that is driven by quarterly profit increments or even annual ROI targets. The market development of impoverished segments is inherently a longer process than one that is dictated by the length of the Julian calendar and/or annualized share performance scores. [Consider the development of on-line selling by e-Bay and the number of consecutive quarters (20+) of losses before the advent of “black” figures].48 The acceptance of long

48 Cohen, Adam (2002). The Perfect Store: Inside eBay. New York: Little, Brown and Company.

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term profit management rather than short term profit maximization is essential. The MCM will sacrifice short term profits in order to lay the groundwork for continued participation of impoverished segments in exchange relationships that will benefit their interests in the long run. Increasingly, large corporations (e.g. Coca Cola) are resisting the provision of quarterly profit guidance to investment analysts because they find such a focus antithetical to the corporate strategic planning process49.

• “Interest representation” of the poor along with their advocacy and empowerment is the new marketing concept of the MCM approach. Genuine service to customers has proven to be the winning marketing formula across all types of markets. Just as the traditional marketing concept includes “profitability” as one of its essential pillars, the MCM presumes that mandated advocacy for the poor and their authentic betterment in the exchange process will more effectively lead to sustainable, on-going relationships with an economic value exceeding the short term approach of the MOM. For example, Casas Bahia, a department store chain operating in the most impoverished sections of Brazilian cities has a decade’s long track record of focusing exclusively on the destitute consumers of San Paulo and Rio de Janeiro. While the retail chain has been criticized by some for its above average interest rates on credit sales, it has generated an incredible loyalty and positive word-of-mouth among its economically challenged customers50.

PROPOSED MODIFICATIONS TO THE MODEL

TABLE 3 Modified Market Construction Model

Functional processes

Interest representation of all stakeholders, especially consumers Mandated advocacy for the poor Co-creation of value with all stakeholders, especially consumers

Aim Long term profit management Change lives (macro)

Outcomes Reconciliation of values and interests Customer empowerment Long-term relationships Sustainable business initiatives

Business role Including unrepresented customer interests Facilitating value creation Investing in future consumption

Vision Laying the foundation for prototype markets that empower the poor while creating “win-win” situations for buyers and sellers

49 Gordon Platt, “United States: Coca-Cola puts the lid on earnings guidance”. Global Finance, 17/1 (January 2003): 10. Other large corporations that have followed Coca-Cola’s lead include McDonald Corp. and Motorola. See Phyllis Plitch, “Moving the Market - Tracking the Numbers/Street Sleuth: More Companies Put Brakes on Frequent Forecasts; Quarterly Earnings Guidance can take Analysts’ Attention Away from Long-Term Goals”, Wall Street Journal (Eastern Edition), April 11, 2006, p. C-3.

50 Miriam Jordan, “A Retailer in Brazil Has Become Rich By Courting Poor”, Wall Street Journal, June 11, 2002 in Murphy and Laczniak (2006), op. cit., pp. 109-112. See also Prahalad (2005), op. cit., pp. 117-146.

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THE RELATIONSHIP OF THE MARKET CONSTRUCTION MODEL (MCM) TO THE SERVICE DOMINANT LOGIC (SDL) OF MARKETING THEORY

One might ask where the Market Construction Model fits into the broad realm of marketing theory. For starters, the MCM is strongly consonant with the thinking outlined in the Service Dominant Logic (SDL or SD Logic) perspective on marketing activities conceptualized by Vargo and Lusch51. Such a connection is extremely important because progressive marketing firms will increasingly conceive their future strategy with the “service centered” orientation outlined in the SDL (or related models) as their strategic focal point.

Like SDL, the Market Construction Model emphasizes the importance of operant, not operand, resources. Operant resources focus on actors proactively shaping the usage of resources rather than the more passive (and traditional) approach of operand resources (e.g. land, raw materials) being acted on. In the MCM, the knowledge and insight of the customer, despite the customer’s relative lack of financial assets, is seen as necessary to the co-production of a sustainable economic relationship; that is, the role of the customer is postulated to be unequivocally operant precisely because customers bring knowledge to the exchange relationship that sellers may not routinely possess. This notion is further elaborated below as we show how the MCM connects to the Service Dominant Logic theory of marketing and embodies its philosophy.

Foundational Proposition 4 (FP4) of the SDL conceives of knowledge as the fundamental source of competitive advantage. This idea is specifically vitalized in the MCM by providing customer empowerment to impoverished marketing segments. By stipulating that the input of these “bottom-of-the-pyramid” (BoP) consumers will prove extremely useful, their preferences and “knowledge” are captured in the product planning process. Put another way, the impoverished market segments at focus in the MCM are viewed to be rich in their insights if not in their per capita financial buying power.

FP6 of the SD Logic holds that the customer is always a co-producer not merely a “target” of market offerings as is often the case in the traditional marketing model. Our MCM approach sees the customer not only as a co-producer but a “co- creator” in the sense that the customer’s contribution to the marketing transaction is viewed as a natural extension of all persons having a stake in the economic system. Such a conceptualization is consistent with the stakeholder theory of management whereby “economic claims” of parties other than investor/owners are important. It also resonates with various doctrines of religious thinking, including Catholic Social Thought, which holds that persons have a right and responsibility to actively participate in the economic system as part of a continuation of God’s creation52.

FP7 of the SD Logic points out that a business enterprise can only offer a value proposition but it requires customers to determine its ultimate value. In other words, customer representation and empowerment are central to a contemporary

51 Vargo and Lusch (2004), op. cit.; Lusch and Vargo (2006), op. cit.

52 National Conference of Catholic Bishops, Economic Justice for All: Pastoral Letter on Catholic Social Teaching and the U.S. Economy (Washington, D.C., 1986), n. 15. See also Catholic Church. Pontificium Consilium de Iustitia et Pace, (2004). Compendium of the social doctrine of the church (Cittá del Vaticano; Washington, D.C.: Libreria Editrice Vaticana; United States Conference of Catholic Bishops, 2004), p. 142.

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perspective of marketing because of the inherent partnership potential they provide. In the MCM, the continuous involvement of BoP customers is seen as essential due to the model’s emphasis of long term and sustainable relationships rather than the short term and exploitive situations that too often characterizes sales to impoverished markets.

Finally, FP8 of the SDL conceives of marketing as “customer orientated and relational”. It is a process that extends in both directions well beyond the point of economic transaction, i.e. the exchange. As Vargo and Lusch write, “…humans are both at the center and are active participants in the exchange process. What proceeds and follows the transaction as the firm engages in a relationship…with customers is more important than the transaction itself”53. Applying this proposition to the MCM, we find advocacy for and representation of customer views to be essential to the implementation of our model. With both the SDL and the MCM the old view of ‘transactions begetting revenue leading to short term profit’ is replaced by a perspective that begins with granting the importance of ongoing relationships; those in turn engender customer satisfaction and long term profitability. In this fashion, the MCM provides a blueprint for sustaining and improving shareholder value.

THE MCM AND OTHER BOTTOM OF THE PYRAMID BUSINESS FRAMEWORKS

With the ascendance of economic globalization, the articulation of paradigms to engage impoverished individuals in developing markets should not be surprising, especially given the raw numbers of persons that comprise the global marketplace. Quite prominent among these efforts is the public policy driven approach to eradicating poverty of Jeffery Sachs54. Another more corporate centered approach is the comprehensive business blueprint provided by Prahalad55. And, perhaps inspired by Pralahad and Hart, is the dynamic Bottom of the Pyramid (BoP) business protocol, spearheaded by a group of academics from Cornell University56. The framers characterize their protocol as a roadmap to “inclusive capitalism”57.

Beginning in 2004 and continuing with ongoing collaborations with various firms and foundations, the BOP protocol is a systematic attempt to generate “a structure and supporting logic” that will stimulate partnership and economic development in economically challenged regions of the world. The idea is to create ventures that possess both economic payoff and sustainability. The BoP protocol attempts to network MNCs and local entrepreneurs in a manner that will create economic opportunities with a “win-win” outcome that is consistent with the “triple bottom

53 Vargo and Lusch (2004), op. cit., p. 12.

54 Jeffrey D. Sachs, The End of Poverty: Economic Possibilities for Our Time (New York: Penguin Press, 2005).

55 Prahalad (2005), op. cit.

56 Erik Simanis, Stuart Hart, Gordon Enk, Duncan Duke, Michael Gordon, and Allyson Lippert, Strategic Initiatives at the Base of the Pyramid: A Protocol for Mutual Value Creation, Version 1.0, February 17, 2005, <www.bop-protocol.org>

57 Ibid., p. 2.

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line” approach to business operations58. The BoP protocol is theoretically rich, in part, because it specifies operating guidelines (e.g. humility, patience, the creation of mutual value) and includes its own code of conduct (e.g. equitable profit sharing, TBL orientation). Significantly, the protocol emphasizes the import of dialog with a cross section of locals and recommends training for on-site management representatives in participatory learning techniques. Its social inclusiveness is showcased by the importance given to maintaining a visible local presence as well as the necessity of supporting infrastructure. In 2005, this BoP approach was field tested in Kenya via a partnership with SC Johnson (Wisconsin, USA) and Kickstart, the earlier mentioned manufacturer of micro irrigation pumps, in order to increase production of Pyrethrum which SC Johnson uses as an ingredient in their insecticides.59

The theoretical thrust of the BoP protocol and its descriptive language are somewhat similar to that of the Market Construction Model (MCM). However, there are some key differences in focus and emphasis. The BoP protocol is concerned primarily with enterprise creation whereas the MCM is centered especially on the exchange relationship between buyers and sellers. The BoP protocol is focused on the value chain elements leading to sustainable enterprise creation, whereas the MCM is motivated by improved market communications that creates an assurance of fairness for customers when consumption opportunities occur for BoP buyers. The BoP protocol seems designed mostly for developing economies while the MCM can be applied to impoverished segments in affluent economies as well. Significantly however, both models attempt to provide real value and greater social justice to impoverished individuals as they are shaped by expanding economic activity.

CONCLUSION

For reasons discussed above, we believe that the Market Construction Model as described and modified in our analysis holds great potential for better serving impoverished markets without the exploitation that has too often characterized these exchanges. In presenting our SWOT analysis we tried to be realistic about the weaknesses of the model as well as the external threats inherent in its adoption by business firms. That said, we find that the MCM provides a promising approach - rooted in justice and fairness to consumers - that can be used in establishing and maintaining business relationships with impoverished market segments. The notion of partnering with the poor in a way that gives them voice, advocacy, and a seat at the table from which to help shape the exchange process is also consistent with modern marketing perspectives of building relationships, especially via the SDL framework, in a manner that is also amenable to non-exploitive globalization. Of course, as is often the case, the challenge lies in the details of implementation and the setting forth of actionable guidelines about that MCM process as firms experiment with operationally refining this model. In future papers, we hope to supplement and build on the MCM to show how such approaches can be both more robust as well as better linked to the concept of corporate social responsibility.

58 See also Stuart L. Hart, Capitalism at the Crossroads: The Unlimited Business Opportunities in Solving the World’s Most Difficult Problems (New Jersey: Wharton School Publishing, 2005).

59 Ibid.

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