Overcoming institutional distance: Expansion to base-of-the-pyramid markets

Journal of Business Research 65 (2012) 1692–1699

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Journal of Business Research

Overcoming institutional distance: Expansion to base-of-the-pyramid markets Sofie Van den waeyenberg a,⁎, Luc Hens a, b a b

Vrije Universiteit Brussel, Department of Applied Economics, Pleinlaan 2, 1050 Brussels, Belgium Vesalius College, Belgium

a r t i c l e

i n f o

Article history: Received 1 October 2011 Received in revised form 1 November 2011 Accepted 1 December 2011 Available online 24 February 2012 Keywords: Base of the pyramid Developed-country multinationals (Institutional) distance Liability of foreignness

a b s t r a c t The paper assesses the international expansion of developed-country multinationals to base-of-the-pyramid markets to launch new-to-the-world product innovations. The case study, of Philips Lighting, uses an international-business framework on the transferability and development of capabilities during international expansion. Institutional distance limits transferability from developed-country markets to base-of-the-pyramid markets; heterogeneity limits transferability across base-of-the-pyramid markets. The case shows that only extant capabilities independent of an institutional context are transferable, thereby forcing the firm to pay more attention to locally building new capabilities for market research and distribution. The transferable capabilities are mainly procedural (such as a customer-centric vision, and experience in high-tech product development); collaboration with local partners eases the development of new capabilities. Firms can improve their base-ofthe-pyramid internationalization strategy by assessing the transferability of their capabilities and by adapting their organizational structure to stimulate knowledge sharing when building new capabilities. © 2012 Elsevier Inc. All rights reserved.

1. Introduction “The approach is the same, but the way is different,” a Philips employee answered when asked about the difference between targeting potential customers in developed countries and targeting the base-ofthe-pyramid population, being the lower tier in the pyramidal categorization of the world population according to annual per capita income, or the 4 billion poorest people in the world (Prahalad & Hart, 2002). His answer refers to how each international expansion has similarities (“the approach is the same, …”), but that the institutional voids in less developed countries (such as weak regulatory institutions and an inadequate intermediary infrastructure for marketing and distribution, especially towards the poor in dispersed, rural communities) force a firm to rethink the on-the-ground implementation of its expansion strategy (“… but the way is different”). The difference originates from the distance between the multinational's traditional working environment—the developed countries (Rugman & Verbeke, 2004)—and the low-income markets in less developed countries. The expansion of developed-country multinationals into the distant, foreign base-of-the-pyramid markets is central in the base-of-the-pyramid proposition. How the foreignness of a developed-country multinational affects the expansion towards the base of the pyramid is the subject of this paper, analyzing the extant capabilities that facilitate a firm's first steps into the base of the pyramid and the capabilities the firm builds locally. The ultimate question ⁎ Corresponding author. Tel.: + 32 26291423; fax: + 32 26292060. E-mail addresses: [email protected] (S. Van den waeyenberg), [email protected] (L. Hens). 0148-2963/$ – see front matter © 2012 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2012.02.010

is how the firm can transfer capabilities to expand to other base-ofthe-pyramid markets. The base-of-the-pyramid proposition addresses developed-country multinationals, points them at the possibilities of approaching the consumer market of the poor with newly developed products (contrary to general belief), and suggests adaptations in business models to do so profitably (Hart, 2010; Hart & Christensen, 2002; Prahalad, 2006; Simanis & Hart, 2008). These suggestions lay the foundation for the base-of-the-pyramid proposition (Karnani, 2007). London and Hart (2004) and Hart (2010) advise companies to develop a native capability or social embeddedness: a multinational must become accustomed to the markets of the poor in less developed countries, and get to know and understand how the poor live (London & Hart, 2004). Even though international-business research has focused on business expansion in developed countries (Ellis & Zhan, 2011; London & Hart, 2004), international-business concepts are useful to analyze how multinationals can develop a base-of-thepyramid internationalization strategy. Base-of-the-pyramid proponents emphasize the advantages of developed-country multinationals in the base-of-the-pyramid markets, but critics (e.g., Karnani, 2007) point at the disadvantages of developed-country multinationals compared to domestic firms and the disadvantages compared to small local enterprises. The literature on the base-of-the-pyramid proposition extensively discusses the motives for entering base-ofthe-pyramid markets (such as the vast unmet needs) and the required adaptations to the business model (such as changing mentality and working with partners), but pays less attention to the specificities and complexities of international expansion. This paper uses international-business concepts to analyze base-of-the-

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pyramid internationalization, and subsequently explores the internationalization of developed-country multinationals towards the base of the pyramid using a real world case study of the activities of Philips Lighting.

2. International expansion to the base of the pyramid International expansion to the base-of-the-pyramid markets requires great efforts from multinationals as they lack experience and affinity with those markets (Prahalad & Hammond, 2002). Internationalbusiness literature has conventionally called a foreign multinational disadvantaged compared to a domestic firm because of the multinational's “unfamiliarity with and lack of roots in a local environment” (Zaheer, 1995, p. 343). Zaheer (1995) labeled the disadvantage a liability of foreignness. Sethi and Judge (2009), however, point out that a multinational can also experience advantages from being foreign and being a multinational. Verbeke's (2009, pp. 136–137) conceptual framework explains how a firm, while expanding internationally, can leverage extant capabilities to new markets as long as the capabilities are not bound to the initial location; how a firm may have to build new capabilities in a new host market; and how distance with the host market affects the leveraging and building of capabilities. Applied to the base of the pyramid, Verbeke's framework helps to analyze the advantages and disadvantages for developed-country multinationals expanding to base-of-the-pyramid markets. The framework will serve as the conceptual backbone of this paper.

2.1. Distance to the base of the pyramid A larger distance decreases the transferability of capabilities across countries, and forces a multinational to put more effort into getting to know the new environment to develop new capabilities (Verbeke, 2009, p. 137). Distance transcends the conventional geographical distance to include distance in terms of culture, administrative or legislative heritage, and economic development (Ghemawat, 2001). Khanna, Palepu, and Sinha (2005) and Webb, Kistruck, Ireland, and Ketchen (2010) emphasize the institutional distance between developed and less developed countries. Institutional distance refers to the differences in terms of “product, capital, and labor markets; […] regulatory system; and […] mechanisms for enforcing contracts” (Khanna & Palepu, 1997, p. 41). A multinational's foreignness to a host country manifests itself in a lack of knowledge on the local market and a lack of local contacts (Sethi & Judge, 2009). In developed countries, firms rely on intermediaries, and the presence of strong institutions allows firms to focus on core activities (Khanna & Palepu, 1997). The generally weak institutions in less developed countries force firms to take on a wider range of activities, including market research and distribution (Khanna & Palepu, 1997; Khanna et al., 2005).

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2.3. Building new capabilities The base-of-the-pyramid literature pays more attention to building new capabilities than to leveraging extant capabilities (Chesbrough, Ahern, Finn, & Guerraz, 2006; Prahalad & Hart, 2002): building local capabilities takes a firm more effort than conventionally presumed (Tallman & Fladmore-Lindquist, 2002). The base-of-the-pyramid literature emphasizes the importance of social embeddedness to overcome the liability of foreignness. Hart (2010) advises invention together with the poor to get a deep understanding of how the local community works (based on two-way communication between the firm and the community; Hart & Sharma, 2004), resulting into products that fit the local way of living. A multinational may learn about the cultures and lifestyles of the poor on its own. To deeply understand the local community before developing a product, the multinational can, for example, let employees live in a community among the poor for a while (Hart, 2010, p.231; Simanis & Hart, 2008). A multinational can also learn about the poor by tapping into complementary resources of other organizations (Verbeke, 2009, p. 34, 50). A multinational can gather local knowledge from, get access to, and gain credibility with the poor through local partners (London & Hart, 2004; Seelos & Mair, 2006; Webb et al., 2010). London and Hart (2004) advise firms to collaborate with non-traditional partners, such as local governments, non-governmental organizations, and local community groups. Especially non-governmental organizations would be valuable partners to bridge institutional distance and build base-of-the-pyramid business models (Chesbrough et al., 2006; Webb et al., 2010). Small local entrepreneurs could build the last mile of the distribution chain (Vachani & Smith, 2008). Working with non-traditional partners requires great effort and time due to differences in location, mission, and organizational culture (Arora & Romijn, 2009; Webb et al., 2010). 2.4. Base-of-the-pyramid transferability The multinational's global reach would be its main asset to expand to a market of 4 billion people (Prahalad & Hart, 2002). Few studies have, however, paid attention to the expansion of base-of-the-pyramid projects (Arora & Romijn, 2009), where a multinational leverages capabilities across base-of-the-pyramid markets. The firm can use the knowledge gained and competencies developed in one base-of-thepyramid market continuously for a deeper understanding of that first base-of-the-pyramid market, and later apply them in succeeding baseof-the-pyramid markets. Cultural and institutional distance between base-of-the-pyramid markets, however, limits base-of-the-pyramid transferability as firms, for example, have to adapt products and search different partners (Arora & Romijn, 2009; Webb et al., 2010). The firm may even be able to transfer some new capabilities to more developed markets (Hart & Christensen, 2002). 2.5. An enabling organizational structure

2.2. Leveraging extant capabilities Seelos and Mair (2006, p. 2) point out that “resources and capabilities that companies have developed in mature markets may be of low or uncertain value in the context of poor countries.” In the presence of institutional voids such as at the base of the pyramid a multinational can no longer rely on all skills developed in the home-country's institutional context (Anderson & Markides, 2007; Khanna et al., 2005; Verbeke, 2009, p. 136; Webb et al., 2010). The capabilities that a multinational can leverage to the base-of-the-pyramid markets would therefore be independent of an institutional context. According to Hart (2010, pp. 19, 104) these capabilities are managerial, financial, and technological resources, and the ability to learn.

Internal organizational barriers can hamper the success of base-ofthe-pyramid projects (see Hart, 2010, pp. 176, 273–274; Olsen & Boxenbaum, 2009). Barriers for setting up and implementing base-ofthe-pyramid projects revolve around the difficulties in changing mindsets, evaluation methods, and routines (Olsen & Boxenbaum, 2009). Having a win-win mindset is important: a belief that projects can create mutual value, benefiting both the poor and the firm (London, 2007; London, Anupindi, & Sheth, 2010; Olsen & Boxenbaum, 2009). As base-of-the-pyramid projects often have longer expected payback periods and higher perceived risk, Hart and Milstein (2003) and Prahalad and Hammond (2002) advise multinationals to separate the funding pool for base-of-the-pyramid projects from the pool for other

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investments. Prahalad and Lieberthal (1998) advise companies to search talented employees in less developed countries. The organizational structure can also impede the transferability across base-of-the-pyramid markets. The geographic scope of their activities makes multinationals prone to bounded rationality problems—a lack of information or an inability to process all acquired information (Verbeke, 2009, p. 52–53; Sethi & Judge, 2009). The question is to what extent the knowledge of partners or employees in the field becomes knowledge for the firm, how the firm uses the knowledge, and how the firm transfers the knowledge to the right people in the organization (possibly in other subsidiaries). Because many of the new capabilities are tacit, Hart (2010) and Simanis and Hart (2008) advise firms to let new managers shadow existing base-of-the-pyramid managers, or form immersion teams with new and experienced employees. Hart and Milstein (2003) advise firms to make a separate base-of-the-pyramid department that clusters experienced employees who are knowledgeable and comfortable with working in base-of-the-pyramid marketplaces.

Apart from the social responsibility perspective, the potential for growth in the key markets of the future is why top management supports base-of-the-pyramid projects. Philips realized that even though the base-of-the-pyramid markets, say, in Africa, are not key markets today, they will be in the future. For about ten years the Corporate Sustainability Office has stimulated the business groups within each sector to suggest base-of-the-pyramid projects. 3.2. Philips Lighting The case concerns Philips Lighting. Philips Lighting has developed lighting solutions for the base of the pyramid that usually use solar power and LEDs (Philips, 2010a). Around 2006 Philips Lighting developed the Uday solar lantern for and with the people from the base of the pyramid in India. Philips Lighting develops and manufactures the products in India, China, and The Netherlands, and manages the projects from The Netherlands. 3.3. Philips Lighting in Africa

3. Case description The construct of the research question—revolving around the process of internationalization towards the base of the pyramid—supports the use of a qualitative research design to collect rich, contextual information about a single case (Eisenhardt, 1989; Marschan-Piekkari & Welch, 2004). The case allowed the authors to study how one firm judged its capabilities towards a new, distant market; how the firm leveraged its capabilities; and how the firm locally built new capabilities. The case study of international expansion to the base of the pyramid enriches base-of-the-pyramid theory because the analysis is guided by international-business theory. The Philips case serves the study's purpose well, as the base-of-the-pyramid proposition is mainly written for large, developed-country multinationals. (If no source is mentioned, information about the case comes from expert interviews.) 3.1. Philips Koninklijke Philips Electronics (referred to as Philips) is a leading Dutch multinational with worldwide business activities structured according to three sectors: lighting, consumer lifestyle, and healthcare (Philips, 2011b). Philips is a member of the World Business Council for Sustainable Development and has long been interested in sustainable development and poverty reduction, aiming to contribute to the Millennium Development Goals (Philips, 2007a). Philips aims to integrate base-of-the-pyramid activities in its core business (combining business and sustainability objectives), transcending charity or corporate social responsibility, as one Philips employee testified: “[to create] a win-win situation between the poor customer and the rich company [the company has to] consider the poor customer as a real customer and take him seriously about his needs.” Respondents emphasized that Philips treats the base of the pyramid as any other market according to the same business principles: efficient marketing and distribution, products that customers are willing and able to pay for, and usual profit margins, while considering the impact on the host country's economic and ecological sustainable development. Philips' mission and vision for its strategy up to 2015 is “[making] a difference to people's lives with meaningful, sustainable innovations” (Philips, 2011a). A respondent confirmed that this vision applies to the base-of-the-pyramid strategy as well: “[The most important driver is] serving, I think. It's about improving the life of others. That's what Philips also thinks.”

Philips and the Dutch government set up a partnership to develop lighting and energy solutions for the poor in Africa (the ‘Sustainable Energy Solutions for Africa’-program; Philips, 2008). The program targets people who are not connected to the electricity grid. The program's pilot project is situated in Ghana (the ‘Affordable Lighting for All’-project; Philips (2007a). The pilot project concentrated on the people in the rural areas of northern Ghana and ran from March 2008 to March 2010; Philips sold about 1400 Uday solar lanterns at a price of $107 (KITE, 2010). 3.4. Data collection and methodology Literature on qualitative case study design in internationalbusiness research guided the collection and analysis of data (e.g., Eisenhardt, 1989; Marschan-Piekkari & Welch, 2004; Sinkovics, Penz, & Ghauri, 2008; Yin, 2009). One author, unattached to Philips, interviewed six experts at Philips, did desk research of internal company documentation and publicly available information, and did a four-week field study of the project in Ghana. All interviews were semi-structured, face-to-face, and in Dutch or in English. For an overview of data sources see Appendix 1. Seven expert interviews, from June 2009 to January 2011 at the offices of Philips in The Netherlands, provided insights in the company's strategy towards the base of the pyramid. First, four experts from Philips Lighting were interviewed, representing a range of positions and hierarchical levels: one respondent was involved in the technological development of base-of-the-pyramid products, another respondent was responsible for the business development (marketing and sales) in Africa and the Middle-East (not exclusively base of the pyramid), and two respondents worked for the sustainability office (a program coordinator and a director of the sustainability office involved in the Affordable Lighting For All-project in Ghana who was interviewed a second time after the field research in Ghana). Later interviews with the consumer marketing director for sustainability from Philips Consumer Lifestyle and the head of the Corporate Sustainability Office provided additional contextual information to understand the position of base-of-the-pyramid projects in Philips' strategy and mission. In September 2010 one of the authors did four weeks of field research in Ghana to observe the local context and to interview all partners involved in the Affordable Lighting For Allproject: the six formal local partners (five non-governmental organizations and one central distributor) plus the three regional distributors. In December 2010 an interview followed in Den Hague (The Netherlands) with the representative of the Dutch government involved in the project in Ghana.

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The use of multiple methods (such as interviews and documentation) and the use of multiple sources within the same method (such as multiple interviews) produced a more complete picture, reduced the probability of misinterpreting information, and increased internal validity (Eisenhardt, 1989). Annual reports and sustainability reports gave a picture of Philips' focus on green products and increased attention to emerging markets, but did not provide detailed information on base-of-the-pyramid projects (the pilot project's end report did). The documentation served as inspiration for interview questions as well as a check for information received from respondents. The interviews provided information on why and how Philips executives came to their decisions and what they learned from the pilot project, information that publicly available documents or even internal reports do not contain. Because of the field study, the authors could better understand what Philips respondents talked about and collected new information. Considering the emphasis on stakeholder engagement in base-ofthe-pyramid literature, interviewing stakeholders in The Netherlands and in Ghana enriched the data analysis. Talking to several employees of Philips and partners in Ghana provided different types of information (general about Philips' vision and detailed about Philips' experience in Ghana) and different perspectives (business, sustainability, or product development perspectives). The different views resulted in a nuanced picture of the decision making in and implementation of base-of-the-pyramid projects, and offset possible distortions from a social desirability bias in respondent information (which was probable considering the ethical issues related to the subject under study). Interviewing different partners contributed to a richer interpretation of decisions and actions as governmental and non-profit partners observed the actions of Philips from a different perspective than Philips employees. 4. Case study findings 4.1. Distance to the base of the pyramid Even though Philips was active in less developed countries, developing innovations for poor customers was new. The presence in less developed countries (even if only for the top and middle of the pyramid) benefitted Philips' base-of-the-pyramid activities. One respondent stated about Philips' presence in India (but this statement could apply to any country): “I would say we were there so far for the top and the middle of the pyramid. I can't say we were in the base of the pyramid yet. … But when you are in those other places already, you do have the strength to go down.” Philips Lighting has four regional offices in Africa (in Morocco, Egypt, Senegal, and South Africa). The regional offices recognize opportunities and inform headquarters about the needs of the poor, but are not necessarily involved in local implementation. Respondents indicated that Philips selected Ghana for the pilot project not only because many inhabitants are not connected to the electricity grid, but also because of indications of a diminishing distance: the expected ease of doing business, economic growth, political stability, development aid, and the presence of a basic infrastructure (even if only in urban areas). Working with governments also reduced distance. The Dutch government contributed with its network of contacts in Africa, its expertise in development issues, and subsidies for the partners of Philips to develop the local market. Respondents indicated that this support reduced the time and cost to reach the poor. Prospective customers could benefit from a project by the Ghanaian government and the World Bank (the Ghana Energy Development and Access Project) that provided subsidies and consumer loans. The respondent, however, also stated that Ghana turned out to be a

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difficult market. Previous unsustainable solar projects in the country eroded the market. As grid connectivity is fairly high (around 60% in 2010) only the poorest of the poor (9.2 million people) remain unconnected which put more pressure on affordability than expected (KITE, 2010a). Philips Lighting managed the project in Ghana from The Netherlands. No regional office in Africa was involved, nor was the official Philips distributor (not a subsidiary) in Ghana because his business focus is on on-grid lighting products which, according to one respondent, requires quite a different approach from off-grid lighting (the distributor is used to working with tenders from the national government and imports Philips' healthcare and lifestyle products). As Table 1 shows, the distance between The Netherlands and Ghana is large. Philips experienced that arranging things and evaluating progress in Ghana from The Netherlands was difficult. One respondent referred to the disadvantage of institutional distance when operating in Africa: “You can't buy a report on consumer behavior in Kenya, because it does not exist. … The system of banking, the transport, the logistics, all things, have to been taken into account. No marketer thinks about ‘how am I going to bring my things to North Germany’ … because it is available.” One respondent admitted that Philips expected the distance to the base of the pyramid to be large but that “[Philips] speculated that the combination of a local distributor with local NGOs would make it easier.” Philips therefore collaborated with local organizations to overcome its liability of foreignness. 4.2. Leveraging extant capabilities Philips' capabilities that are transferable from developed-country headquarters to the base of the pyramid are its vision, product development, size, and brand. Throughout the years Philips has switched from being product-centric to being customer-centric: Philips now first identifies the needs of the people, and then sees whether the organization can offer a better solution than competitors. Philips

Table 1 The distance between the Netherlands and Ghana. Country characteristic Economic distance GNI/capita (PPP, US $, 2008)a Mobile cellular telephone subscribers per 100 inhabitants, 2005b Television (% of households, 2005)b Internet users (%, 2008)a Gross enrolment in education (%, 2006)a Geographical distance Great-circle distance between capital cities (km)c Landlocked c Urban population, (%, 2005)b Administrative distance Colony–colonizer relationshipc Cultural distance Language spoken by more than 20% of the populationc Official languagec Religiond

a b c d

The Netherlands

Ghana

40,615.1 91.0

1322.2 7.4

98.7 87.0 97.5

26.0 4.3 52.9

5230 No 80.2

No 47.8

No Dutch

Akan

Dutch 64.0% Christian, 6.2% Muslim, 25.7% agnostic

English 61.2% Christian 19.0% Muslim 19.3% ethnoreligionist

UNDP, 2010. International Telecommunications Union, 2008. CEPII, 2011. Association of Religion Data Archives, 2010.

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increasingly considers the environmental performance of products, focusing on low energy use and recyclable materials. These visions proved to be valuable when approaching the base of the pyramid. Philips' main contribution to the project in Ghana was its experience in product development and manufacturing. The company leveraged its experience in the development of highly technological products which one Philips employee found to be critical at the base of the pyramid: “The products for the poor have to be really high-tech, to achieve reliability, robustness, [low] cost. You cannot do it with low-tech.” The different environment and low income of prospective customers forced the company to push the limits of product development. Philips developed the Uday solar lantern for the poor in India and later launched the Uday in Ghana. Customers in India had no major complaints except the high price. Customers in Ghana mainly complained about the price and the technical quality of parts such as the battery and the cable. Using feedback from India and Ghana, Philips developed the Uday Mini solar lantern which appeased most complaints (except one: Ghanaians would like to use the device as a mobile phone charger). The company's size and multinationality provided the space to experiment in entering risky base-of-the-pyramid markets. Philips allocated seed money to explore whether the firm was able to develop products and business models that tap into the base-of-the-pyramid markets. Seed money and patience to learn are important as according to one respondent “it [concerns] new markets, new products, sometimes also new technology. It requires quite a lot of effort in R&D.” Learning was also the purpose of the pilot project in Ghana where the objective was to learn how to set up “commercially sustainable (non-exclusive) distribution and marketing chains for electric lighting products and services in off-grid areas of Ghana” (KITE (Kumasi Institute of Technology and Environment), 2010, p. 2). Other solar lighting products are available in Ghana, but many of them, as one respondent explains, have “no name to relate to it, there is no warranty that you can come back to it, there is nothing, no identity.” Philips' brand name—created in developed-country markets and representing high-quality products—helped to market to the poor in rural areas, who recognize the brand from the media and trips to the city. The opportunity to work with a well-known multinational like Philips stimulated local distributors and non-governmental organizations to collaborate; the non-governmental organizations lauded Philips for its initiative and enthusiasm.

“The distribution in the rural areas is more complex, because the infrastructure is often not present. …You need to appoint a very good central distributor, who knows his way around the country; preferably someone who already has a business towards the rural areas.” “That [central distributor] just has amazing contacts and knows people at government level, on first-hand basis. He knows how the game is played.” Philips cooperates with partners to tap into capabilities that Philips lacks, such as knowledge on distributing in rural areas, marketing to the poor, or setting up financing mechanisms. Working with nongovernmental organizations and distributors with experience in rural communities helped to deal with an inadequate commercial and transportation infrastructure. The non-governmental organizations' main contribution was their credibility in the communities, which allowed them to do social marketing (promoting the product and educating end users), to search for community-level retailers who wanted to participate in the project, and to collect feedback. The central distributor imported the lanterns and supplied them to the local retailers (Philips, 2007a). Setting up a distribution chain to rural areas proved to be a challenge. One respondent regrets not having brought the central distributor into the project from the beginning. Having a reliable, for-profit partner who is willing to invest in rural distribution and marketing was imperative. The central distributor knew the local system for taxes and import duties, knew the regional distributors in the north personally, and owned a training center to train the community-level retailers. 4.4. Base-of-the-pyramid transferability “The difficulty remains: how do we scale up? … Starting up one or two projects is easy, but how does it become a breakthrough so it naturally scales up?” The above quote shows that one of the main challenges appears to be how Philips can efficiently expand across base-of-the-pyramid markets. The case shows that Philips can transfer newly built capabilities across base-of-the-pyramid markets and even from the base of the pyramid to the developed-country home market. The experience in Africa enabled Philips to strengthen its capabilities in product development. Philips gained experience in solar applications, which, according to one respondent, made Philips envision other applications:

4.3. Building new capabilities Philips respondents pointed out that product developers need insight not only in the poor's needs, but also in their living environment (to provide comfortable and safe products) and in their aspired lifestyle. To collect information or test products Philips has sent students or inspire teams (groups of Young Potentials at Philips) to live in the communities. In Ghana Philips focused on partnerships to locally implement the project. The Ghanaian partners included five non-governmental organizations (knowledge institutions and development organizations) and a central distributor in the capital city. Three respondents pointed out that the local partners were necessary to work around institutional voids regarding market research, marketing, and distribution: “In industrial countries we have marketers who know everything about how to approach and attract customers, how to communicate with them. … But [at the base of the pyramid] the needs are completely different; the communication has to be different. It is very useful to work with NGOs, … also with distributors who are local and who know exactly who to talk to and how.”

“What has been positive is that [the pilot project] lead to a better insight in those applications … where solar energy is used. So now we are also working on street lighting based on solar energy.” Through the experience in a new technology Philips recognized more market opportunities and expanded the scope of its African activities: Philips is even thinking about community type solutions such as mini-grids to supply a small community with solar energy. Philips also recognizes the possibilities for developed-country markets, such as camping or garden lighting. Philips developed the Uday solar lantern in India. A similar unmet need for lighting allowed Philips to sell the lantern in Ghana. As one respondent stated, however, cultural heterogeneity can confront Philips with a trade-off between scaling-up and local responsiveness: product design “is very cultural: the aspiration in India can be quite different from an aspirational product in [Africa].” The desire to charge mobile phones via the Uday solar lantern became apparent in Ghana, not in India. Despite the possible limitations in transferability of the product itself, the base-of-the-pyramid projects enable Philips to develop other

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valuable capabilities. In Ghana Philips locally built what one respondent calls a business development competence: “[Philips] gained a lot of experience with [the pilot project] about how you handle these issues.” Philips learned about the markets of the poor and about partnerships with the public and non-profit sector. Philips' experience in working with local partners will facilitate future partnerships. The pilot project strengthened Philips' strategy towards the base of the pyramid as well as the support of top management to proceed. 4.5. An enabling organizational structure “It took us almost three years to have our products presented in our top management meetings. … Because it is a business company it has to be a win-win situation.” The above quote shows that in the beginning one of the major hurdles within Philips was getting the support of top management. Top management changed their mind when the people in charge of base-of-the-pyramid projects argued that Africa is the next emerging market: “When that market begins to boom, you really have to be there.” Philips initially struggled to find the appropriate organizational structure as two respondents testify: “First it were corporate programs with central funding and staff and objectives, but it stood a bit apart from the business, and the business is where it really needs to happen.” “The business ownership was extremely unclear until now. It was a bit everywhere and nowhere and that was a problem. Now we got the record of decision that it goes to a business group [e.g., Consumer Luminaires] and that is positive because it enforces the implementation to get real products.” Each sector is now responsible for the business development of its base-of-the-pyramid products, while the Corporate Sustainability Office coordinates base-of-the-pyramid projects across sectors. The department within Philips Lighting responsible for Africa and the Middle East together with the Philips Lighting Sustainability Office ran the Sustainable Energy Solutions for Africa-project. The sustainability office was involved in base-of-the-pyramid projects in other regional departments, while the department for Africa could focus on expanding across Africa. Assigning the responsibility of the new business venture lowered barriers to implementation. Bringing responsibility to business-level departments—contrary to central departments, like the Corporate Sustainability Office— emphasized the commercial character of the base-of-the-pyramid ventures. Philips funded base-of-the-pyramid projects from a pool for projects outside the normal business. Philips's sustainability report of 2006 expressed the need for new ways of measuring success in base-of-the-pyramid projects (Philips, 2007b, p. 30); in 2010 respondents still indicated measuring success was difficult. Philips hires people from around the world to increase diversity. Philips' recruitment of employees helps to reduce distance: one respondent—a product developer—grew up in Morocco where he had his own enterprise for solar lighting solutions. He knows the problems facing the poor and the environment the poor live in. 5. Conclusion The paper used internationalization theory as a guide to explore the process of international expansion of developed-country

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multinationals towards the base of the pyramid. Due to the different institutional context, especially the voids at the base of the pyramid in terms of market research and distribution, multinationals cannot rely as much on capabilities that they have built in the developedcountry home market and need to focus on locally developing capabilities. Differences among base-of-the-pyramid markets limit the transferability of some newly built capabilities. Multinationals can adapt their organizational structure to optimally share experience in base-of-the-pyramid activities. The case study shows that at the base of the pyramid developedcountry multinationals can experience both advantages and disadvantages of being a multinational and of being foreign (see Sethi & Judge, 2009). Firstly, capabilities built independently from an institutional context strengthen a multinational's position in any country. For Philips the capabilities include a customer-centric and green vision, experience in high-tech product development, financial resources, and brand name. Secondly, multinationals can compensate for the disadvantages by collaborating with local partners. Philips, for example, collaborated with non-governmental organizations and local distributors to set up a distribution chain involving community-level dealers to reach the poor. The non-governmental organizations educated consumers and collected feedback for Philips to learn from the pilot project. Thirdly, the experiences from primary base-of-the-pyramid projects are to some extent valuable and applicable in other markets. Philips, for example, learned about setting-up base-of-the-pyramid projects and about collaborating with non-governmental and public organizations. Philips can use the acquired experience in a new technology for the development of other products in developed and less developed countries. By knowing which kinds of capabilities are transferable the multinational can set up an enabling organizational structure. The case suggests the involvement of two departments (at Philips Lighting the departments for business development and sustainability) to better integrate base-of-the-pyramid activities with the core business and share knowledge on base-of-the-pyramid strategies throughout the organization. The case also suggests that the winwin mindset is necessary throughout the organization, meaning for all employees involved in the development and marketing of new products, not just the few employees responsible for base-ofthe-pyramid projects. 6. Limitations and future research The paper's limitations—the focus on the components of the internationalization process and the study of one case—guide future studies. The study examines the expansion of a Dutch multinational to a low-income country (Ghana) where the multinational has no subsidiary, to sell new products to the poor. Given the similarities across multinationals and across less developed countries, some findings are valuable for any multinational expanding to the base of the pyramid. Given the differences across multinationals and across less developed countries, however, the use of a single case study, focusing on new-product development, limits the generalizability of the findings. Studies of other developed-country multinationals and lessdeveloped-country multinationals are called for, as is more research on how a multinational can sequence geographic expansion across the base of the pyramid. Identifying clusters of host countries with lower distance and better transferability of capabilities may be helpful in this regard. A survey of multinationals expanding to the base of the pyramid could provide insight in how success at the base of the pyramid depends on a firm's extant capabilities, a firm's effort to build new capabilities, the presence of a subsidiary, and a firm's

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organizational structure. Future research could examine how collaboration with the public and non-profit sectors increases the probability of success, and the challenges of setting up base-ofthe-pyramid partnerships (e.g., division of responsibilities and accountability, exit scenarios). The non-governmental organizations that implemented the Philips project stood close to the poor in the local communities. As not all non-governmental organizations stand close to the poor, future research could focus on the types of non-governmental organizations to collaborate with to investigate how the organization's profile affects embeddedness in the base-of-the-pyramid markets. More research is needed on the impact of employee involvement and recruitment on social embeddedness and transferability of capabilities. The case identifies a need to define and measure success in subsistence marketplaces (see London, 2009). Ignorance on how to measure success may discourage people from working on base-ofthe-pyramid projects, and could endanger the continuance of baseof-the-pyramid projects.

Appendix 1 (continued) Key information: Factual information on the project in Africa, including partners, task division, and project objectives Official evaluation results Publicly available documentation Philips Sustainability Report 2006 (Philips, 2007b) Philips Annual Report 2009. Staying focused, acting decisively. (Philips, 2010b) Philips Annual Report 2010. Simply making a difference. (Philips, 2011b) Philips, Company website: http://www.philips.com/ (Philips, 2011a) Philips, Off-grid lighting website: http://www.philips.com/offgridlighting (Philips, 2010a) “Ghana. Qualitative Off-Grid Lighting Market Assessment.” (International Finance Corporation, 2008) Facilitating access to renewable energy for only USD 5 per newly connected person. A business development approach. (Rural Energy Foundation, 2010) Ghana: Why the North matters. SNV Briefing. (SNV — The Netherlands Development Organisation; Van Klinken & Zan, 2008) Key information on: The involvement of Philips in sustainability issues The organizational structure of Philips Solar lighting products of Philips Background information on energy consumption in Ghana and the position of the poorer rural north within public investments in the energy sector

Acknowledgments The authors thank the respondents at Philips—namely Frank Altena, Henk de Bruin, Corinne Jeanmaire, Mohammed Khalil, Kees Klein Hesselink, and Helene Mancheron—and Philips' partners in the pilot project in Ghana for their cooperation in this study. The authors also thank the Research Foundation — Flanders (FWO) and the International Centre for Enterprise and Sustainable Development for financially and logistically supporting the field research in Ghana. They thank Cheryl Nakata, Madhu Viswanathan, participants of the Third Subsistence Marketplaces Conference, and two anonymous reviewers for their constructive comments.

Appendix 1. Data sources Expert interviews at Philips Seven interviews with six experts: - Technical advisor, Philips Lighting - Business developer for Africa and the Middle East, Philips Lighting - Program coordinator for the Philips Lighting Sustainability Office - Director of the Philips Lighting Sustainability Office (two interviews) - Consumer Marketing Director for Sustainability, Philips Consumer Lifestyle - Head of the Corporate Sustainability Office Key information on: Decision making, including challenges, struggles, vision, future plans Employee experience with on-the-ground implementation of corporate vision and strategy What Philips learned from base-of-the-pyramid projects, including how Philips deals with foreignness and distance to the base of the pyramid Expert interviews Ghana project Ten interviews with: - One representative for the Dutch government - Five non-governmental organizations in Ghana - One central distributor in Ghana - Three regional distributors in Ghana Key information on: The local implementation of a base-of-the-pyramid project, including the resource dependence of partners The experience of local partners of working with a multinational The sharing of experiences among partners Internal company reports Sustainable Energy Solutions for Africa (SESA) Pilot in Ghana. End of Project Report 2010 (KITE, 2010a) Sustainable Energy Solutions for Africa (SESA) Pilot in Ghana. Project Monitoring and Evaluation Report 2010 (KITE, 2010b) Proposal Pilot Project Affordable Lighting for All (Philips, 2007a) Sustainable Energy Solutions for All. Plan of Action (Philips, 2008)

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