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Investing in the bottom of the pyramid

by Daniel Steenkamp and Wolfgang Thomas

Two companies whose business strategies aid economic development demonstrate the power of a ‘sustainability vision’ in combating malaria in Africa.

While globalisation has brought some major advantages to economies worldwide, these benefits are generally associated with the relatively affluent countries – the so-called top of the economic pyramid. Towards the bottom of this pyramid, poorer countries that have not managed to rise to the complex challenges of globalisation have been left behind. The advent of globalisation has meant little for these economies, if not left them worse off – thus not doing much to alleviate global poverty. An estimated 1.1 billion people, mostly spread between South and East Asia and sub-Saharan Africa, still live on an income of less than $1 per day, with almost no prospects of lifting themselves out of this hopeless situation.

At the same time, even the developed world has not escaped some painful effects of globalisation. In particular, escalating business competition has led to the saturation of conventional first-world markets. In response, the business world is gradually turning its eyes to the poorer markets. This shift has popularly been labelled the bottom-of-the-pyramid business vision. In its crudest form, this may be interpreted as a way of taking advantage of whatever opportunities there are in these markets. But more sincere advocates link the concept with a sustainability vision: poorer markets are not seen as opportunities for exploitation, but rather as areas to develop in order to ensure their sustainability and growth as future markets.

The true bottom-of-the-pyramid vision recognises the potential of merging the need of businesses to expand into new markets with the objectives of communities in need of economic development. By engaging in the latent markets of emerging economies, businesses can gain a foothold in a purchasing capacity estimated at more than $12 trillion worldwide, while simultaneously investing in and contributing to the development of these markets.

Aid programmes are still an invaluable source of relief in poor areas, but their sustainability constraints are recognised. Some commentators even argue that focusing primarily on the provision of aid discourages those initiatives that could promote development, and may well incentivise practices that sustain poverty. In contrast to the work of aid organisations, it is the rethinking of business visions by the corporate world that could result in a more sustainable impact on poor communities.

A study conducted at the University of Stellenbosch Business School (USB) examined the sustainability visions of two companies that decided to set up operations in Africa: Vestergaard Frandsen and BEEPZ. Both have identified opportunities related to malaria and provide products needed in the fight against this scourge, although they are involved in two totally different applications pertaining to the disease. In the USB study, the two companies were analysed in terms of how they put sustainability vision principles into practice.

Malaria’s debilitating effect in Africa

Africa is not an attractive region for conventional business operations. The continent finds itself at the bottom of the World Bank Development Indicators, and is often perceived by authoritative sources as the worst place in which to do business. Africa attracts a mere 1.6% of global foreign direct investment, which shows in the dire lack of infrastructure and development. With relatively small markets and continuous problems associated with HIV/Aids, political instability, wars and other threats, the prospects of returns on investment in especially sub-Saharan Africa remain bleak.

A factor that has a major impact on economic progress in Africa is one that is often overlooked by the Western world, namely malaria. Together with HIV/Aids, malaria has been severely hampering the continent’s economic development. Furthermore, as malaria is largely absent in the Western world, in contrast to HIV/Aids, scant attention has been given to malaria prevention or the economic consequences of the disease. Pharmaceutical companies have put little effort and money into ongoing malaria research while, at the same time, malaria parasites have been developing a resistance to conventional drugs and insecticides.

Africa has the perfect breeding ground for the Plasmodium falciparum strain of malaria, which is the most lethal strain. Its high resistance against current medication makes it extremely difficult to cure and control. The disease is estimated to claim the lives of close to a million people in Africa per year, 70% of whom are children under the age of five.

The two companies examined in the study both saw the business potential in the prevalence of malaria in Africa. They were not drawn to bottom-of-the pyramid markets by opportunities to exploit short-term situations, but by the longer term potential that further economic development could bring.

Vestergaard Frandsen

Vestergaard Frandsen, established in 1957 as a family enterprise in Denmark, specialised in synthetic fabrics for work wear. The company moved its head office to Lausanne in Switzerland in 2005.

The company was first introduced to relief aid in the 1980s when the founder saw the opportunity to provide old blankets for use by the United Nations (UN) during the Rwanda genocide. The son of the founder – and present CEO of the company – became aware of the needs and possibilities of Africa when he toured the continent at the age of 19, and shortly thereafter started a business involving the importation of trucks to Nigeria. A military coup in 1993 forced him to retire to his home country, where he took over the family business. But his family’s connections with the UN and his experience in Africa soon led to a turnaround in the vision of the business.

Verstergaard Frandsen sold its work-wear production arm and started to focus more on relief aid and the development and manufacture of disease-control textiles. It has three main products in the disease-control textile range:

  • Permanet® is a mosquito net made of a textile that is impregnated with a long-lasting insecticide. Its major advantage is that it lasts up to four years. Conventional nets require insecticide retreatment every six months, which presents the logistical challenge of transporting and storing tons of insecticides, and the applying of insecticides by unqualified people.
  • Zerofly® is insecticide-incorporated plastic sheeting used for malaria prevention in complex emergency situations.
  • Lifestraw® is a water-purification device for personal use to assist in the prevention of waterborne diseases.

The vision
The company’s business vision was heavily influenced by the economically crippling effect of malaria in Africa and the awareness that close to 5 000 children under five die of malaria every day. The company realised that one of the easiest ways to curb these deaths was by distributing bed nets to infested areas. Each net has the potential to save lives. The company embarked on a mission to produce nets that could meet the challenges in the particular context. Moreover, the nets needed to be made to the highest possible standard at the cheapest possible price, so that governments and NGOs could afford to buy as many as possible. The company sees itself as fulfilling the demand for malaria control through speed of response, precision, innovation and passion.

In 2006 Vestergaard Frandsen, together with the Global Fund, announced a malaria prevention programme that would bring bed nets to thousands of families in Kenya. With only an estimated 6% of pregnant women and young children sleeping under long-lasting insecticidetreated bed nets, the campaign aims to increase the figure to 70%. Vestergaard Frandsen sees itself as being in the business of saving lives. The company’s eventual aim is to distribute 18 million bed nets in nine countries, thereby contributing to saving the lives of an estimated 380 000 children.

The business model
To be close to the market, a sales office was set up in Kenya. The operations have since expanded to further offices in Kenya, and to Ghana and Nigeria. The research and manufacturing facilities are situated in India, Thailand, Vietnam and Switzerland, thus enabling the more delicate technical processes to be conducted in more sophisticated environments.

Given the lack of proper supply chains and cash flow in its target market, Vestergaard Frandsen follows three approaches in the marketing and selling of its product:

  • Sourcing donations from aid agencies to distribute the nets via NGOs at ground level.
  • Engaging in social marketing, where the company teams up with an aid organisation to market the product and the recipients pay only part of the cost.
  • Marketing nets commercially to more affluent communities.

At present, more than half of the company’s revenue comes from the first approach. It wants this to change in the future, with a gradual shift in emphasis towards the social and commercial marketing models, as communities and other businesses realise the economic benefits of these roll-outs.

The sustainability factor
Vestergaard Frandsen employs a definite sustainability vision. The nature of its product is such that it aids economic development. Effective prevention of malaria will stimulate economic growth in the long term, and enhance the affordability in the market it is serving. Ultimately, the presence of Vestergaard Frandsen in this market is motivated by the long-term prospects of a self-sufficient consumer market.

BEEPZ

Bio-Extracts EPZ (BEEPZ) was established in 2005 and operates from the Export Processing Zone (EPZ) in Athi River, Kenya. The business concept came into being in the 1990s when it became clear that conventional malaria therapies had become less and less effective because malaria was developing a resistance to these treatments. As the mortality rate, especially among children, began to rise, the World Health Organisation (WHO) recommended that all countries experiencing resistance to conventional medication should rather use artemisinin-based combination therapies (ACT).

Artemisinin is an extract from Artemisia annua, a medicinal plant that originates from Vietnam and China. Extracts from the plant had become an essential ingredient in the later generations of malaria cures. Realising the potential of artemisinin, African Artemisia Limited was formed in 1996 in Tanzania to explore the commercial production of Artemisia annua in Africa. In the years that followed, the company engaged in a series of agronomic trials to develop high-quality planting material with improved artemisinin content and yields. The first sale of artemisinin was made in 2002. Large-scale commercial cultivation of Artemisia annua only began in 2004, as more research had to go into the development of a high-yielding hybrid designed for the soil, weather and other growing conditions in East Africa. Partnerships also had to be formed with the local communities, and this took time to establish.

In 2005, BEEPZ was formed as a holding company for the wholly-owned production subsidiaries in Kenya, Uganda and Tanzania. BEEPZ is a privately held limited liability company owned by Advanced Bio-Extracts Limited (ABE), the Acumen Fund, the International Finance Corporation (IFC) and Investment Promotion Services (IPS).

The vision
The founding parties of what is now BEEPZ took cognisance of the deteriorating situation around malaria treatment and saw an opportunity to produce pharmaceutical-grade artemisinin in Africa at a relatively low cost by involving local farmers. By their own admission, it was not the solution to malaria and its consequences that had been the main driving force behind the venture, but rather the commercial opportunity to produce artemisinin, a key ingredient in the lucrative pharmaceutical industry.

BEEPZ manufactures an essential product at a low cost, which directly and indirectly addresses the very real issue of malaria. It implements its core strategy by way of forming strategic partnerships with the people who stand to gain most from the prevention of malaria. Through such partnerships, BEEPZ has established itself as a trusted name, both with its employees and its clients. In this regard, BEEPZ is reaping the benefits, but so are the communities in which it operates. To date 7 500 farmers have been empowered to produce artemisinin, and, with other job opportunities being created, there have been meaningful economic benefits for partaking communities.

The Acumen Fund, a key investor in BEEPZ, states that in the past few years BEEPZ has played a key role in pushing down the cost of artemisinin by scaling up raw-material production.

The business model
BEEPZ realised that malaria is associated with poverty. The production of natural artemisinin at a low cost is therefore a key objective of its operations. The company has established a reliable, high-quality and ethical raw-material supply chain in East Africa that aims to be price competitive with lower-quality producers in South-East Asia.

BEEPZ operates on the basis of empowering local farmers to grow and supply artemisinin. Through this principle, the company has succeeded in bringing its costs in line with its operational objective of low costs, while simultaneously contributing to the general economic empowerment of the farmers.

By 2007, it was estimated that BEEPZ had been involved in planting over 3 500 hectares of the artemisinin plants. Its processing facilities are highly automated and technologically advanced compared to other artemisinin production facilities. BEEPZ has the capacity to extract 4 000 tons of raw material per annum and to purify up to 60 tons of crude artemisinin per annum.

The sustainability factor
BEEPZ is an excellent example of a company that empowers local markets to produce a product that will serve its needs in the long term. In the company’s sustainability vision, a key principle is to form local partnerships which lead to economic benefits for local communities. Besides the jobs offered by its small-farmer model, BEEPZ also employed 120 staff members in 2007, and an additional 50 people were employed by its sister companies in East Africa. Most of the employees are from the local communities in which the processing plants operate. The company therefore contributes directly to job creation in these communities.

A threat to sustainability is the possibility that the sales price of artemisinin may be forced down by the competition from Asian producers. This poses a risk, especially for the farmers. BEEPZ makes sure that farmers realise this, and encourages them to mitigate the risk by reserving a portion of their land for the cultivation of subsistence produce, such as maize.

In order to increase long-term sustainability, BEEPZ plans to develop its scope of operations by taking the processing further to the production of artemisinin derivatives. The market potential for derivatives has already been established, with the main clients being international pharmaceutical companies and regional drug manufacturers who currently purchase derivatives through suppliers in Europe and South-East Asia. Once in production, BEEPZ will be the first supplier of derivatives in Africa and it is foreseen that the entire supply chain for the production of ACT malaria treatments will be transferred to Africa. It is expected that this will significantly reduce the cost of these drugs.

What makes a bottom-of-the pyramid business vision succeed?

The companies studied revealed a number of important principles that underlie the success of bottom-of-the pyramid business visions. These can be summarised as follows:

  • The companies are addressing the needs not purely out of moral obligation, but because of the opportunity in the market.
  • There is a high degree of respect for the target market, as well as for the communities in which the business operates.
  • The business model contributes to the economic development of the market. In the long term, therefore, it stimulates the development of bottom-of-the-pyramid communities into a more self-sustaining consumer market. BEEPZ engages local farmers in the production of its product, which results in higher household income, more self-esteem, and more disposable cash in communities. Likewise, the Vestergaard Frandsen bed nets save households money in the prevention and treatment of malaria, while the reduction of malaria actively contributes to higher productivity and household income potential.
  • Companies need to engage with the target market before they start to design products or services, as conventional products may not meet the requirements specific to conditions in Africa. In the case of Verstergaard Frandsen, the long-lasting feature of the mosquito nets resulted from an intimate understanding of the shortcomings of nets that had to be treated regularly.
  • Products have to be priced in line with the economic environment of a specific target market. But quality cannot be sacrificed, as the economic development objectives are highly dependent on products that deliver the expected functionality.
  • The importance of partnerships must be accentuated, as they incorporate local knowledge and create a platform of trust from which to target communities.
  • The conditions in Africa are unique, forcing businesses to rethink their business processes and logistical arrangements to serve target markets effectively. A very important aspect is the incorporation of employment opportunities for local people in the supply chain, often through the deskilling of work.

What emerges strongly from the study is that a sustainability vision in this particular context is not corporate social responsibility. Many corporate leaders still view sustainability as a nuisance or an obligation, believing it needs to feature somewhere in the company’s social responsibility agenda. This attitude has no lasting impact. What is required is a redefinition of a company’s identity and business vision where not only the products, but also the markets are readdressed. A sustainability vision specifically seeks the development of new markets, while it serves the hitherto unmet needs at these levels. Socioeconomic development is a core element in such a vision.

This study was conducted by Daniel Steenkamp as his MBA study project at the University of Stellenbosch Business School (USB), under the supervision of Prof Wolfgang Thomas. The research report, A review of “sustainability vision” as corporate strategy in Africa, in the context of the opportunities provided by the prevalence of malaria, was presented in March 2009.


Useful resources:
Stellenbosch Business School
The internationally accredited Stellenbosch Business School offers MBA, Master’s, MPhil and PhD programmes as well as executive education programmes – all focused on the development of business leadership.
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