BEYOND STEPPING STONE GROWTH: EXPLORING NEW MARKET ENTRY AT THE BASE OF THE PYRAMID. By Ted London. Draft January 2006

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1 BEYOND STEPPING STONE GROWTH: EXPLORING NEW MARKET ENTRY AT THE BASE OF THE PYRAMID By Ted London Draft January 2006 Please do not cite without author permission William Davidson Institute/Ross School of Business University of Michigan 724 E. University Ave., Wyly Hall Ann Arbor, MI ABSTRACT This study explores the challenges that firms face when they implement a growth strategy that requires building new internal capabilities. The international management and strategy literatures indicate that firms should grow without changing by leveraging existing capabilities in new markets to overcome a lack of context-specific resources. The dynamic capabilities literature explores how firms can change without growing by leveraging existing context-specific resources, especially complementary assets, in existing markets to support the development of new capabilities. Both these literatures are silent, however, on path breaking growth, when firms look to change and grow simultaneously in an environment where they lack context-specific resources and cannot leverage current capabilities. To explore this gap in the literature, this study opens the black box of new market entry capability development. International expansion, particularly recent multinational initiatives entering base-of-the- markets, suggests that firms are indeed attempting path breaking growth. A longitudinal analysis of 18 base of the initiatives in six multinational companies indicates that successful capability development requires an alignment among structure, prioritization metrics, problem-solving approaches, and resources to generate a new contextappropriate business model. Together, these results highlight the crucial and understudied role of business model R&D in capability development. Indeed, conceptualizing business model development as architectural and component R&D appears to be the lynchpin needed to integrate and extend the international management and strategy capabilities literatures in order to incorporate path breaking growth.

2 BEYOND STEPPING STONE GROWTH: EXPLORING NEW MARKET ENTRY AT THE BASE OF THE PYRAMID This study examines path breaking growth, or how firms enter new markets that require the creation of new capabilities. The existing strategy and international management capabilities literatures, when examined closely, appear to have little to offer when firms are trying to implement an organic growth strategy that involves building new capabilities. In these literatures, the recommended approaches to expansion emphasize looking for new markets that require no more than incremental changes to existing capabilities. This path dependent approach to growth offers limited insight, however, when firms enter markets requiring a new market entry capability and associated new business model. Furthermore, the dynamic capabilities literature focuses on exploring how firms can respond to path breaking change in their current markets and emphasizes the value of ownership of context-specific complementary assets. As such, its prescriptions for path breaking change do not readily transfer to organic new market entry, when firms typically do not control context-specific resources. Yet even with these challenges, an increasing number of firms, particularly in international markets, are attempting to grow in a path breaking manner, suggesting that the conventional wisdom about growth in the international management and strategy capabilities literatures may need to be extended. In examining new market entry that requires new capabilities, this empirical study focuses on the following research question: How do firms generate path breaking growth? Exploring this question required opening the capability development black box and involved an extended tracking of 18 new initiatives in six multinational companies (MNCs) that were initially designed to pursue path breaking new market opportunities at the base of the market 1 (Hart, 2005; London & Hart, 2004; Prahalad, 2004; Prahalad & Hart, 2002). 1 For more information on firms pursuing base-of-the- market opportunities, see the Study Design. 1

3 LITERATURE REVIEW Construct Definitions A capabilities-oriented perspective of organizational change and growth provides a conceptually valuable approach to understanding firm differences (Collis, 1994; Helfat, 2000). The associated theoretical and empirical development of this perspective in both the strategy and international business literatures has gained substantial momentum over the past years (Barney, Wright, & Ketchen, 2001; Tallman, 2001). One complaint often raised about the capabilities literature, however, is the proliferation of construct definitions that have been applied by different authors (Collis, 1994). A critical first step in a study using this theoretical lens, therefore, is to clearly define the key constructs, including capabilities, resources, routines, business models, strategy, and organizational structure (Barney & Arikan, 2001; Priem & Butler, 2001). Resources and capabilities are the foundation of the capabilities literature. Resources are assets owned or controlled by the firm (Amit & Schoemaker, 1993) that can be traded on factor markets (Hoopes, Madsen, & Walker, 2003; Makadok, 2001). Resources include, for example, employees, information technology systems, financial capital, patents, and physical capital (Barney, 1986; Barney & Arikan, 2001; Teece, 1986). Some resources are market-specific and can facilitate market entry. These context-specific resources can include reputations, knowledge, and complementary assets (Helfat, 1997; Mitchell, 1989; Teece, 1986). Reputations plays an important role in relationship building and purchase decisions in specific markets (Mitchell, 1989). Context-specific knowledge, including market- and technology-oriented know-how, can support business model design and product development (Helfat, 1997). Complementary assets are resources that reside in the value chain, facilitate commercialization of an innovation in a particular market, and include distribution networks and after-sales service (Helfat & Raubitschek, 2000; Teece, 1986; Tripsas, 1997). 2

4 Capabilities, on the other hand, are integrative assets embedded in the firm that cannot be traded on factor markets. In explaining the difference between resources and capabilities, Makadok (2001: 389) noted that, if the organization were completely dissolved, its capabilities would also disappear, but its resources could survive in the hands of a new owner. Capabilities are strategic in nature as firms proactively develop them to successfully implement a new strategy (Dosi, Nelson, & Winter, 2000). In addition, capabilities are integrative and involve deploying existing resources, routines, and structure (Dosi et al., 2000; Kogut & Zander, 1992). A capability is therefore defined as an embedded asset, consciously created by the organization, that integrates other assets, such as resources and routines, within an organizational structure in order to achieve strategic outcomes (Dosi et al., 2000; Kogut & Zander, 1992; Makadok, 2001). Examples of capabilities include market entry, product development, and brand management. There is increasing recognition that routines are also important organizational assets that help explain inter-firm differences and thus play a key role in the capabilities literature (Knott, 2003; Nelson & Winter, 1982). Routines are embedded, patterned, repetitious, primarily unconscious, and tactically-oriented activities that can enhance organizational efficiency (Nelson & Winter, 1982). Winter (2003), for example, defined a routine as a behavior that is learned, highly patterned, repetitious, or quasi-repetitious, founded in part in tacit knowledge. Routines, therefore, are conceptually different from capabilities, as capabilities are consciously developed, larger in scale, and focus on achieving significant, strategic goals. Coriat and Dosi (1998) suggested that it may be useful to distinguish between operationaloriented, problem-solving routines and governance-oriented, prioritization routines. This is similar to Nelson and Winter s view of organizations being a set of interdependent operational and administrative routines (Nelson & Winter, 1982; Zollo & Winter, 2002). Problem-solving routines are operational-oriented processes or procedures that have been learned and then are used on a 3

5 regular basis, often unconsciously, to resolve problems (Cohen & Bacdayan, 1994). This approach matches Ray, Barney, and Muhanna s (2004) suggestion that routines can be equated with business processes. However, as they introduce dispositions and heuristics that simplify the way managers address the challenges they face, problem-solving routines incorporate biases that can have both positive and negative effects (Schwenk, 1984). Coriat and Dosi s governance routines build on Nelson and Winter s (1982) view of routines as a truce that allows organizational and individual incentives to be aligned and prioritized. Prioritization routines include the resource allocation, control, and reward systems that embody the values and standards of the organization. Similar to the biases in problem-solving routines, existing prioritization routines provide incentives that can direct individual action toward developing certain organizational capabilities while ignoring others (Christensen, 1997; Karim & Mitchell, 2000). Together, a firm s problem-solving and prioritization routines can be considered the source for the development of a firm s business models. As Nelson and Winter noted, the behavior of firms can be explained by the routines they employ (1982: 128). While often discussed in the literature, a business model is rarely defined. In general, business models are viewed as information-like assets that are derived from the processes used to solve problems and the standards used to prioritize among options (Tripsas & Gavetti, 2000). They rely on leveraging resources and are embedded in a structure (Benner & Tushman, 2003). Unless special care is taken, business models are developed based on pre-existing routines and dominant logics that are hard to change (Prahalad & Bettis, 1986; Raff, 2000; Tripsas & Gavetti, 2000; Winter & Szulanski, 2001). The use of a firm s assets, such as capabilities, resources, and routines, is guided by its strategy and managed through its organizational structure. Strategy, it has been noted, is more than operational effectiveness (Porter, 1996). Strategy enables a firm to achieve new objectives (Ansoff, 1965) and can be defined as a prediction about how a firm can gain superior performance in the 4

6 markets in which it currently operates (Barney & Arikan, 2001) or which it may decide to enter (Ansoff, 1965). Structure is the organizational form or architecture used to integrate, create, and protect the firm s assets (Chandler, 1962; Karim & Mitchell, 2000) and is defined as the design of organization through which the enterprise is administered (Chandler, 1962:13-14). Firms have a variety of different structures, including those at the corporate, business, and new initiative levels. MOTIVATION FOR THIS STUDY - A GAP IN THE LITERATURE Stepping Stone Market Entry: Growth without Change Some of the earliest work in the capabilities literature focused on firm entry into new markets (Penrose, 1959; Wernerfelt, 1984). As indicated by Helfat and Lieberman (2002), growth by new market entry offers an important context for exploring capability development. In the strategy literature on capabilities, however, growth typically relies on an implicit assumption. Growth, as conceptualized in research on capabilities, is guided by the idea that firms should focus on entering markets where they can leverage their existing capability development trajectories and associated business models (Mahoney & Pandian, 1992; Peteraf, 1993). While they may need to overcome a lack of context-specific complementary assets, firms primarily exploit opportunities for expansion by leveraging their existing internal routines, structures, and resources as stepping stones to enter new markets (Wernerfelt, 1984). This perspective suggests that firms should enter markets where the resource requirements match their firm capabilities (Peteraf, 1993: 188), and thus focuses on the path dependent adaptation of existing capabilities. Given the growth of markets across the globe, international expansion should be particularly instructive for exploring growth (Helfat & Lieberman, 2002; Tallman, 2001). Similar to the strategy research on growth, however, a path dependent capability leveraging approach is also embedded in the logic of the global strategy literature. The prevalent view on international expansion emphasizes that multinational companies (MNCs) should look to leverage current assets, 5

7 transfer existing internal knowledge, and modify familiar products when entering new markets where they may lack context-specific complementary assets (Bartlett & Ghoshal, 1989). As Tallman (1991: 71) noted, an MNC may enter a new foreign market, an innovative step, but use proven strategies and structural forms to reduce uncertainty in that market. As such, this research on growth has focused on the modification and incremental extension of existing business models and capabilities. In the parlance of the strategy literature, this is again the stepping stone approach, where firm assets in one market setting are incrementally modified to enter a new market. Dynamic Capabilities: Change without Growth There is a capabilities literature that has explored how firms can create new capabilities. The research, however, has focused on path breaking change in a firm s existing market. The dynamic capabilities perspective emerged as an extension of the resource-based view (Barney, 1991; Peteraf, 1993) and evolutionary economics (Nelson & Winter, 1982) to address the issue of non-linear change in a firm s current operating environment (Hoopes et al., 2003). 2 What makes the literature on dynamic capabilities distinct from prior capabilities literature is that it explores how incumbent firms break path dependencies and develop new capabilities and business models. A key reason that incumbent firms face challenges from discontinuous change in their current markets that biases toward existing routines and structure prevent radical transformations in capability development trajectories (Henderson & Cockburn, 1994; Tripsas & Gavetti, 2000; Tushman & Smith, 2002). As empirical research in the dynamic capabilities literature indicates, context-specific complementary assets (Teece, 1986) are critical resources that provide a buffer for incumbents forced to respond to path breaking change within their existing markets (Tripsas, 1997). 2 It has been suggested that a limitation of the resource-based view is that it focuses on strategies for exploiting existing firm-specific assets (Teece, Pisano & Shuen, 1997: 515) and is less effective in examining how firms can develop new capabilities. Evolutionary economics is a more dynamic theory, but it focuses on how firms respond to change by incrementally adapting their existing assets, particularly routines (Nelson & Winter, 1982). 6

8 Firms that survive this non-linear change are the ones able to leverage their complementary assets to build new capabilities that overcome path dependencies. Thus, according to the logic of dynamic capabilities, in current markets undergoing a major discontinuity, firms must look to generate path breaking change by exploiting current context-specific complementary assets. Yet this stream of research is silent on how firms can generate path breaking growth in new markets where they would not have access to context-specific complementary assets. There are, however, global markets, such as those at the base of the, where existing capabilities typically cannot be successfully modified, and firms instead need to build new capabilities that enable path breaking growth (Hart & London, 2005; London & Hart, 2004; Prahalad & Hart, 2002). When entering these new markets, firms will not be able to rely on ownership of context-specific complementary assets that facilitate path breaking change in existing markets. In addition, they must avoid an approach based on incrementally modifying current capabilities and associated business models that is useful in path dependent growth. To date, there has been almost no work in the capabilities literature (international or domestic) that explores how firms enter markets that require creating new capabilities (Tallman, 2001). Indeed, what has not been examined in the international management or strategy research on new market entry is path breaking growth. CONCEPTUAL MODEL The Capability Development Black Box As noted by Dosi, Nelson and Winter (2000: 2), capabilities fill the gap between intentions and outcomes. Strategy formation starts with the discovery of a new opportunity or threat that requires firms to change and/or grow (Andrews, 1971; Kirzner, 1997). Based on the environmental contexts, firms then make a prediction (their strategy) about the market entry capability and associated business model needed to achieve their change and growth goals and successfully launch a new venture in the marketplace (Ansoff, 1965; Barney & Arikan, 2001; Brush & Artz, 1999; 7

9 Miller & Shamsie, 1996). To achieve this outcome, firms must adapt an existing or build a new context-appropriate market entry capability that fills the gap between strategy and desired outcome. 3 If a firm believes that it has been successful in new market entry capability development and has designed a context-appropriate business model, then it moves to the next step, launching a new venture. The further investment required for the initial launch of a new venture into the market space is a first signal that based on managerial perceptions, the firm has developed the necessary new market entry capability and associated business model. On the other hand, firms that do not launch a new venture are indicating that, in the view of their managers, the capability development process was not successful due to the failure to design a context-appropriate business model. 4 A second measure of success at the stage of venture launch is whether the new initiative actually fulfills the objectives of the original strategy. The implementation process can evolve over time with the emergent outcome being different from the original plan (Mintzberg & Waters, 1985). Implementation can be influenced and potentially redirected by existing routines and management biases as the process unfolds (Ahuja & Lampert, 2001; Burgelman, 1983). Thus, as capability development proceeds over time, a strategy for building a new capability to serve a specific market (such as one at the base of the ) can potentially become only an incremental extension of an existing capability that ends up targeting a different market (such as a market higher up on the economic ). The overall model, as shown in Figure 1, incorporates a dynamic perspective as the initiation of a new strategy triggers the need for capability development. 5 3 While important in organizational change and growth, an adjustment to a firm s capability portfolio via merger or acquisition (M&A) does not typically result in organic growth, nor does it require firms to develop capabilities internally (Karim & Mitchell, 2000). Thus, while M&A is important in capability development, this model focuses on new market entry capability development associated with organic growth. 4 In some situations, firms may chose not to launch a new venture due to better alternatives. In this study, however, this issue did not emerge, as funding was available for market entry contingent on the development of context-appropriate business models. 5 In this study, performance is based on venture launch, not post launch success. However, measuring post launch success provides an alternative (albeit post-hoc) measure of venture performance, in this case providing an indication of whether the firm s prediction about which context-appropriate capabilities are required for competitive advantage and commercial success is true (Barney & Arikan, 2001). 8

10 Insert Figure 1 about here While researchers have recognized that filling the gap between strategy and performance requires the development of context-appropriate capabilities, capabilities themselves are often seen as black boxes (Dosi et al., 2000). Indeed, very little is known about how capabilities are borne and change over time (Helfat & Lieberman, 2002). Better understanding path breaking growth requires opening this black box and exploring the building blocks of capability development (Helfat, 2000). In the model in Figure 1, this can be seen as identifying and examining the components inside a capability that lead to the design of a new business model. As was noted earlier, capabilities have an integrative or combinative quality (Kogut & Zander, 1992) and Galbraith and Kazanjian s (1986) important work on the strategy implementation process provides useful insights into what is inside this capability black box. Looking inside the firm, these authors developed a model of strategy implementation that includes the interaction among tasks, structure, processes (problem-solving routines), systems (prioritization routines), and people (resources). If tasks are assumed to be capabilities, then Galbraith and Kazanjian s (1986: 2) components of strategy implementation provide an approach consistent with existing capabilities research and offer a framework for exploring the black box of capability development. STUDY DESIGN Research Setting Building new capabilities that allow firms to explore path breaking growth is becoming increasingly relevant. With existing markets becoming saturated, firms are looking for sources of organic growth. One market opportunity gaining increased attention as a potential source of new growth is lower income markets in developing countries, also known as the base (or bottom) of the (BOP) (Hart, 2005; Prahalad, 2004; Prahalad & Hart, 2002). 9

11 Indeed, in the seminal article on the base of the, Prahalad and Hart (2002) divided global population into three segments based on purchasing power parity, as shown in Figure 2. Base of the (BOP) consumers are defined as approximately four billion customers (or twothirds of the world s population) whose annual purchasing power parity is less than $1,500 per year. While the opportunities are potentially substantial, entering these new markets also poses unique challenges to these firms as this requires path breaking growth (Hart, 2005; Hart & London, 2005). 6 As also illustrated in Figure 2, early empirical findings suggest that MNCs cannot rely on path dependent growth based on modifying existing capabilities and business models to enter the BOP. Indeed, this research indicates that entering BOP markets requires path breaking growth and the development of a fundamentally new market entry capability and business model (London & Hart, 2004). In building this new capability, firms will have to overcome the corporate immune system and existing path dependencies that rebel against unconventional strategic approaches (Birkinshaw & Fry, 1998; Nelson & Winter, 1982). As such, studying the capability development of MNCs looking to enter BOP markets provides a research setting where a theoretical gap in the capabilities literature the exploration of path breaking growth can be examined. Research Strategy Insert Figure 2 about here Given the relatively new and unexplored nature of the phenomenon building new capabilities to enter new markets a longitudinal inductive approach directed at theory building is 6 A growing number of multinational firms are making commitments to launch ventures in BOP markets. These include ABN AMRO, CEMEX, Coca-Cola, Danone, Dow Chemical, DuPont, Eskom, Hewlett-Packard, Johnson & Johnson, Nike, Philips, Procter & Gamble, S.C. Johnson, Tetra Pak, and Unilever, among others. For more information on BOP markets and organizations pursuing these opportunities, see on-going work at Cornell University ( Harvard ( the University of Michigan ( and the WBCSD s Sustainable Livelihoods program ( 10

12 most appropriate (Eisenhardt, 1989a; Yin, 2003). The research strategy I employ is the development and analysis of case studies, which is a particularly effective when the objective is theory generation (Eisenhardt, 1989a; Yin, 2003). A case study approach exposes issues and relationships which are obscure in the standard statistical data and may be worthy of thought (Raff, 2000: 1044). By affording the opportunity for conducting both within-case and cross-case analysis, a multiple case study research design enables tentative explanations found in a within-case analysis to be tested across other cases (Miles & Huberman, 1994; Yin, 1981). This logic of replication provides an important mechanism for enhancing confidence in the findings (Yin, 2003). Sample The sampling in this study was purposive rather than random (Miles & Huberman, 1994). 7 In identifying an appropriate sample for this study, I employed several controls to restrict sources of potential variation (Eisenhardt, 1989a; Yin, 2003). These controls included size, age, home country of the parent firm, source (corporate versus subsidiary) of the initiative, and entry mode (Birkinshaw, 1997; Chang & Rosenzweig, 2001; Oviatt & McDougall, 1994; Porter, 1990). 8 Together these controls focused the sample search on large, experienced U.S.-based firms looking to enter BOP markets through corporate-initiated, wholly-owned greenfield investments. Over a year of archival research and ongoing interactions with leading practitioners and academics resulted in the identification of six MNCs that were most active in terms of entering BOP markets. These experts felt that this group of companies was an excellent sample for the research design 7 An issue often raised about case studies is that they offer a limited opportunity for generalization (Yin, 2003). Addressing this requires recognizing that there are different types of generalization and this impacts the sample design. For a multiple case research strategy, where the sample size is always going to be relatively small, the objective should not be statistical generalization. Rather, the appropriate mode of generalization is analytic generalization (Yin, 2003), in which cases are chosen for theoretical, as opposed to statistical, reasons (Eisenhardt, 1989a; Glaser & Strauss, 1967). 8 This view of the BOP as a source of organic growth was supported by managers for all the companies involved in this study. The following quote from a senior manager at Light is representative of that sentiment: Emerging markets at the base of the are frontiers for sustainable growth, this manager noted. [In these markets], we are looking more for organic growth. Acquisition is not real growth. That is just taking somebody else s work and acquiring it [also] acquisitions in BOP markets are not likely. 11

13 developed for this study. All six companies had identified the base of the as a potential organic growth opportunity and were developing initiatives to explore this market. 9 Each company agreed to share internal (and often confidential) material, allow attendance at BOP initiative-related meetings and presentations, and offer access to the key managers most actively involved in the efforts to target base of the markets. All but one of the companies were involved in launching multiple initiatives targeting the BOP, allowing for both within- and cross-company comparisons. In total, 18 initiatives in the six companies were identified and studied as part of this research program. Background information on the six companies (their names are disguised) and their initiatives (note that the first letter of each initiatives corresponds to the first letter of the name of the company) is provided in the first three columns of Table 1. Data Collection Insert Table 1 about here A key strength of a qualitative study is the richness, depth, and holistic nature of the data collected. Data from qualitative studies can provide thick descriptions (Miles & Huberman, 1994) that are well suited for theory building (Sutton, 1997). In case studies, the data collected is primarily in the form of observation, interviews, or documents (Miles & Huberman, 1994: 9, italics by original authors). In this study, all three sources of data were collected over a period of approximately 18 months. These data collection methods included gathering archival materials, attending company presentations and meetings, visiting company facilities and, most importantly, conducting semi-structured interviews with the MNC and partner organization managers most directly involved with launching BOP-oriented initiatives at these six MNCs. 9 An important reason that all six firms agreed to participate was because of the existing relationship that I and my colleagues had with some of the key managers at these companies. I am grateful to these colleagues (who will remain anonymous in this version of the paper) for their support in facilitating this research effort. 12

14 In total, 84 interviews were conducted with 65 respondents. 10 These interviews were conducted in person or by pre-scheduled phone calls and typically lasted from 60 to 120 minutes, with the interviews totaling 6,765 minutes, or more than 110 hours. The number of respondents per company ranged from For each initiative being launched by the MNCs, 4-15 people were interviewed. 11 Some interviews involved the discussion of more than one initiative, as several respondents were involved in multiple initiatives. All interviews were recorded and subsequently transcribed. These transcriptions totaled more than 1,500 single-spaced pages of data. Data Reduction and Data Display Qualitative research results in a large amount of rich and detailed data, and thus data reduction is a crucial part of the data analysis (Miles & Huberman, 1994). A first step in the data reduction process was the development of interview summaries. 12 Relying on extensive notes taken during the interviews, I summarized the data collected in a condensed and organized form. 13 Data in these summaries were coded based on key constructs and areas of interest. To ensure that detailed and accurate information was captured in these summaries, I used the 24-hour rule for writing up this material (Eisenhardt, 1989b; Miles & Huberman, 1994). All of the summaries were then sent back to the appropriate respondents for verification and additional clarification. Nearly half (38 out of 84) of the respondents reviewed their interview summaries, providing an initial check on my consolidation and coding. The respondents often provided additional information and, at times, further clarification. 10 The managers most centrally involved in each initiative were interviewed multiple times, which enhanced the longitudinal understanding of each initiative. Moreover other respondents, including key implementers, senior managers, and external partners, were involved in the project at different times, which afforded another opportunity to better understand how the initiative evolved over time. 11 Having multiple respondents for each initiative provided an opportunity to enhance the reliability of the interview data. As recommended by Miles and Huberman (1994), I primarily relied on data that was provided by at least two managers and not contradicted by any of the respondents. 12 Indeed, the initial protocol was the first stage in data reduction, as I was required to make initial decisions about which conceptual frameworks, questions, and constructs would be explored 13 I found it helpful to report back to the respondent what I thought were the key points of the discussion, providing the respondents an opportunity to update, clarify, or enhance my real time summarization. 13

15 These interview summaries averaged more than seven pages each (yielding approximately 550 pages of text) and still comprised a large amount of data to analyze. As such, the next stage in the data reduction process was to develop separate case studies for each of the initiatives. 14 Once completed and coded, these case studies provided the basis for both within- and cross-case analysis (Eisenhardt, 1989a; Miles & Huberman, 1994). 15 Next I developed data displays, which are powerful tools for comparing and contrasting initiatives (Miles & Huberman, 1994). My aim was to identify, explain, and validate a pattern of relationships using within- and cross-case analysis. This involved identifying constructs, looking for relationships among these constructs, and developing a framework that integrates these relationships (Glaser & Strauss, 1967). 16 Within-case analysis emphasized exploring constructs, relationships, and configurations. Cross-case analysis was then used to subject the within-case relationships and configurations to comparative analysis, thus testing for validity and generality. 17 RESULTS Performance of the 18 Initiatives In the first part of the data analysis, I examined the performance of the 18 initiatives. For each initiative, I explored two performance measures. The first was whether the venture was 14 These case studies were developed in a two-stage process. An initial version of each case study was written after about 50 interviews were conducted. Additional information requirements and associated key questions were then developed for each case. After all 84 interviews were conducted, the cases were updated. 15 Multiple data sources, such as archival, interview, and observation data, were used to triangulate results (Yin, 2003). 16 As recommended by Miles and Huberman (1994), I developed a variety of conceptually-ordered data displays. I used these data displays to conduct in-depth analysis of within- and cross-case similarities and differences. Identifying contrasts and similarities across different cases led to the clustering of initiatives, in which I examine whether proposed relationships yielded similar or different results across different contexts. 17 In conducting the interviews, I also adopted several measures to enhance reliability and validity. First, to encourage greater disclosure of information, I assured the respondents that confidential information would not be attributed to specific initiatives. Second, where possible, I interviewed the respondents individually to reduce pressures toward reporting of only positive information (Miles & Huberman, 1994). Only four interviews involved multiple respondents. Third, I asked the respondents to focus on providing information that they had seen and could report firsthand. Fourth, an implicit comparison entered the data collection process as I also asked respondents to reflect on how these BOPoriented initiatives compared with other ventures they had been involved with (Larson, 1992). Finally, I asked all the respondents to discuss the challenges and the lessons learned, which helped encourage even strong proponents of the initiatives to more deeply explore warts and trouble spots (Miles & Huberman, 1994). 14

16 launched or not. The findings showed that 13 of the 18 ventures were launched. The five that were not launched (L-Housing, C-Health, P-Water (2), S-Water (1), and S-Water (2)) were either abandoned or suspended. For those in suspension, the management team recognized that launch would require a fundamental change in the approach to market entry capability development. The second performance outcome focused on the market the 13 launched ventures entered. I examined whether or not these ventures actually achieved path breaking growth and were able to launch a venture targeting base of the markets. 18 The results showed that nine of the 13 succeeded in doing this. These ventures were able to avoid traditional internal prioritization routines, as none of the nine were expected to generate substantial economic returns in the short term. The other four (D-Compute, L-Food, C-Beverage (1), and C-Beverage (2)) entered more familiar business environments, in this case middle of the markets. In these initiatives, market entry was based path dependent growth and the associated incremental changes to an existing capability, and the performance expectations focused on existing short-term metrics. 19 One interesting finding was that there was a third important performance difference. There were actually two types of ventures, growth-oriented and learning-oriented. This bifurcation was based on a clear difference in the performance expectations and had important impacts on capability development. Growth-oriented initiatives had a prime goal of generating economic returns to the company, either in the short- or long-term. Learning-oriented initiatives, on the other hand, were designed to be economically self-sufficient or, at best, moderately profitable. Their prime goal was to generate learnings that the company could use in other future growth-oriented endeavors. 18 I used several tactics to analyze the alignment between the original strategy and the market actually entered. First, all the ventures were tracked over time. Thus, at the earliest stage of the research study, the strategic logic for each venture was identified in discussions with multiple respondents. This prevented a retrospective reassessment of the initial strategy at a later date. Then, for the launched ventures, responses from at least two managers, and typically more, were used to determine the market entered. This evidence was then also triangulated with presentation and archival data. 19 It should be emphasized here that I am not evaluating whether entering a certain market (base of the versus middle of the ) is better or worse for the firm. Rather, I am interested in understanding if the variation within the capability development black box can explain this variation in performance outcomes. 15

17 Four of the five ventures that failed to launch (all except S-Water (2)) were growth-oriented, as were all four of the middle of the initiatives. In addition, three of the nine launched ventures that entered BOP markets (D-Technology, L-Farmer, and C-Water (2)) were growthoriented. The other six (D-Community, D-Credit, G-Farmer, C-Water (1), C-Beverage (3), and P- Water (1)) were learning-oriented. Brief descriptions of each initiative and their performance outcomes are provided in the first columns of Tables 2a, 2b, 2c, and 2d Insert Tables 2a, 2b, 2c, and 2d about here BOP Entry Requires the Development of New Capabilities Next, I analyzed the data collected regarding each company s perspective on the capability development required to enter base of the markets. In all six companies, the strategic logic for exploring BOP markets was the need for organic growth. As a senior manager at Clear explained, We are now in [a large number of] countries across the globe. Yet these markets are getting saturated and we can t keep trading market share with competitors. If Clear wants to be around for the next 100 years, we need new customers. [Yet] Clear already blankets the world. We are not going to find new countries to enter now we need to get deeper by reaching further down into these countries To be successful long term, the company needs to learn how to do business in the BOP. We need to learn how to do business where we haven t done it before. 20 In particular, I examined whether each company believed that it could adapt an existing capability (path dependent growth) or needed to build a new one (path breaking growth) in order to generate the business models needed for entry into BOP markets. For all six companies, the findings clearly indicated that entering the base of the required path breaking growth and the development of a new market entry capability and associated new business model. 20 Due to space constraints, throughout the paper it is not possible to include representative quotes for all companies and/or initiatives regarding the major findings. This information can be provided by the author upon request. 16

18 This view is nicely captured by a senior manager from Premium who, in discussing the BOP, indicated that, Premium doesn t know yet how to fully participate in these markets. We have an emerging market initiative that is focused on line extensions of existing product; we are modifying these products to meet local needs. Typically the emphasis is on going down one level, for example, from A to B or B+ or perhaps from B to C. This approach, however, does not include the BOP. A BOP strategy requires a new business model and involves new and different partners. The results across the six companies are summarized in the last two columns of Table 1. The first identifies the companies traditional capability development approaches when entering new markets in developing countries, which was inevitably path dependent growth. The second summarizes their perspectives on the capability development needed for entry into base of the markets, which was consistently path breaking growth. The condensed quotes used for each company come from the case studies and interview summaries. Components in the Capability Building Process Overall, the results from the analysis of different clusters of initiatives indicated both that all four components explored in this study were crucial in capability building and that venture launch required these components to be mutually reinforcing. The alignment among structure, problemsolving, prioritization, and context-specific resources consistently emerged as critical in explaining the variation in the successfully and unsuccessfully launched initiatives. While it is possible that other components could influence capability development, there was no mention in the various data sources of variations in another asset playing a significant role. In my analysis of the data, I looked for the aspects of structure, prioritization standards, problem-solving approaches, and context-specific resource that were most important in explaining the variance in performance outcomes across the different clusters. I examined a variety of different features and certain aspects of each component emerged as crucial in explaining this 17

19 variance. Specifically, I evaluated whether or not the initiative managers were able to develop new prioritization metrics, how the level of internal and external diversity affected the problem-solving process, if the initiative s structure provided an internal white space that offered protection from the influence of existing routines, and how the initiative sourced its context-specific resources. The companies existing prioritization routines emphasized short-term growth metrics, while the development of new prioritization metrics resulted in long-term growth- and learning-oriented performance measures similar to those found in technology research and development (R&D). An initiative s problem-solving approaches could incorporate relatively high or low levels of internal and external diversity. Measurement of this diversity was based on boundary-spanning, an approach used by other researchers (Rosenkopf & Nerkar, 2001). Internal diversity was evaluated by the level of participation in problem solving by managers who crossed departmental boundaries. External diversity was measured by the involvement in problem-solving by external partners. Structure, the third component, either did or did not provide a barrier that protected the initiative from traditional routines. Having an isolating structure provided the initiative with internal white space that offered a buffer. Without this structural protection, an initiative had difficulty escaping the firm s existing prioritization and problem-solving routines. 21 Variations in the gaining access to the fourth component, context-specific resources, also played an important role in new market entry capability development. The various initiatives relied on three different sources for their context-specific resources, including leveraging them from traditional partners, such as a local subsidiary, leveraging them from new partners, such as a nonprofit organization, or investing in the commons As reported by the respondents, a structural firewall emerged from two sources. One was a new structure specifically established to avoid traditional routines. The other was a corporate functional department that did not have to show traditional short-term economic returns such as sustainable development, public affairs, R&D, and external relations. 22 An example of investing in the commons is using the initiative s financial or human capital to build local capacity. In many low income markets, for instance, local distributors serve their customers in an inefficient manner (Prahalad & 18

20 Mutually Reinforcing Prioritization and Problem-Solving A key difference between the launched and not launched ventures was the alignment, or lack thereof, between prioritization and problem-solving. Put simply, an initiative s priorities could focus on short-term growth, long-term growth, or learning, and its problem-solving could have high or low levels of internal and external diversity. A successful launch required the proper alignment between prioritization and problem-solving to a design context-appropriate business model. In this study, all of the 13 launched initiatives either relied on a combination of either new prioritization metrics and new problem-solving approaches or existing priorities and existing problem-solving routines in designing their business models. The five initiatives that were not launched, on the other hand, had new priorities matched with old problem-solving routines. This suggests that new prioritization metrics require new problem-solving. Similarly, launched ventures with existing prioritization routines benefited from traditional problem-solving approaches. The misalignment of new priorities with existing problem-solving routines interfered with the design of a context-appropriate business model. This resulted in a perception that capability building was not successful and led to a decision not to launch. As a senior manager involved with P-Water (2) explained, Premium doesn t like to mess with success and there is concern about trying a new business model. The existing business model has worked for 120 years. The company is willing to explore white space markets, but is only familiar with using existing business models. Our existing business models may have clouded our vision. The influence of prioritization and problem-solving on venture launch is more clearly illustrated by examining and comparing different clusters of initiatives. Alignment for the four ventures that entered the middle of the (see D-Compute, L-Food, C-Beverage (1), and C- Beverage (2) in Table 2c), for example, was relatively simple. Although they had limited internal Hammond, 2002). As such, a company-sponsored training program can enhance an intermediary s skills (London & Hart, 2004). These new skills, however, that cannot be captured for the exclusive benefit of the sponsoring initiative. 19

21 and external diversity in their problem-solving, they overcame this through a change in the target market. By shifting to more familiar middle of the markets, they could rely on traditional growth metrics, which were based on achieving short-term returns. Since these ventures were no longer pursuing path breaking growth and did not need to develop a new market entry capability, they could focus on incrementally modifying their existing one. As such, they did not require a high level of internal or external diversity and could rely on existing problem-solving routines. Light s Food initiative (L-Food) followed the development path. As a project implementer indicated, The idea has changed over time. This respondent then explained that while they were initially targeting lower income markets, the final target market was A/B consumers who are wealthiest consumer group in the country. We will price the product at a premium level to provide high profit margins in the short-term where the value is health and wellness to the A/B consumer. This change occurred due to the influence of traditional problem-solving routines. The original approach was to identify needs and then come up with solutions, a market-oriented approach, a partner in L-Food noted. However, the actual process was based on leveraging existing solutions and technologies, a technology-oriented approach. The solutions were in pocket already. As a result, the process was biased. Ventures that remained focused on base of the market entry, however, needed to break existing routines. 23 A senior manager at Galaxy, noting the internal challenges faced in the resource allocation process by initiatives targeting base of the markets, explained, Short term thinking is probably the biggest challenge to supporting base of the ventures There is a need for slow money. To ensure long term investment, what is needed is a pocket of money that explores business opportunities where there is no clear business case. 23 As was discussed earlier, a business model design emerges based on how a venture searches to solve problems and what standards it uses to evaluate performance outcomes. Unless existing routines are consciously broken, managers will instinctively rely on existing prioritization metrics and problem-solving approaches in designing a business model for a new market entry, which is effective only for path dependent growth (Raff, 2000; Tripsas & Gavetti, 2000; Winter & Szulanski, 2001). 20