Week 3: Base of the Pyramid, Global Institutions and Strategies

Week 3: Base of the Pyramid, Global Institutions and Strategies

“Introduction … India, Rural Markets and Company Strategies … South Africa, AIDS Epidemic, WTO and Global Strategies … Conclusion and Weekly Assessment III … End of Week Assessment 3”
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Summaries

  • Base of the Pyramid, Global Institutions and Strategies > 3.1 Introduction > Introduction for Week 3
  • Base of the Pyramid, Global Institutions and Strategies > 3.2 India, Rural Markets and Company Strategies > India: Early Decades After Independence
  • Base of the Pyramid, Global Institutions and Strategies > 3.2 India, Rural Markets and Company Strategies > India: Post-Liberalization Period
  • Base of the Pyramid, Global Institutions and Strategies > 3.2 India, Rural Markets and Company Strategies > Rural India: Opportunity for Creating Value
  • Base of the Pyramid, Global Institutions and Strategies > 3.2 India, Rural Markets and Company Strategies > ITC in Rural Markets
  • Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > South Africa and the AIDS Epidemic
  • Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > The Pharmaceutical Industry
  • Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > WTO and the Global Intellectual Property Rights Regime
  • Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > South Africa Case Study
  • Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > Role of NGOs & Non-Market Strategy
  • Base of the Pyramid, Global Institutions and Strategies > 3.4 Conclusion and Weekly Assessment III > Week 3: Concluding Remarks
  • Base of the Pyramid, Global Institutions and Strategies > Course Conclusion > Course Conclusion

Base of the Pyramid, Global Institutions and Strategies > 3.1 Introduction > Introduction for Week 3

  • We looked at the social, political, economic and institutional aspects of the country context.
  • We looked at many aspects of the Japanese environment.
  • In week 2, we also tried to understand the typical underlying causes of financial crises, and the role of the IMF in restoring stability, and defining institutions.
  • We took a quick look at other environments, like Singapore, Turkey and Chile, to understand selected aspects of the context, and how institutional changes were brought about.
  • We moved beyond looking at the international environment, to examine how companies are affected and how they address challenges and opportunities presented by an environment.
  • The first of those two important new topics, will focus on how global institutions, or, in other words, the global rules of the game, which are overseen by the World Trade Organization or WTO, mold the international business environment and affect social welfare.
  • We will learn about the complex mix of issues, and the role played by different stakeholders in changing the institutions, and their implications for human welfare.

Base of the Pyramid, Global Institutions and Strategies > 3.2 India, Rural Markets and Company Strategies > India: Early Decades After Independence

  • India is the second-largest country in the world, with a population of 1.3 billion people.
  • About 80% of Indians are Hindus, followed by Muslims, who are 13%, and Christians and Sikhs, about 2% each.
  • If we consider GDP adjusted for prices India has the world’s third-largest economy just behind China and the US. With a growth rate of over 7% India has the fastest-growing major economy in the world.
  • The world has not fully recovered from the recent recession, and with the Chinese economy facing turbulence, there is concern about the world economy slowing down.
  • India’s economic growth, combined with gradual recovery in the US provides hope for the global economy.
  • The BJP won an impressive election victory in the 2014 elections, by promising to control inflation and promote growth, by introducing economic reforms, building infrastructure, and reducing corruption.
  • Corruption indicators, such as the World Bank’s Governance indicators, suggest that India does not fare as well in terms of controlling corruption, as countries like Japan and South Korea, which, as we discussed, have suffered the serious consequences of corruption.
  • Now, let’s take a quick look at some important historical factors, that affected India’s economy, and the government’s policies toward economic development.
  • When India became independent in 1947, the economy was in a sorry state.
  • Cotton grown in India would be shipped to Britain, to be spun and woven into cloth and brought back for sale in India, rather than being processed in India to begin with.
  • The leadership of the proud, young, independent India, was determined to keep the country economically independent.
  • They wanted to build a strong industrial base, and reserved seventeen important industries, for state ownership, following the Soviet strategy of control over the so-called “commanding heights” of the economy.
  • In the years following independence, foreign agencies had predicted that millions would starve in India.
  • India had a socialist ideology, and had done more than many other countries to support small firms, sometimes with subsidies, but at other times by simply letting free enterprise work its magic.
  • Unions were strong and it was difficult, and still is difficult, for companies to fire workers.
  • This is one of the reasons why India has had difficulty putting its massive labor force to work in manufacturing.
  • So compared to countries like China, Canada and Chile, India had very little FDI for a country of its size.

Base of the Pyramid, Global Institutions and Strategies > 3.2 India, Rural Markets and Company Strategies > India: Post-Liberalization Period

  • As we discussed before, there was excessive government control in India in the post- independence era that is after 1947.
  • Inflation exceeded 15%. India’s foreign exchange reserves began to dry up, and when foreign debt rose to 70 billion dollars, the government had to seek IMF assistance which came with conditions requiring economic liberalization.
  • It reduced economic controls and opened the economy to imports and foreign direct investment.
  • Foreign companies began outsourcing services to India aggressively.
  • With India’s low wages and large numbers of engineers, Indian companies could compete globally for value-added services.
  • Engineers in India began designing components for foreign companies.
  • FDI inflow into India rose to 8 billion dollars by 2006 and was expected to reach 12 billion dollars by 2007.
  • Today, there is vibrant entrepreneurship in India with large number of hi-tech start-ups in cities like Bangalore.
  • India’s foreign reserves have also grown significantly.
  • To summarize, we see that India’s historical context of colonization by a foreign power led to creation of institutions that made it inward looking.
  • Today, India is growing fast, but the government recognizes that institutions must change further for the Indian economy to achieve its full potential.
  • India has an important role to play as the balance of power shifts in the world with the rise of China.
  • It has to figure out how to deal with tension over territorial disputes with Pakistan and China and use its influence over South Asia and beyond.
  • We as India, a country of over one billion people, a dynamic democracy that has embraced diversity, but yet lives in a rather turbulent neighborhood.
  • Because, one pre-assumes often that the end of the Cold War, and the end of the East-West divide brought great changes, which they did globally, but in our region what has been the impact of those changes? India, in a sense, globalized its economy liberalized after 1991, and that completely changed the definition of things as far as our economy was concerned.
  • You can learn more about India’s place in the world from an interesting interview that I conducted with Ms. Nirupama Rao, former Foreign Secretary of India and also former Indian Ambassador to the US.

Base of the Pyramid, Global Institutions and Strategies > 3.2 India, Rural Markets and Company Strategies > Rural India: Opportunity for Creating Value

  • Rural India presents an enormous opportunity for organizations to create value no matter which sector they belong to: business, government, or civil society.
  • When you compare that with the fact that 69% of the population lives in rural India, you can see that there is great potential for growth of cell phone service in rural India.
  • Ms. Rama Bijapurkar: So, the interesting thing is, which most people miss, is that half of India’s rich live in rural India; and most of India’s poor live in rural India.
  • We take that bottom most quintile, 20%, 87% live in rural India and only 13% live in urban India.
  • Dr. Sushil Vachani: I see, yeah, it is mostly in rural India.
  • Ms. Rama Bijapurkar: Yeah! So, rural India has half of India’s rich and all of India’s poor.
  • The rural urban divide is blurred because we’ve had road connectivity, so today in most states except for one or two parts of Bihar, UP, and so on, in most states of India you will find that road connectivity is up to 90 or 100% of villages are connected by some kind of an all-weather road. And, so if a car can’t go on it, a truck will go on it, or a bus will go on it, or an auto will go on it.
  • Also because television connectivity and cell phone connectivity’s happened, so we’re actually finding that rural India is no longer stuck in the dark ages, except their problem is income.
  • Income inequality in cities is much higher than in rural India.
  • The government is aggressively implementing the use of technology to benefit the poor including the poor in rural India.
  • One of the most widespread distribution networks in rural India is that of the post office, which not only provides postal services but other services also, such as insurance.
  • Retail sales in India are estimated to have grown at about 15% each year over the previous five years and are expected to rise by 12% per year, the next few years.
  • As I mentioned before, India has over 500 million people below 25 years old.
  • While nearly 69% of Indians live in villages, only 40% of retail sales occur in rural India, which suggests there is a significant opportunity for growth there.
  • About 55% of India’s demand for FMCG is accounted for by rural India.
  • Over the coming decade, e-commerce will increasingly penetrate rural India as connectivity rises and distribution logistics improve.
  • Many large companies like Hindustan Lever and ITC sell their FMCG products in rural India and have increased their reach a lot over the years.

Base of the Pyramid, Global Institutions and Strategies > 3.2 India, Rural Markets and Company Strategies > ITC in Rural Markets

  • Over time, obviously, mobile phone penetration has expanded certainly broadband reached and therefore, whether it is desktop or it is tablets for assisted services, all of that is now a reality in rural India.
  • Other technologies, not only information and communication, other technologies like rapid quality testing of agriculture produce, then your ability to price the product more objectively is higher using that as a technology.
  • Of course, as part of income expansion, you needed to use many other technologies for your GPS, for your nutrients and your fertigation applications through irrigation and other mechanization, and all that.
  • Range of technologies that were used were fairly broad. The entire technologization of agriculture and other rural activities was integral part of the e-choupal model.
  • I mean obviously there is still illiteracy, there is still level of affordability in many of these areas, assisted access is also quite common, much like the sanchalak in e-choupal that got down to more levels where you can show a video, you can capture a video of the farm and then you send it back.
  • These people, obviously, are living in cities and all of this is required as knowledge in the villages for their own production enhancement activities, for their own consumption and so on.
  • What technology enables is to deliver that remotely and in order to deliver something generic, it one-way broadcast helped in the past, television, radio and so on.
  • I said intelligent first mile you need information from the villagers to be fed to these experts and then the response is going back, then you need a two-way communication.
  • We did it using desktop and internet 15 years ago, and today it is done using mobile phones and different kind of apps and where required voice and so on.
  • In any case farmers bring and deliver the produce, they were going out to the town to buy many things that they wanted to buy at that time.
  • In any case, farmer carry back diesel for their farm, pumps and so on, and some repair shop and other services for health care, in any case, a cafeteria like a food park.
  • It became a multiple services center, soil testing lab and some training center and so on.
  • Although because somebody walks and sees that as retail front-end, choupal-Saagar is seen as a retail, but retail is one part of a larger Choupal Saagar complex.
  • There were footfalls, which any case had cash and you have a right product mix available there and therefore you buy and take it back.
  • We had an added advantage because in any case you’re building parking, you have a compound wall, you have a security, you have other supervisory staff and all that your overheads on a retail store or a hyper market, are far lower compared to a stand-alone store.
  • Now, you have this infrastructure built, which is primarily feeding on the warehousing and every other things including a retail was at marginal cost, so to say creating their own revenue sources didn’t make sense if there is an Essential Commodities Act which said you can’t buy more than so much quantity, you can’t stock more than so much quantity.

Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > South Africa and the AIDS Epidemic

  • The people had great hopes that they would enjoy basic human rights, get education, jobs, and homes, and generally lead a better life.
  • It is never easy for a country that has been shackled for decades to take off and improve conditions swiftly.
  • One of the biggest challenges facing South Africa was the AIDS epidemic.
  • Let me provide a brief overview of HIV AIDS and the challenges in treating it.
  • HIV leads to AIDS when the virus attacks the patient’s immune system and cripples it, so that the patient cannot fight other diseases that he or she contracts.
  • Some of those other diseases could be deadly and end up killing the patient.
  • By 2000, HIV/AIDS killed more people each year than any other infectious disease, which is a disease that can be transmitted from person to person.
  • In the early 2000s, infectious diseases killed around 10 million people in the world, each year.
  • There were more deaths from non- communicable diseases like heart disease and cancer, which killed three times as many people.
  • Between the 1980s and 2000s, 20 million people died of AIDS in the world.
  • According to the United Nations AIDS program, UNAIDS, in the early 2000’s there were around 40 million who had HIV/AIDS.
  • Unless aggressive programs were implemented for prevention and treatment over the next 20 years, AIDS could kill as many as 68 million people in 45 countries that were most vulnerable.
  • Now, let’s consider what makes a nation vulnerable to AIDS.
  • Clearly, where there is a high degree of poverty, people suffer poor health owing to lack of awareness about preventive care, low nutrition, and inability to afford medicines.
  • Global health organizations gave AIDS prevention a high priority.
  • Only five percent of the funds devoted to control of AIDS were spent in developing countries.
  • In 2001, 360,000 people would succumb to AIDS in South Africa.
  • As result of historic and economic factors, a significant part of transmission in South Africa was through sexual activity.
  • There was great stigma attached to AIDS, and people were reluctant to have themselves tested and not always sympathetic toward those who were known to have it.
  • The Government of South Africa had been very slow in tackling the AIDS epidemic.
  • 35,000 children died each year and that could be prevented by reducing transmission from mothers to their children with the drug AZT.
  • At one stage, President Mbeki, had made statements that HIV did not cause AIDS.
  • There was no vaccine to prevent AIDS and no drugs that could cure it.
  • Medicines could slow down the spread of the disease and extend life.
  • In the early 2000s, the price of a year’s supply of a combination of drugs used for treating AIDS, referred to as anti-retroviral drugs or ARVs was 10,000 dollars or more in developed countries.

Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > The Pharmaceutical Industry

  • We saw that in early 2000s, AIDS was killing a lot of people in South Africa, and while drugs existed to control AIDS and prolong life, they were too expensive for most patients.
  • The pharmaceutical industry devotes a lot of money, time and talented human resources to Research and Development to discover and develop drugs that save millions of lives, and alleviate much pain and suffering in the world.
  • The time taken from initial lab work on drug discovery, to development and testing of the drug, to government approvals and launch, can be ten to fifteen years.
  • Successful drugs had to not only make profits to cover their own cost of development, but they had to make up for the money sunk into the R&D effort, that had been devoted to development of other drugs, that did not turn out to be viable.
  • The industry benefited from basic scientific research that was government-funded, and contributed knowledge that was essential for drug discovery.
  • Governments typically left commercialization of drugs to the industry and did not share in its profits.
  • The patent regime allowed companies to charge high prices for drugs and recover R&D costs and earn significant profits.
  • Drug prices varied a lot across countries, even for the same patented drug.
  • Of course, generic drugs sold in countries where patents had expired, or where patents were not honored, were available at a fraction of the price of the patented drug, sometimes as low as 2-3%. The pharmaceutical industry faced scathing criticism for selling life-saving drugs at prices that poor patients could not afford.
  • In 1999, expressing frustration over the unaffordability of AIDS drugs in developing countries, the UN Secretary General, Kofi Annan, described the annual price tag for AIDS treatment as belonging to another galaxy.

Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > WTO and the Global Intellectual Property Rights Regime

  • International laws provide for the transfer and use of patented technology across countries through licensing and foreign direct investment.
  • Now, the global rules for conduct of trade between countries are overseen by the WTO, which tries to ensure that trade between countries flows as smoothly, predictably and freely as possible.
  • TRIPS, which was negotiated in the late 1980s and early 1990s, was designed to create uniformity among the laws governing intellectual property rights in countries across the globe.
  • If the patent holder refused to provide a license to produce the product in a country at an acceptable price, the government could allow someone other than the patent holder to produce the product without the permission of the patent holder.
  • A country needing life-saving drugs could also import drugs from any foreign country where they were available for a lower price provided they were produced legally.
  • While these provisions of TRIPS made it possible for a developing country to resort to measures to save people in a medical emergency, in actual fact, this was far from easy because there was no clear definition of an emergency and governments of countries that were home to the pharmaceutical multinationals pressured the poor countries not to set patents aside.
  • In the face of such pressure, the response of developing-country governments to the issue of waiving patents varied considerably across countries.
  • The pharmaceutical industry pointed to some serious practical challenges associated with selling drugs at low prices in developing countries.
  • They feared that drugs sold for low prices in developing countries, might be shipped to developed countries and undercut profits in those markets.
  • Companies also worried that once one country waived patents and began to allow inexpensive generic products, others would follow and put a serious dent in global profits.
  • Perhaps there would be pressures to cut price even in developed countries if the price differential between developed and developing countries became large.

Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > South Africa Case Study

  • They see the South African Government as having failed to create awareness, address bias, and provide drugs and other care.
  • Some students blame the US Government for supporting the multinationals in pushing back on the South African Government’s attempts to make low-priced generic drugs available in South Africa.
  • Others fault the multinationals for not cutting prices of drugs in developing countries more aggressively and quickly than they did.
  • A question worth asking is to what extent were multinationals maximizing profits in developing countries by pricing drugs as high as in developed countries? Of the six million people in developing countries who needed the drugs, very few could afford to pay 10,000 dollars per year.
  • If very few were able to pay for drugs and no one was stepping up to buy the drugs for them, the multinationals could make very few sales, and make very little profit.
  • If the drugs were priced at 10,000 dollars and the variable cost was 300 dollars, then for each person, for whom drugs were bought, the companies would have earned 9,700 dollars per patient per year.
  • As we noted before, at that price, very few people bought the drugs and so sales and profits were negligible.
  • Now, if the price had been slashed by 90%, to say 1,000 dollars, the profit per person would be only 700 dollars per person per year, instead of 9,700 dollars.
  • Even if drugs were purchased by or for only a 100,000 patients in developing countries, the multinationals would have earned profits of 70 million dollars per year.
  • The drugs would have had to be given away practically for free.
  • If multinationals did that, they would incur very large losses on the drugs.
  • Charitable organizations would have had to purchase the drugs at a price that covered multinationals’ costs.
  • The interesting observation is that multinationals could have made more money in developing countries, and also have saved more lives by dropping prices well below 10,000 dollars, which they were eventually forced to do as the circumstances evolved.
  • Low-priced drugs could be shipped from developing countries to developed countries.
  • If drugs were used in developing countries without adequate patient nutrition and care, that could result in drug-resistant strains.
  • One of the striking facts is that civil society played a crucial role in moving the industry to a point where drugs were made more affordable.

Base of the Pyramid, Global Institutions and Strategies > 3.3 South Africa, AIDS Epidemic, WTO and Global Strategies > Role of NGOs & Non-Market Strategy

  • Let us consider what we can learn about the role of NGOs in changing institutions, or the rules of the game, from the case of pricing of AIDS drugs.
  • Often, it is advocacy NGOs, who focus on representing the interests of the weaker sections of society, who draw the attention of companies, governments, and inter-governmental organizations like the WTO, The World Bank, or the United Nations to problems that companies or governments are not focusing on.
  • In the AIDS-pricing case, NGOs played a role in many ways.
  • NGOs applied pressure on the South African Government to respond to the crisis.
  • Even more important, when the US Government supported multinational companies and pressured the South African Government to refrain from waiving patents and having generic drugs manufactured locally-global NGOs protested loudly and embarrassed the US Government into changing its stance.
  • Given the nature of their mission and the scarcity of resources, NGOs adopt unusual methods to get publicity for the causes they are championing.
  • Shocking events get free publicity and draw attention to the problem that the NGOs want to highlight.
  • Government officials and managers can be put off by the strident demands of NGOs and shy away from interacting with them.
  • In actual fact, there can be very useful partnerships between government, companies, and NGOs designed to address complex problems of society.
  • NGOs can contribute all the way from implementation at the local level to advocacy on the global stage.
  • Of course, NGOs can also suffer from some of the same problems that afflict governments and companies.
  • Actually, they can benefit a great deal by working with NGOs to understand unfamiliar environments and become aware of unanticipated problems associated with their value chain.
  • Another group of non-market players is inter- governmental agencies like the WTO and the UN, which work on creating global rules and agreements and generally do so through a process of negotiations.
  • NGOs are non-market players who express the will of the people and work to serve them.
  • When NGOs are clamoring for attention and demanding action from companies, managers can serve their stakeholders better if they listen carefully to what the NGOs are saying instead of brushing them aside.
  • As mentioned before, NGOs can serve as partners in influencing governments to change policies and in helping with operations on the ground that go beyond the company’s traditional value chain.
  • You can read about an innovative, operational NGO, as opposed to an advocacy NGO, which provides a very valuable service by educating children in slums and villages in India.

Base of the Pyramid, Global Institutions and Strategies > 3.4 Conclusion and Weekly Assessment III > Week 3: Concluding Remarks

  • This week, we started out by looking at India to deepen our understanding of how historical context can mold a country’s objectives and strategy, and how institutional change is triggered.
  • We saw how the global rules of the game that are formulated and overseen by the inter-governmental institutions, such as the WTO, must balance the interests of creators of inventions, such as life saving drugs, and the needs of the poor who desperately need them.
  • We saw how the implementation of the intellectual property rights regime is subject to political pressures, and how NGOs can play a critical role in changing the rules of the game and their implementation.
  • Managers and bureaucrats are sometimes reluctant to deal with NGOs owing to their strident demands and unusual methods for getting attention.
  • We thus got to see how NGOs play their part in creating value at the base of the pyramid along with governments and companies.
  • This week gave us a glimpse of the opportunities and challenges at the base of the pyramid, how the global rules of the game are managed, and how governments, companies and NGOs jockey to change those rules to create an environment that they consider suitable.

Base of the Pyramid, Global Institutions and Strategies > Course Conclusion > Course Conclusion

  • As you know, the course focused on the social, political, economic, and institutional factors that mold country environments and the implications for company strategy and social welfare.
  • We began by looking at country environments and then at companies and their strategies.
  • In between, we switched our focus to companies and their strategies.
  • McDonald’s strategy for managing risk when entering the former Soviet Union, ITC using technology to tap into the vast Indian rural market, and the pharmaceutical industries’ strategy with regard to AIDS drugs.
  • We saw leaders building and changing institutions and how that can affect trade and investment.
  • We saw the gradual shift in global power with the rise of China and the implications for Japan and other countries.
  • Along the way, we saw the role played by a number of players other than governments and companies.
  • I recommend reading the international sections of several excellent newspapers such as The Economist, Financial Times, and New York Times, in addition to news outlets in your own countries.

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