Non-Ownership Services for the Base of the Pyramid

An Analysis of the Applicability of Innovative Business Concepts


Bachelor Thesis, 2012

108 Pages, Grade: 1,4


Excerpt

Table of Contents

List of abbreviations

List of Table and Figures

1 Introduction
1.1 Purpose of the Study, Problem Definition and Objective
1.2 Course of Investigation

2 Concept of Service-Dominant Logic and Non-Ownership Services
2.1 The Shift from Goods-Dominant to Service-Dominant Logic 2.2 Value Co-Creation through Service
2.3 Non-Ownership Service Definition, Characterization and Typology
2.3.1 Service Characteristics
2.3.2 Non-ownership and Non-Ownership Services
2.3.3 Definition of Non-Ownership Services
2.3.4 Characterization and Terminological Differentiation of Non-Ownership Services
2.3.5 Typology of NOS

3 Base of the Pyramid - a Potential Target Market
3.1 Defining the Base of the Pyramid
3.2 Market Data
3.3 Mass Market vs. Multiple Market Niches
3.4 Doing Business at the Base of the Pyramid
3.4.1 Special Characteristics of Base of the Pyramid Markets.
3.4.2 Challenges and Constraints
3.4.3 Entrepreneurship at the Base of the Pyramid
3.4.4 Business Concepts and Market Entry at the Base of the Pyramid..
3.5 Specific Needs at the Base of the Pyramid.

4 Transferring a Business Model: Non-Ownership Services at the Base of the Pyramid
4.1 Non-Ownership Services as Business Concept in Developed Markets
4.1.1 Reasons and Motivations for Non-Ownership Services
4.1.2 Current Development and Competitive Advantages
4.1.3 Overview of Existing Concepts
4.2 Non-Ownership Services as Business Concept in Developing Markets.. Non-Ownership Services for the Base of the Pyramid
4.2.1 Reasons and Motivations for Non-Ownership Services
4.2.2 Existing Businesses
4.2.3 Competitive Advantages and Entry Potential.
4.3 Transfer of Business Models

5 Implications, Limitations and Future Directions
5.1 Implications
5.2 Limitations and Suggestions for Further Research

6 Conclusion

Reference List

Appendix

List of Abbreviations

illustration not visible in this excerpt

List of Table and Figures

Figures

Figure 1 Schematic Illustration of NOS Characterization

Figure 2 Schematic Illustration of NOS Typology.

Tables

Table 1 Overview of Existing NOS Concepts in Developed Markets

Table 2 Overview of Existing NOS Concepts in BoP Markets

Table 3 Economic Data per Country

Table 4 Economic Data per Region

Table 5 Transitional Stages from G-D to S-D Logic

Table 6 Theoretical Foundations of S-D Logic

Table 7 Foundamental Premises of S-D Logic

1 Introduction

1.1 Purpose of the Study, Problem Definition and Objective

“I'm sort of rich. I can rent anything I want!” (emphasis added) this ironic quote by the cartoon actor Homer Simpson1 metaphorically catches a currently ongoing development in consumption behavior and indicates general relevance for a current research discussion: Embedded in a whole body of works from Lusch and Vargo (Vargo & Lusch 2004a, 2004b, 2006, 2008a, 2008b; Bolton et al., 2004; Lusch, Vargo, & O’Brien, 2007), an extensive shift of research paradigms in marketing logic from a goods-dominant to a service-dominant logic is defined, reasoned and characterized. In connection to this change of logic, the process of value creation has also been redefined and adapted, mainly based on works of Grönroos (Grönroos 2008, 2011; Grönroos & Ravald, 2011; ) and further scholars (Vargo, Maglio, & Akaka, 2008; Edvardsson, Tronvoll, & Gruber, 2011). Concluding from these two significant streams of ideas, Maglio and Spohrer (2008) labeled the research field of “service science” and numerous publications have inquired various aspects of its details (i.e., Spohrer & Maglio, 2008; Vargo & Lusch, 2011). With respect to this, the discussion of service characterization and definition, influenced significantly by Gummesson and Lovelock (2004), opened the field for a further stream of thought: Non-Ownership services (NOS), which enable consumers to receive a certain service as provided by a supplier without actually owning the asset necessary to “produce” the service, have become increasingly relevant, both for scholars (Botsman & Rogers, 2010; Möller & Wittkowski, 2010) and in practice, as an increasing number of successful, i.e. profitable renting and leasing business in multiple forms prove (i.e., erento.de, avelle.com, boels.de, flexpetz.com, flinkster.de, zipcar.com).

Simultaneously, since Prahalad’s first appeal, the attenuation of poverty effects through private sector interaction (Prahalad & Hammond, 2002; Prahalad, 2004) has raised public, economic, and research attention (Prahalad, 2010; The Economist2). This idea of profitable poverty alleviation has been continuously developed and yielded different approaches to challenge the problem of prolonged poverty (i.e., Karnani, 2007, 2011; Garrette & Karnani, 2010; Sheth, 2011). The question arises, whether the NOS approach can be applied to Bottom of the Pyramid (BoP) consumers, as Prahalad (2004) refers to the poorest part of a market’s population. The specific needs of BoP consumers (e.g. affordable products at significantly low income) and special advantages of NOS business concepts (i.e., lower costs of access to assets) seem to fit, but in detail analysis is required to gain reliable insights. Therefore, this analysis follows Prahalad’s call for “new and creative approaches [that] are needed to convert poverty into an opportunity for all concerned. That is the challenge.” (Prahalad, 2010, p. xv).

Thus, an analysis of the applicability of NOS for the BoP in emerging markets is the goal of this thesis. A conceptual classification of NOS is developed and the BoP as potential market is identified to enable this analysis. The applicability is investigated through an identification of successful business concepts in developed and emerging markets and an imaginary transfer of concepts from developed to emerging markets, based on previously identified entry potentials.

1.2 Course of Investigation

In order to base the analysis on a solid conceptual framework, first, the shift from a goods-dominated (G-D) to a service-dominated (S-D) logic and the connected concept of value co-creation is demonstrated referring to existing literature. Furthermore, the concept of NOS is characterized and defined as conceptual framework for the following analysis. Moreover, a typology of NOS is developed to systematically categorize existing concepts. Second, the BoP is identified as potential target market for the application of NOS by defining and characterizing the market perspective and referring to underlying market data. Special aspects to be concerned while doing business at the BoP and specific needs of BoP consumers are also elaborated on for the applicability of NOS. Third, to systematically transfer the concept, successful NOS business models in developed markets are analyzed and classified as well as successful concepts at the BoP based on the developed conceptual framework to demonstrate current developments. Here, additionally, market entry potential through possible shortcomings is investigated. Based on this potential market entry wedges, identified concepts are transferred from developed markets to the BoP. Finally, implications for different stakeholders are derived, limitations and future directions elaborated, and the results of the analysis summarized in the concluding part of this thesis.

2 Concept of Service-Dominant Logic and Non-Ownership Services

2.1 The Shift from Goods-Dominant to Service-Dominant Logic

In the previously mentioned body of works, Lusch and Vargo (Vargo & Lusch 2004a, 2004b, 2006, 2008a, 2008b, 2011b; Bolton et al., 2004; Lusch, Vargo, & O’Brien, 2007) developed a new fundamental paradigm for marketing science: the service- dominant logic. This widely discussed and acknowledged new perspective of markets and transactions will be used as conceptual basis for the analysis, and is thus presented in this section. An overview of underlying literature explaining and defining theories and elements Lusch’s and Vargo’s work is based on is summarized in Table 6 (p. 77).

The service dominant logic has been developed in the presence of the so far valid paradigm of a goods-dominant logic, which evolved out of basic economic understanding and principles (Vargo & Lusch, 2004a): In the goods-dominant logic (G- D logic), the sense of economic activities has been the production and distribution of units of output, which have primary been tangible goods (Vargo & Lusch, 2011b). During the production process, goods are loaded with value, which represents utility to the user or consumer. The reason for firms to exist is the production of products, i.e. value-laden goods. Efficiency in the production process and distribution, and thus profit maximization is the primary goal of firms (Vargo & Lusch, 2004a). This results in product standardization efforts and production separate from the market place. In the case of non-direct consumption, products can be inventoried (Vargo & Lusch, 2011b). Suppliers and producers are involved in value or supply chains, generating value within the process of production (Porter, 1996). Within the exchange of goods for money or equivalents, value is delivered in form of utility gained from products. The consumer is defined as value de-constructor (2011b), “consuming” the created value.

Despite this theory, as Vargo and Lusch (2004a) define, there are several reasons which demand a new logic of market transactions and value creation: “The focus is shifting away from tangibles and towards intangibles, such as skills, information, and knowledge, and toward interactivity and connectivity and ongoing relationships. The orientation has shifted from the producer to the consumer” (p. 15). Furthermore, the “focus is shifting from the thing exchanged to […] the process of exchange” (p. 15). Additionally, limitations of the G-D logic emerge, as goods themselves are not the only reason for a purchase decision. It is rather the connected benefit, or “service” gained from the product (Vargo & Lusch, 2004a). Intangibles, such as brands, self-image, or social connectedness also play a major role (Vargo & Lusch, 2011b). Another aspect is a different perspective on the creation of value, which is rather co-created in a mutual process than embedded into simple goods (Vargo & Lusch, 2004a).

In order to introduce their new logic and basis for a paradigm shift, which is based on several schools of thought as summarized in Appendix E (see p. 90), Vargo and Lusch (2004a) clearly separate goods-dominant from service-dominant logic (S-D logic) by distinguishing the role of resources (operand vs. operant) in the respective conceptual frameworks. The S-D logic can be fundamentally delimited from the G-D logic in six dimensions, namely (a) the primary unit of exchange (goods vs. specialized competences), (b) the role of goods (“end products” vs. “embedded knowledge”), (c) the role of the customer (recipient of goods and value de-constructor vs. applicant of operant resources and value co-creator), (d) the determination and meaning of value (determined by producer as “exchange-value” vs. perception by the consumer as “value- in-use”), (e) the firm-consumer interaction (transaction partners vs. active in relational exchanges and co-production), and (f) the source of economic growth (consumer and producers surplus vs. learning and acquisition of new operant resources) (as Appendix F summarizes; see p.92). Additionally, Vargo and Lusch (2004a) developed eight foundational premises (FPs) to clarify their idea of the S-D logic, summarized in Table 7. Here, they further elaborate on the arguments, that service instead of goods is the unit of exchange (FP 1), which might be hidden by the process of indirect exchange, as “service” (benefit/utility) is co-created in the use of products, incorporating knowledge and skills (FP 2, FP 3). Since value is generated in a mutual process, the consumer is always a co-creator of value (FP 6), and a firm works as facilitator of value propositions (FP 7). This knowledge focused exchange and value co-creation also classifies all economies as service economies (FP 5) and knowledge is the key to competitive advantages (FP 4). Generally, it follows that a service-centered view is customer orientated and relational (FP 8). Concluding, this first argument of S-D logic states the resource based differentiation of the G-D and the S-D logic and turns the focus towards a co-creation concept of value, based on exchange of specialized knowledge instead of goods. In subsequent works, this basic argument has been refined: In a first reaction, leading scholars of service research comment and evaluate on this new thought (Bolton et al., 2004), critically reflecting the respectively made arguments. Vargo and Lusch (2004b) clearly distinguish services from service. While in the G-D logic services are seen as minor category of products (intangible), and the Intangibility, Heterogeneity, Inseparability, Perishability (IHIP) criteria are used to separate them from products (the IHIP discussion is elaborated in more detail in 2.3), service in the sense of S-D logic is defined as the use of competence for the benefit of the opposite party and thus includes the direct or indirect application of knowledge and skills (Vargo and Lusch, 2004b). Vargo and Lusch (2006) add a ninth premise, capturing the idea that value creation happens on a basis of networks rather than in a sole mutual process, such that social and economic actors become resource integrators (FP 9). Effects and development steps based on the ongoing transition (summarized in Table 5) and responses to arguments and ideas made by fellow scholars are stated in Lusch and Vargo (2006). Lusch, Vargo and O’Brien (2007) further examine practical implications of the S-D logic and propose the idea of “market with” as further evolutional step of market orientation, connected to the principal of value co-creation. In Vargo and Lusch (2008a) next to a redefinition of the previously developed FPs, a tenth FP is developed, stating that, as value is co- created in a network based process by the consumer, the created value is uniquely and phenomenologically determined by the beneficiary (FP 10). This results in the statement that value is “idiosyncratic, experiential, contextual, and meaning laden” (p. 7). Vargo and Lusch (2008b) as wells as Gummesson et al. (2010) adapt ideas and arguments and examine on a generalization of the service concept, especially the practical application towards marketing disciplines, concluding that “service is a simple, yet powerful and multifaceted construct not only to characterize emerging and converging marketing thought, but also to accurately inform and motivate the associated research, practice, and public policy” (Vargo & Lusch, 2008b, p. 36). A holistic market and transaction perspective, based on the service concept, is given in a recent work of Vargo and Lusch (2011a). Maglio and Spohrer (2008) prove practical relevance by phrasing S-D logic as basis for “service science”.

2.2 Value Co-Creation through Service

Important Elements of the S-D logic for the Special Case of Non-Ownership Services.

After generally displaying the conceptual framework of service-dominant logic, two detailed aspects of this theory will be highlighted: the concept of “value-in-use” and the concept of “value-in-social-context”. Beforehand, three major characteristics of the service dominant logic are summarized from the previous section, namely (a) the distinctive use of operant instead of operand resources (Vargo & Lusch, 2004a), (b) the definition of service as application of knowledge and skills and primary unit of exchange (e.g. Vargo & Lusch, 2006), and (c) the creation of value is an involved actor based co-creational process, creating unique and contextual value out of integrated resources (Vargo and Lusch, 2004a, 2008a). This value-creation process is the point of focus in this section. Integrated in the first definition of S-D logic (Vargo & Lusch, 2004a), a discussion based on existing literature, stated by Dixon (1990), separates the concepts of “value-in-exchange” (G-D logic) and “value-in-use” (S-D logic). While in the theory of value-in-exchange, utility is gained by the user through the acquisition or the exchange of goods, value-in-use demands the application of goods, defined as “embedded knowledge”, to generate a service for the beneficiary and thus co-creates value (Vargo and Lusch, 2004a). 3

Value-in-use. The co-creational process plays a major role in the concept of service- dominant logic and is stated within early S-D logic literature (Vargo & Lusch, 2004a, 2004b). A significant emphasis is put on the concrete use of operant resources to gain service (benefit). This happens during the co-creation of value-in-use, a mutual process involving consumer and supplier, in which both facilitate value creation through the supply of resources (operant). These are applied by the consumer to actually create value-in-use (Grönroos, 2008). Thus, FP 5 and FP 6 emerge and service is defined as the application of knowledge and skills (Vargo & Lusch, 2004, 2006). Furthermore, Grönroos defines the roles of the supplier as “value facilitator by providing customers with a foundation for their value creation in the form of resources (goods, services, information or other resources)”, and the consumer as “value creator during value- generating processes (consumption) where other (necessary) resources available to customers and skills held by them (customer’s value foundation) are added and where value fulfillment takes place” (p. 306). This also defines the consumer or the act of consumption as place of value creation.

Value-in-context. Enlarging the idea of the mutual value generating process into a broader perspective, the aspect of resource facilitation based on networks is captured in FP 9 (Vargo & Lusch, 2006). Vargo (2008) states that value-in-use should be re- interpreted as “value-in-context” since the facilitation of resources in and the reach of value created is not limited to the supplier and customer, but always interconnected to systems and networks around these two direct participants of the process. Vargo, Maglio, and Akaka (2008) elaborated on this concept and developed a model, summarized in Appendix G (p. 94), depicturing the interaction of value generating actors with the service systems around them. Vargo (2009) raises the aspect of an institutional and relational perspective, as service ecosystems can be identified, providing a basis for continuous value creation and market perspective. This market perspective is further analyzed by Vargo and Lusch (2011a), who generalize the value creation process and the concept of service as primary unit of exchange into a market theory. This can be connected to Storbacka and Nenonen (2011), who define markets as evolving systems, dynamically changing, permanently offering new opportunities for value co-creation.

Value-in-social-context. A special aspect of the relational, institutional and ecosystem based co-creation process of value is the social perspective. This is examined in detail by Edvardsson et al. (2011), aiming at the intersection and connection of network based value creation concepts and social constructivism. As they point out in their analysis, “value co-creation necessarily follows social structures and takes place within social systems in which the actors (customers and companies) adopt certain social positions and roles as they interact and reproduce social structures” (p. 330). A schematic framework is summarized in Appendix H (p. 95), aligned to the ecosystem theory, pointed out by Vargo (2009) and Vargo et al. (2008). As result of the application of social constructivism concepts on the S-D logic, Edvardsson et al. develop four prepositions, stating that (a) “value has a collective and intersubjective dimension and should be understood as value-in-social-context” (p. 333), (b) “the way in which resources are assessed depends on the social context” (p. 334), (c) “service exchange and value co-creation can be asymmetric” (p. 335), and (d) “Service exchanges and actors’ roles are dynamic in adaptive service systems” (p. 336). Additionally, Vargo and Lusch (2008a) point out the individuality and the subjective measurement of the actually generated value by the involved actors, underlining the complexity and the idiosyncratic character of the value generating process based on network wise facilitated resources (FP 10).

2.3 Non-Ownership Service Definition, Characterization and Typology

In order to develop a categorization and a systematic typology of NOS, first, a clear characterization of services based on existing literature will be discussed. Second, nonownership as distinctive criterion between services and goods and the thus evolving service categorization will be displayed, and reasons and justifications for the choice of NOS are investigated. Third, derived from the elements of an existing definition, NOSs are classified into a framework of a systematic typology, based on arguments and theory stated within existing literature as well as practical examples, including best practices and innovative business models observed.

2.3.1 Service Characteristics

Vargo and Lusch (2004a, 2004b, 2006) underline the argument that in the S-D logic the term “service”, not “services”, has to be used, as services stems out of the terminology of the G-D logic, used for the differentiation between goods and services (inferior goods, not tangible). However, as neither value creation nor the service concept but distinction of goods and services is in the focus of this part of the section, the scholar discussion about the IHIP criteria is analyzed. IHIP has also been evaluated and accepted by Vargo and Lusch and classified as helpful to characterize value and value creation in the sense of their concept (Vargo & Lusch, 2011b). An extensive, in detail literature review conducted by Zeithaml et al. (1985), which has been widely cited, was the first high-angled perspective analysis revealing IHIP criteria as clear distinction between goods and services, initially defining its elements: (I) intangibility, stated as the fundamental difference between goods and services emerging out of the definition of services as “performances”; (H) heterogeneity, underlining the non-standardized character of services and the variance in value or quality level generated within the process of services, including the customers perception; (I) inseparability of production and consumption, puts emphasis on the fact that in the contrary to goods, which can be produced away from the market, distributed and consumed in different points in time, the production and consumption of services happens in an interactive, simultaneous process; (P) perishability, describes the inability to store services due to their definition as performances, an individualized, interactive process involving the consumer, which causes them to be fixed in a point of time (Zeithaml et al., 1985, p. 33-34). Edgett and Parkinson (1993) refined and further elaborated on, but also confirmed the IHIP criteria, based on an extensive literature review on the existing works at this point of time.

Since these two foundational works mainly constituted the IHIP characterization of services, a vivid discussion about their generalization and applicability and about the service concept in general has developed in the field of service marketing. Edvardsson et al. (2005) analyzed the literature concerning this debate and interviewed service marketing experts to answer the questions about the definition of the services and about the characterization of services. As a first result, the process nature of services, including three core elements, namely (a) activities, (b) interactions, and (c) solutions to customer problems, which is most often described by the phrases “performances”, “processes”, and “deeds” is identified from literature and experts opinion. Second, the discussion about the generalization and the applicability of the IHIP characterization of services (market offerings) is reduced to the statement that the concept has to be applied carefully and with respect to the respective circumstances to be used correctly, as numerous exceptions from the initial definitions have been developed in literature and stated by experts. Concluding that next to the classification of services as market offerings, service exists as perspective of value co-creation as value-in-use, Edvardsson et al. (2005) adapt the idea of S-D logic. Connecting these two ideas, (1) the approach of a selective and precise application of IHIP to characterize services and (2) the implications of the S-D logic, Möller (2010) systematically summarizes the criticism and adapts the IHIP characterization, mirrored against the service concept and the value creation perspective of S-D logic, in her refinement of the FTU model (Möller, 2008). This “FTU framework allows IHIP to be assigned to a specific aspect of services and not to services as a single entity” (Möller, 2010, p. 364)4. Based on the FTU framework, which subdivides service provision into the three stages of facilitation, transformation and usage, (a) perishability applies to the facilitation of provider resources, which perish if not activated. Moreover, (b) heterogeneity applies to the integrated consumer resources and (c) intangibility applies to the performance conducted by the provider. Also, (d) inseparability applies to the transformation process, which demands the integration of both, the consumer’s and the provider’s resources. Thus, the IHIP characterization of services can still be used as distinction criteria of goods against services, as a “distinction and with it the characteristics of services and goods are still necessary”, since a purchase decision of goods or the interaction with the customer within the service process results in “substantial difference[s]” in its implications (Möller, 2010, p. 365).

2.3.2 Non-Ownership and Non-Ownership Services

Within the criticism of the IHIP characteristics and alternative approaches of services characterization analyzed by Möller (2010) and Edvardsson et al. (2005), one especially interesting concept is stated: the distinction between goods and services based on the transfer of ownership rights, brought forward by Gummesson and Lovelock (2004). According to their argumentation, also referring to an extensive analysis of the generalization and potential shortcomings of the IHIP characteristics, “marketing transactions that do not involve a transfer of ownership [services] are distinctively different from those that do [goods]” (Gummesson & Lovelock, 2004, p. 34). That is, stated differently, a good always incorporates the transfer of ownership rights, whereas services do not encompass any transmission of ownership. They rather “involve a form of rental or access in which customers obtain benefits by gaining the right to [(a)] use a physical object, [(b)] to hire the labor and expertise of personnel, or [(c)] to obtain access to facilities or networks” (p. 34). Out of this perspective, five major categories can be derived: (1) rented goods services, (2) place and space rentals, (3) labor and expertise rentals, (4) physical facility access and usage, and (5) network access and usage. Mixed forms of these categories can also occur (Gummesson & Lovelock, 2004). Furthermore, this access or rental service perspective leads to the following key implications which are to be highlighted: (a) Goods can be the basis of services as in rented goods services, which is especially beneficial, when very specific needs occur or the time horizon of ownership is determined as inappropriate by the consumer. Aiming at the differentiation of the aspects of (b) time considerations and (c) pricing between services and a ownership decision, services can offer lower absolute costs of ownership but the same generation of service (value creation) compared to ownership. Additionally, (d) services offer the opportunity to share scarce and expensive resources, thus meet challenges and demands in both, developed and developing markets (Gummesson & Lovelock, 2004). The combination of the category of rented goods services and the learnings out of the implications lead to the concept of NOS: The transfer of ownership rights of a good is replaced by a rented goods service, that is, a temporary access (Gummesson & Lovelock, 2004). In a recent study, Möller and Wittkowski (2010) show the current relevance of these services, proved by successful business models, and investigate the motivations and justifications for the evolving forms of “consumption without ownership” (p. 176). Based on an analysis of “burdens of ownership” (Berry and Maricle, 1973), which encompass (1) “risks with regard to product alteration and/or obsolescence”; (2) “risks with regard to making an incorrect product selection”; (3) “responsibility for maintenance and repair of the product”; and (4) “the full cost of goods for which a consumer has only infrequent use” (Möller & Wittkowski, 2010, p. 179), these burdens can be stated as justification for nonownership consumption, in agreement with Gummesson and Lovelock’s (2004) argument of efficient and less costly use of resources. Furthermore, based on an investigation of potential motivations, the negative influence of “possession importance”, and the positive influence of “trend orientation” and “convenience orientation” on the demand for NOS has been concluded by Möller and Wittkowski (2010) as result of an empirical preliminary study.

2.3.3 Definition of Non-Ownership Services

After having demonstrated the importance of the distinction between services and goods and having systematically derived the concept of NOS, a clear categorization of NOS is required to systematically transfer the business concept. Therefore, a definition which is adapted as definition of NOS for this analysis is investigated. In accordance with the above stated ideas Schäfers and Moser define NOS as “an alternative form of consumption in which the acquisition and possession of an object is replaced by temporary access to that object” (Schäfers & Moser, 2011, p. 1). It contains four key elements: (1) the definition of NOS alternative to acquisition and possession; (2) the limitation in time and space as expressed by the characterization of being temporary; (3) the necessity of having access to an underlying object; and (4) the reference to the underlying object or asset and its value creation itself.

2.3.4 Characterization and Terminological Differentiation of Non-Ownership Services

Tangible vs. Intangible Ownership. Out of the first key element, the alternative to the acquisition and possession of an object, it emerges that a transfer of ownership rights has to occur in the first alternative, which is then replaced by a service. Thus, the different forms of ownership rights are to be inspected to clearly characterize the alternative form of consumption, the NOS. In the property rights theory (Eggertsson, 1990; Furubotn & Pejovich, 1972), four different rights to a resource can be distinguished: (a) the right to use the resource (ius usus), (b) the right to maintain the gained return out of the use of the resource (ius usus fructus), (c) the right to alter shape, substance, and location of the resource (ius abusus), and (d) the right to surpass one or more of these property rights (ius successionis). Ownership now emerges out of these property rights if one actor combines all property rights at the same time (Haase, 2008; Schwab, 2007). As Haase and Kleinaltenkamp (2011) show in their adaption of the property rights theory, ownership and market transactions to the S-D logic, with service as primary unit of exchange and resource integration for context-based value co- creation, two major types of exchanges evolve: As summarized in Appendix K (see p. 98), actors can decide, if they want to enter a purchase contract and gain full ownership via obtaining all property rights (type I in which the actor is owner and user of a resource) or enter a rental or leasing contract, gaining single property rights (non- ownership) and render service from these type II in which the actor is not owner but user of a resource). This characterizes the alternative aspect and reinforces the possession and acquisition aspect in more detail. As Haase and Kleinaltenkamp point out, purchase contracts majorly focus on operand resources, so in the sense of this analysis the investigation will be limited to the alternatives of primarily “tangible” operand resource purchase decisions, whereas digital goods such as data (movie, music) are included, while abstract intangibles (e.g., rights, patents) are left out.

“True” Ownership vs. “True” Services. Furthermore, the alternative characteristic to acquisition and ownership also demands a distinction from services (operant resources). The importance thereof has been stated above within the discussion of service characteristics and explicitly phrased by Möller (2010). Gummesson and Lovelock’s (2004) non-ownership distinction criteria and the adapted form of the IHIP characteristics in the FTU model (Möller, 2010) are helpful concepts in order to differentiate this term. This results in a terminology for this analysis that “true” ownership is distinguished from “true” services. “True” ownership has to be understood as clear purchase decision, not including mixed forms of service agreements. “True” services are to be understood as all forms of service which cannot or not directly be replaced by ownership (cf. Gummesson and Lovelock’s service categories which give definitions of these “true” services, except goods rented services, which result in NOS).

“True” & “Pure” Ownership vs. Informal Non-Ownership. As a third point, leaving out all forms of “true” services, “true” ownership has to be separated from the so far included shared ownership and other forms of informal non-ownership. As Belk (2010) analyzes, informal non-ownership, such as sharing or borrowing, is a common way of non-ownership consumption, occurring on a frequent and familiar basis in social institutions such as families or friendship and other social relations. Botsman and Rogers (2010) also show the alternative of collaborative consumption (e.g., shared ownership, public or common, or “publicized” goods) analyzed with regard to “attenuated” (diluted) property rights by Haase and Kleinaltenkamp (2011). These two options have to be excluded, as NOS serve as a third party service offering, implemented as an alternative to a single consumer purchase and consumption decision. So for this analysis the terminology of “true” and “pure” ownership is used. True and pure ownership describe the unshared obtainment of all four property rights by one single actor, gained through the formal process of a purchase or acquisition contract.

These distinctions result in a binary alternative decision of true and pure ownership or its substitution by NOS. It is important to note that this binary decision is limited to non-perishable underlying resources not destroyed or consumed during the process of use and value creation. Since, as Möller and Wittkowski (2010) and Haase and Kleinaltenkamp (2011) point out, NOS include the transition of one or more property rights from one actor to another (for example ius usus in an ordinary car rental contract, whereas ownership remains with the original beholder). One further adaption is made with regard to the terminology used in this analysis. While Gummesson and Lovelock use the term “goods” within their category of goods rented services and Schäfers and Moser use the term “object” in their definition, these two descriptions might be limited to tangible things within the normative sense of their words. Botsman and Rogers use “product” in their NOS categorization of “product service systems”. However, as products are referred to as result of economic, value creating activities and in the wider sense of NOS also unprocessed things can be rented (e.g., land), a different terminology is chosen for this analysis. Since “assets” are defined as both tangible and intangible objects symbolizing worth for the beholder and thus include more abstract ideas of networks, information and also digital resources, Botsman and Rogers “product service systems are adapted to “Access to Asset Systems” (A2AS) as NOS-based alternative to true and pure ownership.

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Figure 1 Schematic Illustration of NOS Characterization (own production)

2.3.5 Typology of NOS

Short Term vs. Long Term. Based on the above stated characterization and the residual three key elements of the definition, a typology of NOS is developed. The second key element, the limitation in the temporal dimension of access (expressed by the term temporary) implies a distinction of short term from long term time horizons. Gummesson and Lovelock (2004) already mention the difference between rental and leasing contracts with regard to the contract period. Haase and Kleinaltenkamp (2011) also refer to legal implications which evolve out of differences in time horizons. Practical examples observed also indicate this differentiation, as for example leasing contracts for cars are usually entered for several years, while rental services, such as Boels or BMW DriveNow5, offer rentals for days or even minutes.

Agent-to-Agent vs. Agency-based. When considering the dimension of time, the dimension of space implicitly is involved. Even though Grönroos (2008) defined the consumer as place of value fulfillment in the value co-creational process, the actual place of service market offerings can differ. Derived from existing business concepts, agency-based and agent-to-agent concepts can be identified. In agency-based concepts, the asset can be accessed at and has to be returned to a fixed location, such as with ordinary car rentals. This limits the space dimension of service market offerings to the location of the respective agency (it is recognized that through digital services this fixation of locations is diluted as transactions for car rental services can also be made online, for example, but it has to be underlined that the actual access, so the provision of service is bounded to the physical asset [inseparability]). Contrarily, in agent-to-agent concepts the asset is passed on from one user to another, such that no certain fixed location for the asset can be defined, but rather an area of market offerings. This results in an implied idea of ubiquity within this “market,” for example displayed by zipcar in the city area of Washington, D.C6. This differentiation is captured in the dimension of independence. It has to be noted that agent-to-agent concepts required standardized goods and standardized usage of goods, so that it is only applicable for a limited number of offerings (e.g., car sharing).

Real vs. Digital Access. The third key element of having explicit access to the respective asset enables a differentiation in terms of how this access is conducted. While a significant number of NOS concerns the access to a real object and thus real (physical) access is required (e.g., tool rental services), recently, a number of digital NOS concepts have developed, replacing physical assets by digital objects. Examples are given by Netflix or maxdome7, replacing object based NOS offerings such as DVD rentals by online streaming offers or access rights to databases. Additionally, digital assets such as software or games have been replaced by subscription services (e.g., Microsoft Office 3658 ). Differences with regard to three aspects emerge: the form of access significantly influences the consumer behavior and the strategies of the respective businesses (Loginova, 2009; Riegner, 2007; Danaher et al., 2003; Porter, 2001), for digital access another underlying asset (e.g., PC or smart phone) is required, and the geographic reach (nationally or even internationally) and the presence of these offerings (“24/7”) are influences by online-based transactions. So a differentiation between real (physical) and digital access is assumed to be necessary Simple “value-in-use” vs. “value-in-social-context” . The fourth and final key element of the definition, the underlying asset and the derived value creation, differ in their applied meaning for the consumer. Based on the above stated analysis of the value co- creation process in the S-D logic within the broader concept of value-in-use, the ideas of value-in-context and especially value-in-social-context (Edvardsson et al., 2011) were identified. This leads to a distinction inside of the concept of NOS offerings, ranging from “simple value-in-use” to “value-in-social context”. Simple “value-in-use” can be phrased by the idea of a simple tool rental for a specific need where most of the value is created by the actual application of the integrated resources. “Value-in-social-context” can be depictured by the rental of a special and often highly appreciated car, symbolizing social status and generating admiration from peers, such that the majority of value is mainly co-created in social context and by network based resource integrations, rather than by the actual use (i.e. driving) of the integrated resources. Since no clear cut between value-in-use and value-in-social-context can be made but rather both value prepositions can be present simultaneously, a continuum is used to indicate which of those two value types is prevailing in the respective case. Expressed more abstract, this continuous differentiation is based on the level of reach and on the intensity of social constructivism of integrated resources and the use of networks or ecosystems and institutions in the process of value co-creation.

Differentiation through Characteristics of the underlying Asset. The underlying asset also enables a second level of NOS classification, since, next to the mentioned dimensions, the underlying asset itself offers potential to differentiate existing NOS offerings. The asset’s properties (1) price, (2) quality, (3) technology, and (4) image and brand are chosen to distinct otherwise similar NOS concepts in more detail. A practical example is given by the wide range of car rental services, especially modern car sharing concepts, which partly show a similar typology, but significantly differ in the offered assets, so for example BMW DriveNow and flinkster (higher class BMW cars versus various middle class car brands). Another example would be tool rentals provided by DIY-markets like Praktiker, offering standardized tools often from owned retail brands, in comparison to Boels, offering high class equipment also for professional applications. Appendix L summarizes the above described typology and differentiation.

illustration not visible in this excerpt

Figure 2 Schematic Illustration of NOS Typology (own production)

3 Base of the Pyramid - a Potential Target Market

3.1 Defining the Base of the Pyramid

The idea to classify consumers into a framework of differently leveled segments of a pyramid according to purchasing power and consumer behavior, and respectively resulting implications for specific adaption of the business’ marketing and sales strategy, can originally be found in Zeithaml et al. (2001). However, Prahalad and Hammond (2002) were the first to publish the idea of the BoP (BoP) in their widely cited article Serving the World ’ s poor, profitably, describing a significantly uncovered and overseen market of large scale of about 4 billion people with critically small purchasing power per customer, i.e. approximately $2 per day. Prahalad (2004) refined and further discussed the thought of the BoP concept to attenuate the effects of poverty by private sector interventions in his milestone work Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits. According to his argumentation, the aggregated purchasing power of this large scaled market offers potential profits especially for multinational companies. Simultaneously, the chance to alleviate poverty through mutual benefits arises, as prosperity can be created by selling specialized products to the poor. In the course of numerous following publications, the discussion about an exact definition of the “Base of the Pyramid” (Hart & Christensen, 2002) evolves. Definitions differ from four billion people with an annual income of less than $2,000 at purchasing power parity conditions (PPP) (Prahalad & Hammond, 2002), over four billion people with less than $2 per day (Prahalad, 2004) to four billion people with less than $1,500 (Prahalad & Hart, 2002), whereas Hammond et al. (2007) refer to the definition criteria of per capita income of less than $3,000 in locally adjusted purchasing power. In contrast, estimates about a number of 600 million people exists (The Economist, 2004) as well as a definition criteria of an average daily consumption rate of $1.25 (Chen & Ravallion, 2004). Due to those extensively differing numbers, criticism about the lack of a unified definition as well as a simultaneously applied measuring method has risen (Karnani, 2006, 2007) implying that this can lead to over- and underestimations of the true market size which might in turn lead to imprecise implications. However, the $2 per day criteria (PPP) has been found most widely used in literature (Karnani, 2007; Pitta et al. 2008) and is referred to as general criterion. Thus, BoP markets in the sense of this analysis, are referred to as worldwide occurring, large scale, low level income markets, defined by a maximum of $2 per capita income per day based on PPP calculus.

3.2 Market Data

To tie in with the discussion in the previous section and based on the distinction criterion of a $2 per capita income (PPP) per day, selected empirical data is presented in this section to indicate where and under which conditions the BoP consumers are located. Even though Karnani (2006) critically mentions the difference between PPP conditions and actual market rates and Hammond et al. (2007) also prefer locally adapted exchange rates, this calculation method is widely used by economic data providers to ensure comparability, quality and validity of underlying data (e.g. World Bank) and is thus accepted for this analysis as generally acknowledged. The data presented is sourced from the World Bank Data Base9 which serves as widely appreciated and trusted data provider for scholarly research (The Economist, 2004; Guesalaga and Marshall, 2008). The following indicators have been chosen for analysis to enable a detailed view on the BoP population, as they cover the defined $2 per capita per day income criterion and also show the differentiation to the $1.25 per capita per day income segment as referred to by Chen and Ravallion (2004): (a) the poverty gap at $1.25 a day (PPP) in percent, (b) the poverty gap at $2 a day (PPP) in percent, as well as (c) the poverty headcount ratio at $1.25 a day (PPP) in percent of population and (d) the poverty headcount at $2 a day (PPP) in percent of population. Additionally, as poverty has to be seen relatively, based on local conditions, and can hardly be compared on a global scale, (e) the poverty gap at national poverty line in percent and (f) the poverty headcount at national poverty line in percent of population is inspected. This measure has not been concerned in BoP literature lately and is thus included in this analysis to emphasize the relative perception and evaluation of poverty and draws focus on this difference. Furthermore, general economic data shall complete the BoP perspective by stating (g) GNP per capita at PPP current international dollar, (h) GNI per capita at PPP current international dollar, as well as an (i) current population overview. Hammond et al. (2007) analyze concrete estimations of market volume and scale per region and center the BoP mainly in Africa, Asia, Eastern Europe and Latin America, differentiating in its rural (Africa and Asia) or urban (Eastern Europe and Latin America) orientation. Despite that, the analysis of presented data is conducted qualitatively and in terms of population percentages, as potential shortcomings of monetary business case projections and calculations have been criticized as mentioned above (Karnani, 2007).10

Contrarily to Prahalad’s (2004), 2.75 billion instead of four billion individuals live at a $2 income rate per day according to recent World Bank data. The highest total figure can be found in South Asia with about 1.1 billion people (approx. 42% of whole BoP population), followed by 750 million living in East Asia and Pacific (accounting for ca. 28%) and 622 million sub-Saharan Africans (23%). While the poverty gaps of $1.25 and $2 daily income can be seen as indicator for the extent and impact of poverty within one society, and show a nearly linear reciprocal relation to GDP and GNI per capita data, the main focus is centered on headcount statistics. The percentage and absolute figures show that an significant part of the as BoP classified population with less than $2 per day is also categorized as living with less than $1.25 per day, hence suffering from extreme poverty. Even though Guesalaga and Marshall (2008) and Subrahmanyan and Gomez-Arias (2008) argue that creative and innovative BoP consumers also urge for satisfaction of higher needs according to Maslow’s Pyramid, relational to their income, the largest amount is spend on basic needs. Consequently, the less money available, the more has to be spent on vital demands. This potentially lowers the market scale of the BoP concept and evolves a different but interesting idea of the Top of the Bottom of the Pyramid (ToBoP). Individuals living at a daily income of more than $1.25 but less than $2 per day might be seen as “true” BoP consumers, providing enough purchasing power to acquire additional goods, but still living at the minimum of consumption (Subrahmanyan & Gomez-Arias, 2008). In Table 3, absolute and percentage figures of this ToBoP concept are stated, summing up to an absolute potential market of 1.27 billion individuals, mainly concentrated in South Asia (530 millions) and East Asia and Pacific (430 millions). Respective data per country (see in Table 4) underlines this idea, as often the majority of the $2 headcount percentage term falls back on a high $1.25 headcount ratio (e.g., Burundi, Liberia, or Chad), especially in substantially low income nations. However, moderate income societies show a larger proportion of the ToBoP population (e.g., Panama, Venezuela, or Brazil), where only a minor part of the BoP is segmented into the below $1.25 category.

Additionally, country data shows notable information about relative poverty (Foster, 1998). While the $2 per day per capita income at PPP rates is used as basic criterion to enable comparability and a unified measure, local differences and circumstances impose another aspect on the poverty perspective (Foster, 1998). This has also been the reason why Hammond et al. (2007) refer to locally adapted exchange rates in their analysis. The national poverty line, here used as one indicator, defines poverty relative to the costs of living and average income within a nation. Thus, it yields a locally adapted and differentiated concept of poverty11 and creates a specialized measure. Positive and negative deviations of the $2 poverty headcount ratio to the national poverty line headcount ratio imply that, next to PPP and market exchange rates differences (Karnani, 2007), also local prices and relative costs have to be considered. This tosses the focus on an important aspect to the BoP concept discussion, as next to market size and purchasing power, the local meaning of this standardized purchasing power criteria has to be inspected (e.g. the concept of Buying Power Index, Guesalaga and Marshall, 2008).

3.3 Mass Market vs. Multiple Market Niches

According to the discussed definition and market data examination of the BoP market, the question arises, how this market, defined as the population with a per day per capita income of $2 (at PPP), has to be categorized. The categorization as either mass market or multiple market niches, which implicitly means segmentation, becomes relevant, as it implies significant factors for strategic and marketing decisions (Steenkamp & ter Hofstede. 2002; Foedermayr & Diamantopoulos, 2008).

On the one hand, the large relative scale of BoP markets, on first sight, might tend to raise the idea of a categorization as mass market, since a mass market is defined as “a market that covers substantial numbers of the population”12. Referring to the previously analyzed market data, this would hold true for a majority of the presented national market samples, since a significant percentage of their population falls under the $2 (at PPP) income headcount criterion (Table 3). Also, earlier BoP literature consistently refers to “the” BoP (e.g., Prahalad & Hammond, 2002; Prahalad & Hart, 2002; Prahalad, 2004; Karnani, 2006) and relies on the argument of substantial aggregated purchasing power, indicating a unified market categorization.

On the other hand, the geographic spread of BoP market locations, product specifications for the BoP (e.g. D’Andrea et al., 2010; Viswanathan & Sridharan, 2012), and variations in the definition of poverty or applicable purchasing power (Karnani, 2006; Guesalaga and Marshall, 2008) evoke the idea of a categorization into multiple market niches. Market niches are defined as “a very specific market segment within a broader segment. A niche market involves specialist goods or services […which…] may have a specific requirement not satisfied by standard products.” Furthermore, “niche markets are often targeted by small companies that produce specialized goods and services”13. Additionally, Schäfers (2010) notes that market niches are defined by the two criteria of relative specificity as well as the relative offer diversity with comparable specificity [ translated ], highlighting the relativity character of market niches (p. 81). Particularly, the specialized goods and services for the BoP and the small business approaches in these markets are widely discussed in literature (e.g. Hammond et al., 2007; Prahalad, 2010; Karnani, 2007; Nakata & Weidner, 2012), which supports the multiple niche argument. The wide spread of the defined market population into various nations and so existing cultural differences should also be taken into account (Steenkamp & ter Hofstede. 2002). Moreover, as discussed in more detail in a later section (see chapter 3.5, p. 27), the BoP proves to be highly diverse in needs and local circumstances, such that multiple relative niches can be identified. As one indicator of relative differentiation, the above discussed relative definition of poverty can be taken as an example. Furthermore, approaches to segment the BoP market concept in concrete submarkets can be found in literature: For example Rangan et al. (2011) propose segmentation by living standards and the individual’s value-creation role. Living standards are subdivided into income levels of low income ($3 to $5 per day), subsistence ($1 to $3 a day), and extreme poverty (below $1 per day); the role in value- creation encompasses consumers, co-producers, and clients. Hammond et al. (2007) as well as Prahalad (2010) also elaborate on a distinction in between the BoP market segments according to income classes, and Sheth (2011) names market heterogeneity as one key characteristic of BoP markets. This leads to the conclusion that BoP markets have to be seen as multiple market niches within a large scale population rather than one mass market.

3.4 Doing Business at the Base of the Pyramid

3.4.1 Special Characteristics of Base of the Pyramid Markets

In addition to the previously discussed market scale and multiple market niches classification of the BoP concept, certain special characteristics regarding operations and conducting business at the BoP, stated in prevailing literature, will be highlighted in this section. As Sheth (2011) points out, these characteristics gain significant relevance as strategic decisions, concerning marketing or explicitly market orientation, have to be adopted towards these. He defines the five key characteristics (1) market heterogeneity, (2) sociopolitical governance, (3) unbranded competition, (4) chronic shortages of resources, and (5) inadequate infrastructure. Moreover, the author arguments on how these can be used as advantages through innovative strategic thinking. Especially, the shortage of resources and infrastructure characterizes and affects business decisions in BoP markets, and, putting emphasis on this fact, also defines the market ($2 poverty level). Anderson and Billou (2007) further elaborate on these two characteristics and underline their importance by adapting them into two conceptual basics in their 4As framework, namely “Availability” and “Affordability”. Turning the focus onto the population of the BoP markets, the low level of formal education, literacy, and know- how is remarkable and significantly influences decision making processes (Viswanathan et al., 2008). Additionally, BoP individuals have to be considered as both, consumers and producers, as they show a noteworthy entrepreneurial spirit and can be included into value chains (Karnani, 2008). With regard to political and overall life circumstances, it has to be considered that a substantial part of the BoP population lives in conflict areas, urban slums, or remote rural areas (Anderson et al., 2010). The absence of stable institutional networks or frameworks is another remarkable aspect of BoP markets: Instead of fixed institutions, informal networks such as social or family based networks gain a major role in the socioeconomic framework, decision making processes, and affects the business environment in multiple aspects (Danis et al., 2010; Khavul et al., 2009; Rivera-Santos & Rufín, 2010; Viswanathan et al., 2010). Inspecting the markets’ supply side, a remarkable number of case studies exists (e.g. dos Santos et al., 2009; London et al., 2010; Wood et al., 2008). These envision that the market is served by a vivid and innovative local network of entrepreneurs and local entrepreneurial efforts of multinational firms. Product and service adaption are defined as key characteristic of successfully supplying BoP markets (Kuriyan et al., 2008; v.Waeyenberg&Hens, 2008).

[...]


1 Episode „Homerrazzi“, broadcasted in 2007 on FOX, U.S.A.

2 http://www.economist.com/node/18863898 accessed on 12.01.2012

3 An elaborated distinction, based on a review of recent literature, and managerial implications of this separation can be found in Kowalowski (2011).

4 The tabular summarization of criticism which serves the FTU model as foundation and a schematic illustration of the FTU approach itself can be found in Appendix I.

5 www.boels.de, boels is an internationally operating rental services for tools and machinery and other equipment; www.drive-now.com, BMW Drive Now is an innovative car rental service.

6 www.zipcar.com

7 www.netflix.com and www.maxdome.de are both online entertainment providers offering movies and music as online streams

8 http://www.microsoft.com/de-de/office365/online-software.aspx

9 http://data.worldbank.org/ and http://www.app.collinsindicate.com/worldbankatlas-global/en

10 Table 3 summarizes the analyzed data for the named indicators per country; Table 4 summarizes the analyzed data per region. Definitions for each indicator is given in Appendix A (p. 77) and illustrations of both, income (measured by per capita GDP) and poverty (depictured by poverty headcount at $ 2 per day) per region and country are given in Appendix B (p. 80).

11 Adapted from World Bank (http://www.app.collinsindicate.com/worldbankatlas-global/en)

12 Bloomsbury Business Library - Business & Management Dictionary

13 Bloomsbury Business Library - Business & Management Dictionary

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Details

Title
Non-Ownership Services for the Base of the Pyramid
Subtitle
An Analysis of the Applicability of Innovative Business Concepts
College
European Business School - International University Schloß Reichartshausen Oestrich-Winkel
Grade
1,4
Author
Year
2012
Pages
108
Catalog Number
V193685
ISBN (eBook)
9783656188094
ISBN (Book)
9783656188391
File size
1336 KB
Language
English
Tags
Marketing, Non-Ownership Services, Business Concepts, Base of the Pyramid, EBS, Bachelor Thesis, Transfer of Business Concepts, Strategic Management, Institutional Entrepreneurship, developing markets, emerging markets, typology, characterization
Quote paper
Achim Schade (Author), 2012, Non-Ownership Services for the Base of the Pyramid, Munich, GRIN Verlag, https://www.grin.com/document/193685

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