Are the world's poor, who individually have less than $5 a day in disposable income, a viable market for new goods and services? Consider the fact that there are four billion people around the globe that fit this description and you have the start of an answer.
But businesses that want to enter this market at the bottom of the economic pyramid (BOP) must look beyond just selling products—they must find ways to create social and economic value, according to the editors of a new volume, Business Solutions for the Global Poor.
The book grew out of a Harvard Business School conference in December 2005 on business solutions for alleviating poverty. The work combines chapters from a variety of perspectives—business, academic, government, nonprofit—to examine the nature of poverty, how the poor can become producers as well as consumers, and the roles to be played by policymakers and society at large. Of particular interest to business leaders are a number of case studies of successful BOP business models.
The co-editors are all associated with HBS: V. Kasturi (Kash) Rangan and John Quelch are faculty, Gustavo Herrero is executive director of the Latin America Research Center, and Brooke Barton is a research associate. We talked with Rangan about the research and the courses he teaches on business and poverty.
Sean Silverthorne: Traditionally, it was thought that the goal of the private sector—to maximize profit—was at odds with efforts to alleviate global poverty. How do these two interests align?
Kash Rangan: At its core, the private sector has always been about value creation—producing goods and services valued by consumers, generating employment, and delivering profits for shareholders. Nothing has changed in that respect. The shift we see is in a new understanding about who the customer is. Traditionally, leading companies—both in the West and in developing countries—have operated under the assumption that the world's poor majority—those four billion people on the planet with a disposable income of $5 a day or less—were simply a non-market, just a void. Writing off four billion potential customers was short-sighted, because even if their individual incomes are tiny, collectively they represent a massive business opportunity.
But the myopia of the past toward this market is starting to correct itself. More and more companies now see the possibilities of undertaking traditional value creation activities—from sourcing to engaging the poor in production to distribution and sales—in low-income markets. To the degree that these ventures empower the poor—either by improving their quality of life (clean water, for example), providing them with productivity tools and services (cell phones, for example), or creating jobs—that's where the goals of poverty reduction and economic profit can align.
Q: One of the interesting perspectives you offer is that the global poor are not only potential consumers to be tapped; they're also potential producers as well. Could you describe some of these entrepreneurial efforts?
A: There is a lot of talk—both in this book and elsewhere—about the massive potential consumer market at the base of the economic pyramid. However, for a poor consumer, participating in the marketplace requires having cash in your pocket, which at the end of the day is all about having a job. So you could say that the drive to sell consumer products to the unemployed and underpaid may be putting the cart before the horse. We are not arguing the fact that, in some cases, much-needed, good-quality consumer goods could enhance one's quality of life, just that the pecking order from the poor person's perspective is likely to be different.
The shift we see is in a new understanding about who the customer is.
That's why we think that more companies should be looking to leverage the productive capacity of the poor as an input to business. We have several great examples of that.
First of all, Nestlé. Since World War II, Nestlé's milk has by and large been produced by thousands of small farmers in developing countries. And their supply chain efforts have gone way beyond just sourcing. Nestlé has provided the technology, training, and supply-chain investments to make it possible for the small farmer to produce good-quality milk, transport it, and sell it to the company. This makes sense for the company because it needs fresh, locally produced milk, and for the small farmer, an assured steady source of income.
Unilever is another important example. In 2003, the company's Indian subsidiary refocused its efforts on the country's rural poor in the face of growing competition from new market entrants. By training and hiring low-income, community-based saleswomen, the company successfully expanded the reach of its products to an additional 60,000 rural villages. By relying exclusively on low-income women as their frontline sales force, it also provided a significant source of income to a traditionally marginalized group.
Q: What are some of challenges that companies face operating at the base of the pyramid? Certainly the poor are very different consumers from the more affluent. What kind of business models are needed?
A: There are three major challenges. First, there is the issue of cultural distance between corporate decision makers and the poor. Let's face the facts: the men and women in the executive suite are often out of touch with the realities of the poor. They tend to come from the upper economic classes and primarily interact with people like themselves. Because of this difference in world view, corporate leaders may overlook crucial business opportunities in low-income markets if they do not proactively transform their organizational culture. The case studies in this book show that the companies which have succeeded in low-income markets were ones that strengthened their bottom-up market intelligence—finding novel ways to integrate the preferences, constraints, and habits of the poor into their business development—and very importantly had a corporate leadership that set a tone of engagement and commitment from the top.
Many consumers at the BOP don't have a voice—social, political, or economic.
The second crucial challenge businesses face is a serious lack of infrastructure in poor markets that can make operating at the base of the pyramid difficult, and potentially costly. For instance, a basic lack of physical connectivity is typical in many rural markets in developing countries, which is a real barrier for companies trying to deliver goods and services efficiently. Just as important, companies must contend with a lack of formal institutions regarding the "rules of the game." This means that company success may rely on local leaders and community agents who have the social capital to bring people together and build incentives for everyone to play by the rules. The role of social capital is also key to overcoming obstacles related to weak economic institutions. In the absence of formal credit bureaus, many micro-credit organizations, for example, rely on the self-selection and mutual monitoring of a group of micro-entrepreneurs to reduce credit risk and minimize default.
Finally, companies are challenged to find ways to bring BOP initiatives to scale and sustainability within the time frames dictated by traditional corporate targets. In many BOP ventures, the true profit driver lies in volume rather than in profit margins. However, because of the other two challenges, few BOP ventures can be expected to reach scale at the pace seen in their mainstream counterparts. Indeed, those BOP ventures that do quickly reach scale often credit some of their success to support from governments, multilateral donors, and nonprofit organizations. Others that grow more slowly have benefited from enlightened managers who take the view that a BOP venture's steep start-up costs are a long-term investment.
Q: The case is made that companies in BOP markets can't just operate to make profits, they also must create social value in the areas where they operate. Could you elaborate a little on why this is important?
A: Frankly, this always the case regardless of whether they operate at the TOP or BOP of the pyramid, except that at the top, there are enough agencies protecting consumers, and consumers themselves have the choice to spurn suspect offers. Not that misalignments don't happen; they correct themselves in the long run. That is not the case at the BOP. Many consumers at the BOP don't have a voice—social, political, or economic. That's why the onus is on the "business" to demonstrate how their participation improves people's lives. If they do so, then nobody will begrudge their due share of profits.
Even when companies do carefully consider the economic and social impacts of their products on the poor, they may still face reputational threats if their BOP ventures are seen as "excessively profitable." Of course, it can be argued that without this profit, businesses targeting the poor will not attract the level of investment necessary to be sustainable or scaleable across the entire BOP. According to this view, above-average profitability should be seen as a sign of success, one that will no doubt invite competition and thereby bring down prices, ultimately benefiting the poor. To minimize negative public perception, however, companies that find that they are "profiting from the poor" must be willing to publicly address the profit debate, work collaboratively with NGOs and governments, and also measure and report on the social value they are creating for the poor.
In conclusion, companies should not look to the poor merely to exploit their untapped purchasing power or dip into low-cost labor pools. Over the long term, such a cursory and extractive approach will draw the attention of governments and NGOs—many of which already question the legitimacy of the private sector's involvement in BOP operations. To succeed in serving this market, companies must strike a delicate balance, keeping in mind both their legal obligations to return profits to their investors, as well as their social responsibilities. Companies cannot afford to treat their social license callously.
Q: Long term, what impact could the private sector have towards alleviating global poverty?
A: The private sector brings a performance-driven culture when addressing any market. The poor are no different. Once management has figured out the business model, bringing the operation to scale is a necessity for their own bottom line. Investments will flow automatically without many gut-wrenching debates on theories of economic development and so on. That is the nice thing about the private sector. When they choose to focus there is action. At the same time it would be a wild dream to believe that private sector investment is going to save the world. Unless the appropriate government participates actively as an investor, regulator, or guarantor, there will not be the rush of private entrepreneurs to participate in this market. We believe that much of private sector efforts will come through an enlightened approach involving partnerships.
Government partners are essential for companies that may be attempting to build new markets where existing infrastructure is weak. In addition, to create a secure environment for business to operate, governments can also play a role in helping companies to provide socially beneficial services (particularly in sectors such as water, energy, and healthcare), by subsidizing service provision to certain consumer groups (e.g., those who cannot pay), or by providing the seed funding necessary to reduce cost structures and generate the incentives for business involvement.
Companies that have productive relationships with NGOs and nonprofits can find it very useful as well. Through partnership, companies can leverage the strengths of their civil society counterparts—including deep knowledge of local conditions and legitimacy as local representatives—to dramatically lower their costs of market and gain valuable on-the-ground feedback. Some NGOs provide the much-lacking "voice of the customer" input for design of products, programs, and services.
Q: You teach several HBS elective offerings in this area. Could you describe those courses and the reaction of students who take them?
A: I teach two elective courses: Social Marketing, and Business at the Base of the Pyramid—B-Bop (with Senior Lecturer Michael Chu). Both are new to the HBS curriculum, only two years old: The former deals with challenges facing marketers promoting "social" goods rather than "private" goods. The organization itself can be a for-profit or a nonprofit (the course has half of each); that doesn't matter. It is the goal of marketing and what it is intended to do that stretches our knowledge base. In this course we deal with fascinating issues of social change, cause marketing, cause branding, and so on. The feedback from the about forty to forty-five committed students who take the course is gratifying. Next year, we plan to make it a full course (in partnership with another social enterprise course on business leadership taught by Professor Dutch Leonard), and that might broaden the appeal.
The second course, B-Bop, deals exactly with the kind of issues we have been discussing in this article, and we get about seventy-five students. Here we deal with business models at the base of the pyramid. Students seem quite enthusiastic about the nature of the cases and discussion topics we bring to the classroom. It is indeed a privilege to have the benefit of over a hundred bright minds helping us think through the many challenging managerial issues in these two domains. I am simply grateful to have the opportunity to share my passion and ideas on these very important topics with future leaders, many of whom will make a lasting contribution to society, the economy, and humanity.