[Vnbiz] Business and the Global Poor

[Romi]

- Forwarded (originally sent out by Surya Darma) -

... 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¡ªwere 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.

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, Nestle'. Since World War II, Nestle'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. Nestl¨¦ 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.

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¡ªsocial, 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.
 Excerpt: Marketing Programs to Reach India's Underserved

by Kunal Sinha, John Goodman, Ajay S. Mookerjee, and John A. Quelch

Business models targeting low-income consumers require managers to change
their mind-set from one focused on revenue and margin maximization to one
concerned with sales volume and market penetration. Since the revenue
potential of the underserved markets can be as much as five times that of
the elite market, sacrificing short-term unit margin for volume and market
share can improve long-run profitability. However, to succeed, traditional
assumptions about managing the marketing mix must be challenged.

Products for poor markets have to be cheaper and therefore simpler, stripped
down to the key elements most important to the consumer. Distribution is
often more reliant on direct, relationship-oriented channels, leveraging the
power of third parties. To keep costs low, O&M and its clients have found it
useful to synchronize distribution and communication channels. Most of the
communication that O&M organizes for its clients in traditional
*haats*(weekly bazaars) and
*melas* (fairs) includes product sampling and direct selling. Since
word-of-mouth plays a significant role in poor communities, the retailer and
his shop are the key to successful communication.

Reaching the poor requires less reliance on brand-building advertising than
on targeted promotions and support services. The task for the marketer is to
introduce and build the category. Targeted promotions including sampling
help to change long-entrenched behaviors and shift consumers from
commodities to brands. For the Hindustan Lever shampoo brand Clinic Plus,
the challenge was to create dissonance among users of mud, natural herbs,
and low-cost local shampoos. O&M created a "Mother-Daughter Day," a talent
competition in which teams of mothers and daughters displayed their talent
in the fields of study, handicraft, painting, cookery, and rural folk arts.
Shampoo demonstrations were carried out during the event, creating a
memorable experience. Some 250 million rural consumers participated in these
events, resulting in an 8 percent increase in users.

Excerpted by permission of John Wiley & Sons, Inc., from Business Solutions
for the Global Poor, edited by V. Kasturi Rangan, John A. Quelch, Gustavo
Herrero, and Brooke Barton. Copyright 2007 by John Wiley & Sons, Inc. All
Rights Reserved.
 About the author

*Sean Silverthorne* is the editor of HBS Working Knowledge.

-- 
~ Romi ~
http://romibleue.wordpress.com/about/
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