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The Base Of The Pyramid: Will Selling To The Poor Pay Off?
By Marc Gunther
The concept of serving the world's poorest four billion or so people has been popular since CK Prahalad introduced the idea a decade ago. But so far, profits remain elusive

When CK Prahalad's book, The Fortune at the Bottom of the Pyramid, was published in 2004, the book made an immediate splash. Its argument was irresistible: The world's poorest people are a vast, fast-growing market with untapped buying power, Prahalad wrote, and companies that learn to serve them can make money and help people escape poverty, too.

Microsoft founder Bill Gates called the book "an intriguing blueprint for how to fight poverty with profitability". BusinessWeek's Pete Engardio described Prahalad, a professor at the University of Michigan business school, as a business prophet. He was awarded honorary degrees and sought out by CEOs.

Ten years later, businesses big and small continue to pursue profits at the bottom of the pyramid. The global uptake of mobile phones has proven that poor people will buy cell service if it's available at low prices. (It costs a fraction of a cent per minute in India.) Single-serve packages of shampoo, toothpaste and soap dangle from shelves of tiny storefronts in rural villages. Products ranging from eyeglasses to solar panels are being designed and marketed to people earning $2 a day.

The bottom-of-the-pyramid (BOP) market leader, arguably, is Unilever, with its Anglo-Dutch colonial heritage and a chief executive, Paul Polman, who is determined to improve the world. Unilever generates more than half of its sales from developing markets, with much of that coming from the emerging middle class. Its signature BOP product is Pureit, a countertop water-purification system sold in India, Africa and Latin America. It's saving lives, but it's not making money for shareholders.

And there's the rub. If there is a fortune to be made at the bottom of the pyramid, it remains elusive. Partly that's because doing business with the poor is unavoidably complex, and partly that's because the notion was oversold, says Mark Milstein, director of the Center for Sustainable Global Enterprise at Cornell's business school and an expert on the BOP.

"I haven't seen anyone making a fortune," Milstein told me. "Unilever's made money on some products, but they've been challenged. Other companies are making profits, but not enough to matter to their organization."

A bumpy road

The biggest challenge in targeting the BOP is that each consumer makes a very small purchase, says Mark Martin, vice president of international marketing for SC Johnson. "You need lots and lots of consumers to cover the fixed costs," he said. "It's all about getting the scale."

The difficulty is illustrated by plenty of failures.

In the early 2000s, Hewlett Packard touted a project called "e-inclusion", which sought to enable "all the world's people to access the social and economic opportunities of the digital age". It was shut down because its objectives weren't tied to the company's business mission, author Kellie McElhaney wrote in her book, Just Good Business.

Procter & Gamble invented a water-purification powder called PUR for bottom-of-the-pyramid markets, but it was a commercial failure. It's now distributed by a philanthropic enterprise.

In 2007, household-products giant SC Johnson launched Community Cleaning Services, a BOP business aimed at creating employment in Kibera, a sprawling slum in Nairobi, Kenya - but because profits were hard to come by, the project was eventually spun off into a nonprofit.

Meanwhile, DuPont's Solae unit tried to alleviate malnutrition and open new markets by selling soy-fortified snack foods in a pilot program in India, but saw no path to profitability and dropped the idea, according to Erik Simanis, who described the effort in a Harvard Business Review article called "Reality Check at the Bottom of the Pyramid".

"Apart from some successes in industries such as telecommunications, fast-moving consumer goods, and pharmaceuticals, global corporations have been largely unable to reduce costs and prices enough to serve poor consumers," researchers with the Monitor Group (now Deloitte) wrote in a 2011 Harvard Business Review (HBR) article.

Lessons learned

Forward-thinking companies, though, aren't giving up.

Consider Donn Tice, who was one of Prahalad's research assistants at Michigan in the early 1980s, and is now CEO of d.light, a San Francisco company that sells solar-powered products to the poor.

Recently, d.light said it has sold more than 6m solar products in 62 countries, including 125,000 small-scale solar panel systems for homes. "CK literally changed the course of my life," Tice says. There's not a chance that I'd be doing what I'm doing today were it not for the time we spent together."

Prahalad died in 2010, but his ideas remain influential.

Tice said he has absorbed key lessons about doing business at the base of the pyramid. Building a learning organization is vital, he says. "These problems haven't been solved before. Usually your first solution isn't the right one. You have to keep learning and adapting," he says.

Important, too, is getting close to customers, even if they live in remote rural areas. "Our customers design our products," he says. Patience, persistence and focus all have helped d.light. Unlike big companies, it's betting its entire future on the base of the pyramid.

What big companies are doing

SC Johnson also has been heavily influenced by BOP thinkers, notably Stuart L. Hart, who - with Prahalad - co-authored an HBR article about the bottom of the pyramid that led to the 2004 book. Hart, Milstein and Simanis all teach at Cornell (where the business school is named after company founder SC Johnson), and all have advised the company. As a family-owned company, SCJohnson has been able to invest in BOP ventures without facing short-term earnings pressures.

Working with nonprofit partners in Rwanda, SC Johnson sources pyrethrum, an insecticide used in Raid, from farmers who get training in agricultural practices, sustainability and financial management. Two years ago, the company launched a pilot program in Ghana with the Bill & Melinda Gates Foundation. Aiming to reduce the transmission of malaria, the project distributes repellents and insecticides to rural families, who become members of small "clubs" that provide air care and home cleaning products, as well as the repellents. "The challenge is to put together a bundle that excites the consumer," SC Johnson's Martin says.

Another company with a strong commitment to BOP consumers is SABMiller, which supports small businesses as suppliers, distributors and retailers. In Mozambique, SAB Miller sells beer made from cassava, while in Uganda it sells a beer brewed with sorghum. Using local crops like cassava and sorghum appeals to local tastes, provides a livelihood for local farmers and keeps costs down so SAB Miller can compete with homemade brews, its primary competitors in Africa. In South Africa, SABMiller has helped former bottling plant employees start their own one-truck distribution businesses.

An SAB Miller project in Columbia called Oportunidades Bavaria (named after the local beer, called Bavaria) supports small-scale retailers with loans of about $100 to $1,000 for a broad array of purposes: fixing up or expanding a store, sending a child to college or even funeral expenses for a relative. The program has touched more than 10,000 tenderos, or shopkeepers. "They begin to see us in a different light," says Andrés Peñate, vice president of corporate affairs for SABMiller Latin America.

The state of play

Cornell's Erik Simanis, who has more than a decade of hands-on experience at the BOP with DuPont, SCJohnson and Unilever, now believes that companies need to bring a stronger business focus to their BOP work. Alleviating poverty must be subordinate to core business purposes for their initiatives to thrive and grow, he says.

In a 2013 book, Simanis writes, with admirable candor: "We (include myself here) got too caught up with our own beautiful theories and abstract concepts (like mutual value creation, inclusive business) and lost sight of the pressure on managers to meet next quarter's sales and earnings forecast. We theorized ourselves out of being relevant."

That doesn't mean that business should leave the task of fighting poverty to governments or aid organizations. "Companies can bring unique value to the poor," Simanis says. SC Johnson's Mark Martin agrees: "This is very much a to-be-continued story."

--(Courtesy: The Guardian)
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News Updated at : Sunday, May 25, 2014
 
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