Down to the bottom dollar
Posted by jembendell on August 27, 2006
In the next couple of months I’ll be adding some material from the past 3 years of pre-blog-life that’s still relevant (or so I think). The following features me in the Sydney Morning Herald squaring up to strategy guru CKP … kinda.
Pub: Sydney Morning Herald
Pubdate: Wednesday 27th of April 2005
Down to the bottom dollar, by Wendy Frew
As big companies look for ways to sell to developing countries, Wendy Frew asks if they’re doing right by the poor.
NEELAMMA, from the town of Kuppam in south-east India, is one of the
US computer giant Hewlett-Packard’s least lucrative customers. But she has become one of its most valuable customers in terms of public relations. The 27-year-old rents a digital camera and printer from the company at market rates, and makes a living charging about 90 cents to take pictures of fellow villagers.
Although Neelamma is from one of the poorest regions in the world, she is presented as the future of Hewlett-Packard’s revenue growth. “Neelamma joined the HP Village Photographer program in
India, using a solar-powered HP camera and printer to record events in her rural community and take photos for a government program,” its promotional material says. “She has expanded her work, ultimately doubling her family’s income.”
Neelamma and 4 billion people like her are the target of a Hewlett-Packard division called “Emerging Market Solutions”, which recognises developing regions “as one of the most significant business growth opportunities of the 21st century”. The 10 biggest of these emerging-market countries spent nearly $US77 billion ($99billion) on computer equipment in 2003. IT sales growth averages 12 per cent in these economies, compared to 5 per cent in developed countries.
Elsewhere in India, entrepreneurial villagers can rent a Hewlett-Packard “Digital Rural Theatre”, with a video projector, DVD player and speakers, to show movies in local neighbourhoods. Poor communities can also buy cheap wireless computers that use “cantennas” – antennas made of discarded tin cans – to cut costs.
Other multinational companies are following suit. Hindustan Lever, the Indian subsidiary of the world’s largest whitegoods maker, the Dutch giant Unilever, distributes soaps and detergents to villages across the country. The soaps are the same as those marketed to wealthier communities, but are sold in small packages to save costs. Sales representatives drive trucks around the villages, spruiking the products over a microphone.
In Brazil, the whitegoods retailer Casas Bahia provides credit to consumers with low and unpredictable incomes. In
Mexico, Cemex, one of the world’s biggest cement suppliers, has set up a scheme to help the poor save and invest so they can afford to buy the materials to extend their homes.
Is the Western world stooping to a new low in exploiting poorer countries? Or are these enlightened multinational companies figuring out how to help kick-start undeveloped economies and make a buck at the same time? Leading the debate is the US academic and business consultant C.K. Prahalad, whose new book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, promotes the idea that companies can make money and help create jobs in developing countries by doing business with the poor.
Prahalad’s views carry weight because he is considered a member of the elite business academia, alongside gurus such as Michael Porter and Gary Hamel. His ideas, which centre on the buying power of the poor, have been described as visionary by some in business and political circles, and were on the agenda at several World Economic Forum seminars.
However, sceptics in aid and development circles describe his thesis as simplistic and possibly environmentally unsustainable. But even critics agree his work has started a fresh debate about how to tackle world poverty.
The Indian-born academic, who works from the Stephen M. Ross School of Business at the University of Michigan, says the developed world should stop thinking about the poor “as victims or as a burden, and start recognising them as resilient and creative entrepreneurs and value-conscious consumers”.
“Four billion poor can be the engine of the next round of global trade and prosperity,” Prahalad says. “It can be a source of innovations … Market development at the bottom of the pyramid will also create millions of new entrepreneurs at the grassroots level – from women working as distributors and entrepreneurs to village-level micro enterprises.”
Prahalad defines the bottom of the period as the 4 to 5 billion people in the world who live on less than $US2 a day. Instead of assuming their plight can be alleviated only through aid, businesses should consider them as worthwhile customers. He says the challenge is in finding ways of profitably selling to this group using a combination of high-technology solutions, private enterprise and co-operation between business, government and non-government organisations.
To succeed, business has to rethink how to produce, package and distribute goods to the poor, who have volatile earnings and little disposable income. For example, Prahalad says, in the case of consumer goods such as shampoo, the poor are unlikely to be able to afford a standard-sized bottle but will buy a one-wash sachet on an irregular basis.
In many countries, the poor are paying up to 30 per cent more for basic necessities because of poor distribution networks, fragmented markets and corruption. The rural poor are particularly disadvantaged because of their distance from markets and the lack of affordable transport to those markets.
It is also near-impossible for them to borrow money except at extortionate interest rates from local money lenders.
Prahalad concedes the biggest risk to his vision is convincing the business world to change its attitude to the poor. “To approach this market, we have to fundamentally challenge our existing cost assumptions. That means the existing way of going to market is not sacrosanct. That creates some doubt about whether this is possible because we don’t have economic models on how we can create the same features and functionality [for products sold in undeveloped markets]. But once you cross that, the solutions are more obvious than people think.”
Success in marketing to the poor will also depend on approaching them as valuable consumers. “The [bottom-of-the-pyramid] consumers get products and services at an affordable price, but, more important, they get recognition, respect, and fair treatment,” writes Prahalad in his book. “Building self-esteem and entrepreneurial drive at the bottom of the pyramid is probably the most enduring contribution that the private sector can make.”
Statements such as these have attracted the sharpest criticism from development experts. Atul Wad, a sustainable-business consultant, says Prahalad’s argument that the corporate world needs to go beyond corporate philanthropy is compelling. However, many of the world’s poor suffer not just from a lack of money but from everything from the HIV/AIDS epidemic to civil wars and natural disasters.
“These people are not even close to being active participants in any marketplace … selling shampoo to them is not the solution,” he wrote in an article on the website SustainableBusiness.com.
“Though the collective purchasing power of the poor is enormous, buying decisions are still individual. By rampant marketing, a rural household may well end up spending its small disposable income on inappropriate products … It is morally reprehensible to see people as purely consumers for shampoo and beer.”
Dr Jem Bendell, a consultant to the United Nations and professor of management at the University of Nottingham’s International Centre for Corporate Social Responsibility, says Prahalad’s focus on the poor as consumers overlooks the damage multinational companies could do to employment in poor communities if they do not manufacture locally. Selling goods in much smaller serves also increases the amount of packaging, which puts pressure on environments. “It’s good Prahalad has opened up the door [to such discussions], but we need more work on it.”
He says Prahalad risks joining those academics whose main contribution to debate is presenting complicated ideas in a sexy, simplistic package, but that may not help solve long-term problems. “You need a much more critical examination of how corporations can help the poor but still make money.”
The chief executive of Opportunity International Australia, Paul Peters, agrees there is money to be made from poorer markets if products are well-priced. “If you go into any slum, the people there buy products at many times the cost that you and I pay here … there are just so many more middlemen in the process. If you just look at the sheer number of people … there is a lot of money being transacted.”
However, Peters, whose group aims to create jobs and stimulate business by providing micro-finance to the poor, says businesses face several challenges: finding the right models for the markets they target, and finding local staff with the appropriate skills and a commitment to serving the poor.
It is not enough to inject cash into the top of an economy. “Coke can put a bottling plant anywhere. The question is, does the economic benefit of that just sit with the shareholders? Unless you are doing things that will get to the bottom of the market or create wealth at the bottom [it won’t make much of a difference],” he says.
Prahalad contends his book was not meant as a solution to all the ills facing the world’s poor. “What I am suggesting is that leaving people in abject poverty without giving them a sense of hope and opportunity creates all kinds of disturbances,” he says.
“[The book] provides a fresh perspective to the biggest development challenge we have faced in the past 50 years: subsidies, foreign aid, philanthropy and corporate social responsibility can only take us so far.
“We have tried it but the sustainable solution that seems to work is when business gets involved and creates markets.”