Sustainability Challenges and Solutions at the Base of the Pyramid

Business, Technology and the Poor

Prabhu Kandachar, Minna Halme

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9781906093112
• eBook ISBN: 9781351279864
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Around the turn of the millennium it had become painfully evident that development aid, charity or "global business-as-usual" were not going to be the mechanisms to alleviate global poverty. Today, there is little dispute that poverty remains the most pressing global problem calling for innovative solutions. One recent strategy is the Base of the Pyramid (BoP) concept developed by Prahalad and Hart, which relies on entrepreneurial activity tapping into the previously ignored markets of the economically most disadvantaged. It is a process requiring innovations in several disciplines: technological, social and business.This book covers a number of areas. First, much of the current BoP discussion emphasises targeting products to the needs of the poor. But do we actually know what the real needs of the poor are?

This book takes a bottom-up human-centred approach and examines examples that truly engage the poor in BoP product and service development. What types of needs assessment methodologies are indicated considering the cultural differences in BoP countries? Are the existing methodologies adequate? Do they need to be redefined and redeveloped?

Second, the book considers how we can balance poverty alleviation and stimulate economic growth without stressing the ecosystem. Tragically, the poor are hardest hit by the adverse effects of environmental deterioration such as water shortages, climate change or the destruction of habitats. While the economic welfare of the poor is critical, the BoP approach must balance its inherent paradox of encouraging greater consumption while avoiding further pressures on environmental sustainability. The link between the BoP approach and sustainable development is a key feature of this book.

Third, it looks at innovation and asks what kinds of"bottom-up" innovation (open source, technological, social and business) support BoP initiatives (and sustainable development)?Fourth, the book deals with the relationship between development assistance and BoP. Is a BoP strategy the antithesis to development aid or can these two co-exist or even complement each other?Finally, the book raises questions about the relationship between corporate responsibility and BoP. Is BoP a new form of corporate neo-colonialism or a new form of corporate responsibility?

Although the BoP concept has unleashed an extensive and generally enthusiastic response from academics, businesses, NGOs and governments, the knowledge domain around this concept is still in the early stages of development. This book addresses that need with a focus on the needs of the end-users – the poor – as a starting point for BoP products and innovations. With contributions from both supporters and critics, it provides a treasure trove of global knowledge on how the concept has developed, what its successes and failures have been and what promise it holds as a long-term strategy for alleviating poverty and tackling global sustainability.

Part I
Inclusive markets and BoP strategies

1
Understanding the markets of the poor*

A market system approach to inclusive business models

Christina Gradl
Emergia Institute/Martin-Luther-Universität Halle-Wittenberg, Germany
Sahba Sobhani, Afke Bootsman and Austine Gasnier
United Nations Development Programme

THTF, a Chinese technology company, sells computer equipment to poor farmers in rural China. When THTF first started, they did not know what the farmers would want to use computers for, or what ability they had to use them; and the farmers in turn did not know how to use a computer, or what to use one for. With the support of the Beijing government, the company built its own market through market research and consumer education.

Celtel provides two million customers in the Democratic Republic of Congo (DRC) with mobile phone services. In a country with a per capita GDP of $210, which has just escaped a civil war, few people have had the financial means and identity documentation required to establish a phone service contract. By selling airtime via low-price prepaid cards, Celtel has enabled even the poorest to benefit from access to telecommunication services.

Manila Water serves over 140,000 low-income households in Metro Manila in the Philippines with clean water. When it took over the concession in 1997, only 1,500 households were connected to the grid and two-thirds of the water was lost to leakage and illegal tapping. The company has extended its network and made use of the enforcement power of social networks to ensure that bills are paid and no water is stolen, thus providing better service at a profit.

These are three examples of business models that employ innovative ways to provide products and services under challenging conditions.¹ We call them ‘inclusive businesses models’, because they manage to build bridges between businesses and the poor in a way that benefits both. Business benefits include increased profits and the potential for long-term growth by: winning new customers and developing new markets; strengthening the supply chain and expanding the labour pool; and the innovation of products, processes and business models. Benefits for the poor include improved access to goods and services that satisfy basic needs, increased productivity, new sources of income and the empowerment of individuals and communities. Inclusiveness also implies that the poor should not be harmed through negative externalities of the business model, such as environmental degradation and pollution.²

This chapter introduces a market system approach to developing inclusive business models. We argue that it is the particular conditions in the market systems where the poor live that constrain the development of inclusive business models. In contrast to a marketing approach, this view explains why few businesses have been able to use the opportunity to do business with the roughly half of humanity that remains poor. Based on evidence from 50 new case studies, we identify the five main constraints in these market systems as: market information; knowledge and skills; regulatory environment; access to financial products; and physical infrastructure. Companies can overcome these challenges only partially by their own means, through adaptation and investment. Often, they need to collaborate with other stakeholders, including communities, organisations or governments. A better understanding of the market systems of the poor will help companies identify inclusive business models. More broadly, it will help us to understand how productive market systems evolve generally.

The chapter is organised as follows:

• 1.1 Introduces the argument for a market system approach and briefly explains the applied research methodology
• 1.2 Outlines the five main areas of constraints and explains their pervasiveness with a theory of coordination failure
• 1.3 Shows the five solution approaches to overcome the constraints
• 1.4 Puts the analytic framework together and argues for a systemic approach to understanding markets and their evolution

We conclude with three suggestions for the application of our findings by practitioners and academics.

1.1 A market system approach³

1.1.1 The enigma of the untapped market

The BoP literature suggests that there is a ‘Fortune’ to be made ‘at the Bottom of the Pyramid’ (Prahalad 2004). Prahalad and Hart (2002: 1) assert: ‘Low-income markets present a prodigious opportunity for the world’s wealthiest companies—to seek their fortunes and bring prosperity to the aspiring poor.’ The literature that has evolved from this stimulating idea continues in the same spirit, with optimistic terminology pointing to the ‘untapped’ markets (Weiser et al. 2006) of the ‘Next 4 Billion’ (Hammond et al. 2007).

Indeed, business at the ‘bottom of the pyramid’ has the capacity to deliver benefits to both businesses and the poor. Some businesses, like the 50 we studied for this research, manage to capture the win–win potential described above. And, yet, billions of people remain excluded from markets. So why have profit-seeking companies not found ways to capture this value already?

1.1.2 The market system versus the marketing approach

Some suggest that the reason for this untapped market lies within management and its ‘blind spot’ towards low-income customers. Prahalad (2004) argues that the ‘dominant logic’ does not allow managers do not think about the poor as customers. The attention that his work, and consecutive publications and conferences, has achieved has contributed to changing the dominant logic. However, economic theory suggests that, if a profit could be made from some economic activity, somebody should have realised it. Surely, not all managers can have the same blind spot?

Our argument takes the economist’s perspective: we suggest that the main reason why opportunities for mutual value creation have remained unrealised is to be found in the market systems where the poor live. In those rural villages and urban slums of developing countries markets do not function properly due to the lack of enabling conditions. We argue that a lack of enabling conditions is the main hurdle for the development of inclusive business models.

This argument also implies that low income is not a problem for business. Clearly, the whole idea of the BoP discussion is based on the assumption that profitable business models exist, with the poor as consumers. Adapting one’s marketing mix to this specific target group is a standard marketing task, not inherently different from adapting it to the middle- or high-income group. The marketing approach is, in many ways, business as usual, even though the target group may be a new and unusual one.

The market system approach is an unusual one. Business, at least the kind of business that has been the subject of most business strategy and marketing literature, the one ‘at the top of the pyramid’, usually takes place in well-functioning market systems. There is no concern about the conditions that make these market systems work. Yet the market systems of the poor are often seriously dysfunctional: low literacy, poor logistics infrastructure and lack of contract enforcement mechanisms make doing business with the poor a challenge. In these circumstances, transaction costs may be so high that doing business ceases to be an attractive option, even if the deal on offer is valuable for both sides. A market system approach will systematically identify these kinds of structural challenges and create an understanding of how to address them. This chapter shows some initial findings and develops a framework of thought for a market system approach to inclusive business models.

1.1.3 Research methodology

The results of this article are based on a multiple case study research design. As part of the UNDP Growing Inclusive Markets Initiative, 50 case studies have been prepared.⁴ The selected cases represent 11 industries and 13 countries from Africa, Asia, Eastern Europe, as well as Latin America and the Caribbean. Case study authors conducted their research based on the common protocol. The guiding question for the research was ‘What are the challenges that prevent the development of inclusive business models and what innovations are used to overcome them?’⁵

The analysis of the cases followed an iterative process with the purpose of finding commonalities among the studies and building explanations (Yin 1994). The content of the case studies was analysed, based on the research questions, and any findings were listed in a database by means of short descriptions. Through this exercise, a pattern emerged where all the observed structural challenges could be placed under five constraint categories and all the innovations could be placed under five categories of solution approaches.

1.2 Five areas of market constraints

Market constraints are conditions in a given market that are relevant to all market participants. They are not based on the characteristics of single players in the market but are part of the general field. Market constraints arise from the absence of conditions that enable markets to function efficiently.

The case studies reveal five areas of market constraints:

1. Market information
2. Knowledge and skills
3. Access to financial products,
4. Regulatory environment
5. Physical infrastructure⁶

These areas of constraint will be briefly introduced in the following sections. The findings from the case studies are occasionally backed up with secondary quantitative data.

1.2.1 Market information

Entrepreneurs often lack detailed information about the market that they are engaged in.⁷ Markets where the poor live are often fairly ‘dark’ areas in terms of the information available about them. In many cases, it is not known exactly how many people live in an area, because there is no record of births, deaths and movements of people. Information about accurate spending power or consumer preferences and behaviour is non-existent. Even if this market information is available in principle, it may not be easily accessible because intermediaries such as market research firms or are widely absent. When THTF, the Chinese technology company, ventured in this direction, computers were not used by farmers. There was no information on the kind of applications the farmers might find useful or the level of ability they had in dealing with information technology.

1.2.2 Knowledge and skills

The lack of knowledge...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Foreword
• Acknowledgements
• Introduction. Farewell to pyramids: how can business and technology help to eradicate poverty?
• Part I. Inclusive markets and BoP strategies
• Part II. Local enterprises at the BoP: cooperative efforts
• Part III. Are BoP consumers and citizens included?
• Part IV. Capabilities, opportunities and challenges for MNCs in developing BoP business
• Part V. Sustainability challenges and solutions
• About the contributors
• Abbreviations and acronyms
• Index