The Pyramid and the Pie
By Dr. Atul B. Wad, CEO of Tambourine Innovation Ventures (TIV) & Professor Emeritus of Kellogg School of Management
Many scholars who write on Base of Pyramid (otherwise known as "Bottom of Pyramid," or BoP) economics point to the increasing interest in how the private corporate sector can be more proactively involved in addressing the problems of the poor and underprivileged. Notable in this trend are compelling arguments, such as those made by Professor C.K. Prahalad in “The Fortune at the Bottom of the Pyramid”, in which he describes how corporations need to go beyond concepts of corporate philanthropy and social responsibility if they seek to combat global poverty (the bottom of the pyramid); and that by doing so, they can reap larger profits and become more successful as businesses, while simultaneously achieving a social good. Central to this is to start viewing the poor as ‘customers’ for a range of products, services and technologies, which, if properly designed, priced and distributed, will benefit the underprivileged.
Professor Prahalad has done a great service by this contribution, but it also highlights the need to examine the fundamental issues involved in the impact of globalization on the poor and underprivileged, and the implications for the role of the corporate sector.
There are some issues that need to be recognized if one is to have a broader perspective on the problem at hand. In the first place, poverty is not the only ill that besets this huge population that is described as an untapped market. Millions of people around the developing world are in far more dire straits.
The underprivileged, or ‘marginalized’ population includes those affected by disease and epidemics; The magnitude of the HIV/AIDS epidemic in Africa, for instance, is so staggering that it has been predicted that the economies of these countries will simply implode if current trends continue. In various parts of the world, civil wars and state sponsored campaigns (e.g Darfur) have made more millions into refugees; They live in a constant state of insecurity and terror, and have virtually no economic existence except as clients of aid programs and humanitarian agencies. Natural disasters and breakdowns in the governance of states have also added to the problem. These people are not even close to being active participants in any marketplace, unless you see millions of Africans with HIV/AIDS as being ‘customers’ for very expensive drugs.
The plight of the poor is not just a lack of money – it is far worse – it is a lack of basic services such as water, health, education and infrastructure; it is the corrupt environment that they live within, where bribery is a fact of daily life; it is a socio-cultural nightmare for women, who have to live with abuse and marginalization; it is the existence of what can only be called a slave trade in child labor in many countries; it is a disenfranchisement on a global scale.
The architecture of the bottom of the pyramid needs to be redesigned to reflect these problems, and the demographic identities of the population that is included.
Taken in this broader perspective, the concept of ‘livelihood’, or ‘quality of life’ is a more sensible approach, in that it views the condition of the underprivileged in broader than solely economic terms – and includes issues such as security, infrastructure, representation and governance, dignity, culture, gender bias, environment, communalism, health and education and other basic needs. This involves a rethinking of the concept of ‘sustainable development’ itself – a process that is already underway in many circles in these countries.
It is from such a broader, and more complex, perspective that the role of the corporate sector, and the requirements to accomplish this role, can be articulated. Indeed, corporate philanthropy is a limited approach, and corporate social responsibility may be mostly lip service. The notion that a win-win solution that achieves social benefits and also serves corporate interests is conceptually valid and compelling, but it could be seductive, and requires a great deal more analysis, and the development of business tools, strategies and capabilities that will enable such solutions to be implemented. It also suggests that the roles of other social actors – government, non-governmental organizations and the social sector, broadly defined – need to be examined in a similar manner.
Central to the concept of sustainability is the role of partnerships between these actors (public-private partnerships) that can more effectively harness their collective capabilities to serve a social purpose. Equally important is the need for new knowledge and new conceptual frameworks that reflect the reality of the circumstances of the underprivileged and the socio-economic context within which they exist.
For example, it may be correct to say that everyone, including the poor, want quality services and products and should be treated as customers. But, what products and services? Selling shampoo in India in single serving packets is a great concept in terms of market penetration, but with the very limited household income they have, is this the best way to spend their money? The rural sector in India, and most other developing countries, has a host of much more serious problems – lack of power and water for their farming, inadequate health and education services; weak infrastructure, and virtually no insurance. They should be seen as customers in this light – as customers for a broad range of products and services that improve their livelihood and the circumstances of their existence.
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. They may spend on TVs and cosmetics and forsake savings for the education of their children and for their health needs. With the onslaught of credit cards, they may well end up borrowing against their future and securing these loans with their land. Farmers in India have committed suicide because they could not service government loans.
Yes, the poor should be treated with respect and as customers, but in a broader sense -- they are the customers of the government and the corporate world and NGOs and the social sector. Their political power needs to be recognized as well – the market opportunity they represent is not simply based upon their collective spending power, but, at least in some countries, their political power. Note that in India, they represent 80% of the population and the electorate. Despite the great strides the Indian economy has made in the last decade or so, the elections earlier this year demonstrated this power quite dramatically. In the midst of this great economic advance, the rural sector had been largely neglected.
There are other areas where new thinking is needed, as well. For instance, the analysis of supply chains needs to include equity and environmental considerations. The real and unseen impact of globalization has been the acceleration of the search for profits by large corporations. By itself, this is not necessarily a problem, but this strategy should be based upon some sense of long term sustainability. There is no sustainability if there is no long term view. Supply chain management must therefore include equity, environmental and social factors in the optimization process. Unfortunately, most corporations don’t have the in-house capabilities to understand and analyze these issues. The chocolate industry, for example, recently was in the news because it was discovered that cocoa farms in West Africa were using child labor. Despite some efforts by the industry, the child trade still continues. To solve it requires that these major purchasers of cocoa become more intellectually involved in the problem – analyze the supply chains, production economics, technologies and farming patterns in these locations – and develop business tools and strategies that address the root of the problem – i.e. that a cocoa farmer finds it economical to use child labor.
It is also a matter of technology, and knowing where your true competency lies. Globalization and customerization is often taken to mean McDonaldization. The business model here is the delivery of low cost, standardized and consistent food products. Notions of localized health concerns and taste patterns are largely absent from such an approach. At a time when people in the US are becoming more aware of the damage that this type of food does to the public health, such a model has severe limitations. The fact of the matter is that poor people know food very well – they just don’t have enough.
And they have taste. A long time ago, I worked in the villages in India during a drought, and was given the job of distributing milk (from milk powder) and wheat to the starving villagers. I set up shop and the lines were long, but then I found out that they used the milk to paint their huts and fed the wheat to their animals. They still ate their meager supply of ‘chapatis’ and pickles, which was far tastier than anything I could give them.
But the McDonalds model does have a value. They have managed to develop an incredible technological foundation, along with supply chains and distribution systems that enable them to deliver consistent quality food products at an economical price to millions of consumers all around the world. The poor need good quality food at low prices – rural women spend most of their day making food, and this would relieve them of this burden. Corporations could find a way to use this model to deliver locally acceptable food to these markets. It could well be applied to other product areas and industries, perhaps for the delivery of medicines.
The developing world of today consists of yesterday’s colonies. The colonialists, especially the British, were extremely good at exploiting the local market with their products. They bought the raw materials, added value, and sold them back to the colonies.
The concept of ‘value-added’ is central to sustainability, but it needs to be enriched in at least two important respects. First, it needs to be localized – the conversion of raw materials and resources into higher value products should be achieved locally, so that the local ‘economic pie’ is enlarged. To some extent, this is being achieved, but on a limited scale. To truly enlarge this local ‘pie’ will require more localized technological innovation and capacities, a better understanding of the market potential for such products, and a rethinking of the economic potential of local resources. A company in India that produced ethanol from sugar cane was able, through technology and research, to find that red sorghum, a cheaper crop, could produce higher yields of ethanol per acre than sugar cane.
Secondly, since many of these countries have large agricultural sectors, the concept of waste needs to be reexamined. There is enormous waste in the agricultural sector for a number of reasons – seasonality and the lack of storage facilities, market fluctuations, etc. Yet, there are examples of ventures that have taken this waste and converted it into useful value added products. The waste from banana cultivation has been converted into biocomposites and oil absorbents, for instance. Biofuels are being made from waste fats and oils from fast food outlets.
There is a need to view agricultural waste as a source of value, rather than an economic cost, and to explore the opportunities that may lie there. Corporate research and product development need to change their ‘search strategies’ to encompass this domain.
The technology angle is interesting. Every IT company in India is trying to ‘do something’ in the villages. They give them handhelds, internet access, offer real time price information etc. But, after all is said and done, a subsistence farmer is still living with his poor productivity, weak infrastructure, corrupt governments officials, bad roads and expensive water. Knowing the latest prices for his crop in the global market must give him some comfort and some economic gain, but a more useful approach may be to explore how the total value added that he can produce could be enlarged, and how IT could improve the overall quality of his livelihood?
The potential of IT for addressing the needs of the underprivileged is enormous, especially as prices decline and the ‘reach’ of the technology lengthens. In South Africa, pilot projects have been developed to use a combination of cell phones, and e-mail to expedite the transmission of medical tests from patients in remote areas to testing clinics and back to the patient.
In the financial sector, the “Equator Principles” for socially responsible investment has received a great deal of press, and has been endorsed by many leading financial institutions. Yet even the International Finance Corporation (IFC), which promoted the protocol, would probably agree that its impact in terms of actual utilization has been limited. The concept is great – the limitation lies in the capabilities of the implementation structure. In India, rural financial institutions, which are mainly government controlled, lack the in-house technical abilities to conduct the proper analyses, and fall back on the more traditional criteria. Someone made those loans to those suicide farmers. Notably, some private corporations have developed innovative services to reach the rural sector, and there is the tremendous success of micro-financing in many countries. One would hope that such positive examples are built upon, and better models and tools are developed.
The underlying thread in all of this is that corporations need to expend a great deal more intellectual energy to identify more precisely the areas where they can make the most sensible contributions to society and simultaneously serve their corporate interests. Essentially this requires examining every functional dimension of business, and developing the analytical tools, relationships, and strategies that would make them more effective.
Rajan and Zingales are quoted by Surowiecki as saying that, ‘we may need to save capitalism from the capitalists’. Perhaps what is really needed is to redefine capitalism. Corporations need to understand that by pursuing socially responsible objectives, they will benefit as businesses. There is nothing inherently conflicting between corporate goals and sustainable socio-economic progress, except that most corporations don’t have the knowledge base or capabilities to address this meaningfully.
It is ultimately an issue of knowledge. The production of knowledge that can be used to address these issues is such an important need that it should probably become a new inter-disciplinary field. Corporations have their designated “Social Responsibility” executives, but for the most part, don’t really want to think too much. Business schools don’t teach it.
About the Author
Dr. Atul Wad, PhD is co-founder and President of Tambourine Innovation Ventures (TIV) and Professor Emeritus at the Kellogg School of Management at Northwestern University. He has held many leadership positions at several UN agencies and pioneered flagship programs such as the UN’s Advanced Technology Alert System, (with luminaries such as Ernst von Weizsacker and Aklilu Lemma) and the Center for Interdisciplinary Study of Science and Technology at Northwestern University.
Dr. Wad’s career has spanned a variety of roles, such as: advisor to the Mexican Association for Incubators and Technology Parks (AMIEPAT); Faculty at CENTRIM, University of Brighton; Kellogg School of Management, Northwestern University; the Institute of Design at Illinois Institute of Technology(IIT) Chicago; the Autonomous University of Yucatan, Mexico; Indian Institute of Technology(IIT), Bombay; and the Indian Institute of Management(IIM),Bangalore. He was also a Visiting Fellow at Institute of Development Studies (IDS) and SPRU, University of Sussex, At Columbia’s Water Center of the Earth Institute he focused on cutting edge issues such as the water-energy-food nexus and other sustainability issues within the context of climate change.