Company lessons in reaching the world's poorest
Sunday, 23 March 2008
Christian Seelos
FT Syndication Service
Can multinationals make money out of serving the world's poorest people? In his classic book, The Fortune at the Bottom of the Pyramid, C.K. Prahalad insisted they could. However, companies have been told little about what they need to do to succeed. How could returns justify the costs and uncertainties of such investments? In practice, the needs of companies for profits and of millions of poor people for products, services and jobs are not coming together at the hoped-for speed and scale.
Problems arise when trying to follow the traditional advice that businesses must: first, build resources and competencies to create and meet demand even though market-supporting institutions are largely absent; and second, form joint ventures with local pro-poor organisations that have objectives and competencies different from their own. But success is not impossible, as two cases from Bangladesh demonstrate.
In the 1990s, the telecoms industry believed it was impossible to make money out of serving poor customers in Bangladesh. But the Norwegian telecom business, Telenor, banded together with Grameen, a well-known Bangladeshi organisation serving the poor.
The partners formed two organisations: one used Grameen's skills in providing micro-loans to the rural poor; the other used Telenor's expertise in building mobile infrastructure and serving higher-income urban customers. Grameenphone, the commercial company, was operated by experienced Telenor managers: its strategic aim was to maximise financial returns. Grameen Telecom was the interface to the Grameen Bank, whose objective was to maximise jobs for the poor.
Grameen's support was critical to lowering Telenor's perception of risk and to granting access to resources below their economic cost. Grameen helped shield Telenor from the risk of corruption, granted use of its established brand and provided access to development loans. By 2006 Grameenphone had more than 6.0m subscribers and held a 60 per cent market share. It is among Bangladesh's largest private taxpayers. Meanwhile, Grameen Telecom had created more than 250,000 jobs for rural female entrepreneurs.
In the second story, the city council of Dhaka, Bangladesh's capital, was spending a quarter of its budget on waste removal but was able to deal with less than half the waste. Two local entrepreneurs saw an opportunity. In 1994, they launched Waste Concern, which aimed to turn waste into compost. Eventually they succeeded in persuading the largest fertiliser company, Map Agro, to sign a "trial contract" that guaranteed sales of 200 tonnes of compost. Demand from Map Agro customers quickly pushed this figure up to 50,000 tonnes. Since Waste Concern helped the government deal with a serious hazard, the government donated the land needed for the compost plants. As a result, Map Agro had access to compost at far below market value. Profits were so impressive that three other fertiliser companies went on to compete with Map Agro for a partnership with Waste Concern.
In both cases, the traditional companies do not serve the poor directly. Instead, they offer a bigger market to the existing organisations that serve those at the bottom of the pyramid. In exchange, the multinational companies obtain preferential access to valuable human and material resources. But they continue to serve the higher income customers with whom their competencies are better aligned.
The challenges of meshing the competencies of multinational companies with the needs of the very poor are huge. But they are not insuperable. Here are some lessons for companies.
Engage with organisations in the target markets that serve the very poorest, before your competitors succeed in doing so; work hard to understand their objectives, in order to help build their trust in your intentions; identify the bottlenecks in their models and use your corporate skills to eliminate them; lever undervalued resources in poor markets, to build your own business model, whose aim is likely to be serving higher-income customers; and structure a business model that makes both partners better off by growing the markets they serve.
The bottom of the pyramid is hard to reach. But it is also, by definition, broad. Good opportunities are to be found by those prepared to seek them.
The writer, director of the platform for strategy and sustainability at IESE business school, is winner of an essay competition sponsored by the Financial Times and the International Finance Corporation on the private sector's role in development.
FT Syndication Service
Can multinationals make money out of serving the world's poorest people? In his classic book, The Fortune at the Bottom of the Pyramid, C.K. Prahalad insisted they could. However, companies have been told little about what they need to do to succeed. How could returns justify the costs and uncertainties of such investments? In practice, the needs of companies for profits and of millions of poor people for products, services and jobs are not coming together at the hoped-for speed and scale.
Problems arise when trying to follow the traditional advice that businesses must: first, build resources and competencies to create and meet demand even though market-supporting institutions are largely absent; and second, form joint ventures with local pro-poor organisations that have objectives and competencies different from their own. But success is not impossible, as two cases from Bangladesh demonstrate.
In the 1990s, the telecoms industry believed it was impossible to make money out of serving poor customers in Bangladesh. But the Norwegian telecom business, Telenor, banded together with Grameen, a well-known Bangladeshi organisation serving the poor.
The partners formed two organisations: one used Grameen's skills in providing micro-loans to the rural poor; the other used Telenor's expertise in building mobile infrastructure and serving higher-income urban customers. Grameenphone, the commercial company, was operated by experienced Telenor managers: its strategic aim was to maximise financial returns. Grameen Telecom was the interface to the Grameen Bank, whose objective was to maximise jobs for the poor.
Grameen's support was critical to lowering Telenor's perception of risk and to granting access to resources below their economic cost. Grameen helped shield Telenor from the risk of corruption, granted use of its established brand and provided access to development loans. By 2006 Grameenphone had more than 6.0m subscribers and held a 60 per cent market share. It is among Bangladesh's largest private taxpayers. Meanwhile, Grameen Telecom had created more than 250,000 jobs for rural female entrepreneurs.
In the second story, the city council of Dhaka, Bangladesh's capital, was spending a quarter of its budget on waste removal but was able to deal with less than half the waste. Two local entrepreneurs saw an opportunity. In 1994, they launched Waste Concern, which aimed to turn waste into compost. Eventually they succeeded in persuading the largest fertiliser company, Map Agro, to sign a "trial contract" that guaranteed sales of 200 tonnes of compost. Demand from Map Agro customers quickly pushed this figure up to 50,000 tonnes. Since Waste Concern helped the government deal with a serious hazard, the government donated the land needed for the compost plants. As a result, Map Agro had access to compost at far below market value. Profits were so impressive that three other fertiliser companies went on to compete with Map Agro for a partnership with Waste Concern.
In both cases, the traditional companies do not serve the poor directly. Instead, they offer a bigger market to the existing organisations that serve those at the bottom of the pyramid. In exchange, the multinational companies obtain preferential access to valuable human and material resources. But they continue to serve the higher income customers with whom their competencies are better aligned.
The challenges of meshing the competencies of multinational companies with the needs of the very poor are huge. But they are not insuperable. Here are some lessons for companies.
Engage with organisations in the target markets that serve the very poorest, before your competitors succeed in doing so; work hard to understand their objectives, in order to help build their trust in your intentions; identify the bottlenecks in their models and use your corporate skills to eliminate them; lever undervalued resources in poor markets, to build your own business model, whose aim is likely to be serving higher-income customers; and structure a business model that makes both partners better off by growing the markets they serve.
The bottom of the pyramid is hard to reach. But it is also, by definition, broad. Good opportunities are to be found by those prepared to seek them.
The writer, director of the platform for strategy and sustainability at IESE business school, is winner of an essay competition sponsored by the Financial Times and the International Finance Corporation on the private sector's role in development.