HBS models look for new markets while serving the global poor

At $55 a copy, “Business Solutions for the Global Poor” (John Wiley & Sons, 2007) won’t be a hot seller in what economists call the base of the pyramid (BOP).

That’s the informal, localized, and little-known stratum of the global market in which 80 percent of humanity – living on an average of $700 a year – does its buying, selling, and trading.

But the 433-page book, a thematic presentation of business models compiled from a 2005 Harvard Business School (HBS) conference, may sell well in the corporate world. The base of the pyramid represents high potential for revenue – up to $500 billion a year. Add in food and other consumer goods and that figure reaches $1.7 trillion.

“When you finally boil it all down to the products and services these folks consume – that is a vast market,” said V. Kasturi Rangan, the Malcolm P. McNair Professor of Marketing at the Harvard Business School and co-chairman of HBS’s Social Enterprise Initiative. “It’s not a fortune, but [these markets] are diamonds in the rough. By addressing them creatively one can create enormous social and economic value.”

Rangan was one of four HBS co-editors of the new book. This semester he is co-teaching a course on business solutions for global poverty.

Despite the profit potential, he said, only 50 or so multinational companies (there are 63,000 worldwide) have tried to penetrate the base of the pyramid.

Standing in the way are barriers: social (poor consumers may be unemployed or underpaid); cultural (they dislike risk and can afford to buy only in small quantities); and material (societies at the base of the pyramid often lack the hard and soft infrastructures that developed nations take for granted: roads, transportation systems, credit agencies, and the rule of law).

Yet a new wave of investment in unexplored markets could improve the lives of the world’s poor, said Rangan. It could also open a new source of steady profit for corporations, which are close to saturating “mature” markets at the top of the global economy, including those in wealthier areas of China, India, Indonesia, and Mexico.

“It’s almost by necessity that companies are seeking growth from these markets,” said Rangan.

Harvard Business School, he added, is out ahead of a wave of corporate and academic interest in business solutions for the global poor. For one, there is the new book, which appeared in January. Its 32 case studies are co-written by business academics and business practitioners, ensuring its content a robust legitimacy, said Rangan.

Add to that the full course on global poverty that Rangan teaches with HBS senior lecturer Michael Chu; a related HBS seminar series for faculty; and a student-led social enterprise conference every spring.

This is not tilting at windmills, said Rangan. The aim of business should not be to alleviate global poverty, he said, but to penetrate these hidden markets in such a way that both companies and the struggling poor can gain.

Businesses won’t target the lowest layer of the base of the pyramid – the “poverty market,” where 1.2 billion humans live on a dollar a day or less. But they will target the estimated 2.8 billion consumers in “submerged markets,” where incomes of up to $5 a day are more the norm.

“These folks need basic stuff,” including jobs, said Rangan, a native of India and a 24-year HBS teaching veteran. They also need food, clothing, shelter, potable water, reliable energy, and primary-level education.

“This is not a market where the private sector can go alone,” said Rangan. Opening the economic potential of the base of the pyramid requires the foresight and intervention of governments as well, he said. “It’s a cooperative opportunity.”

“Business Solutions for the Global Poor” puts the spotlight on some of the companies already exploring profits in nontraditional markets.

In 1999, CEMEX, a global building company based in Mexico, launched Patrimonio Hoy (PH), a project intended to ease credit for poor families in need of cement and other materials. Local promoters – 98 percent of them women – boosted their incomes; the speed of adding sorely needed housing more than doubled; and CEMEX’s self-built market segment will eventually make steady profits – an estimated $24 million per year by 2009.

In 2004, Eastman Kodak Corp. saw potential in selling film products to the rural poor in Brazil, who were unlikely to tap into the digital age. Since then, its countrywide sales of traditional cameras and high-margin film have increased 60 percent – and the poor have access to cheaper cameras.

In India, Unilever launched Project Shakti in 2001 as a way to broaden its sales of detergents, soaps, and oral care products. It had long ago captured the 250 million Indians at the top of the pyramid. Now it reached out to an untouched rural market of 500 million consumers.

Hindustan Lever Ltd. (HLL), a Unilever subsidiary, overcame transportation, communication, and cultural barriers to reach out to consumers in villages of 500 or more. Rural networks of entrepreneurial women gained income and quality of life, while HLL’s bottom line improved. By 2010, the subsidiary estimates that its rural sales will account for 10 percent of net income.

But the base of the pyramid may be hazardous territory for big companies. If the temptation remains “to make a huge profit right away,” said Rangan, “you draw the wrath of the civil society.” The first aim of companies is to create value for shareholders, he acknowledged. But to sustain that, he said, “you have to add social value.”

Adding profits while adding to a consumer’s quality of life means “keeping your social license to operate,” said co-editor Brooke Barton, a research associate with HBS’s Global Poverty Project.

In the annual reports on the near future, companies will record a “double bottom line” by routinely enumerating social value along with profits, said Rangan. Metrics are being developed by the Global Reporting Initiative, an international sustainability group based in the Netherlands.

“It’s a wave that’s sweeping the business world,” said Rangan. He then paraphrased a friend: “The business of business is to make a decent profit decently.”