Profitable poverty alleviation creates a new frontier for corporate responsibility
An Article from Business Respect, Issue Number 79, dated 12 Dec 2004
By Mallen Baker
Last week, the Financial Times carried a story about how GrupoNueva aims to target the world's poor as a potential market by aiming to design and sell affordable wood and water pipeline products to this vast segment of the world's population. The company, it said, was aiming to show how profitability and corporate responsibility can go hand in hand.
The move is one of the first responses to the reasoning behind the recent book by C.K.Prahalad, The Fortune at the Bottom of the Pyramid. Prahalad's premise is that the intelligent application of markets can create a real breakthrough in tackling global poverty. After all, he points out, for more than 50 years the World Bank, donor nations, aid agencies, governments and others have taken what steps they could but have failed to eradicate poverty. It remains the world's most visible and daunting problem.
There has to be a better approach to alleviate poverty. The innate potential of the poor to innovate and create enterprise needs to be unleashed. Companies should actively provide products and services which meet real needs affordably and profitably.
This is not about community investment programmes. With the best will in the world, global poverty will not be solved by corporate philanthropy. It is about offering choices to the poor, building self-esteem and creating a positive upward-spiral effect.
There are some basic assumptions behind this approach. The first of these is that companies do most damage to the poor if they ignore them and their needs altogether. The benefits of globalisation won't be realised so long as the poor have no access to them. The second is that there needs to be real innovation to serve such markets products developed for wealthy markets cannot simply be transferred to serve the bottom of the pyramid markets. Thirdly this is core business. A choice to focus in this area may be part of a company's approach to corporate responsibility, but to be sustainable it needs to be run as any other part of a profitable business. It is not about charity.
Why have companies not rushed to embrace such concepts in the past? Predominantly, because of certain beliefs about the nature of these markets that are highly open to challenge.
One such belief is that there is no money amongst the poorest communities. And yet the aggregate purchasing power in poor economies can be immense. Economies of scale enter a new dimension when there are literally billions of people involved. Using a figure based on dollar purchasing power parity, China is a $5 trillion economy, for instance.
Another belief is that such markets are not brand conscious. In fact, the markets are very brand conscious, but they are also extremely value conscious. Aspirational brands are as important for these consumers as for many others.
The logic of developing products for poor consumers is, however, a different one to the traditional. The basic economics is based on small unit packages, low margin per unit with high volume. Products need to be designed to work in areas where infrastructures may be poor, and distribution mechanisms need to be rethought.
All well and good. But can it really work? At a recent Business in the Community event at the British Museum, Niall Fitzgerald gave several examples from the work of Unilever, which has been one of the most active companies in this area (the examples are also given in the book). For instance, in India more than 70 million children suffer from iodine deficiency. Hindustan Lever (HLL), a Unilever subsidiary, produced an innovative process for treating salt which meant that it would retain its added iodine content in spite of the harsh environmental conditions. It created an iodised salt which only released the chemical once the salt had been eaten and not before. The venture has proven to be both beneficial to health, and profitable for the company.
Another example is that of how Hindustan Lever addressed the soap market. Diarrhoea is a major cause of death, creating 2.2 million deaths annually. A significant difference to such figures can be made with some basic improvements in hygiene practices, even to such a simple level as washing hands with soap. Amongst children in developing countries, washing hands can reduce diarrhoea fatalities by 50 percent. So HLL realised that health-based education was going to be key to the development of their market.
The company approached village schools to educate children on the causes of disease, using ultraviolet dirt to show the difference between clean-looking hands washed in dirty water, and those washed with soap. The children often became the most educated in the family on hygiene, and so began educating their parents. For a country where the population is significantly not reached by electronic media, such a process was a powerful way to get messages out.
There are many other aspects to how such markets can be made to work. There has to be a revolutionary approach to the use of technology. Eco-efficiency needs to be highly advanced. Distribution systems are completely different (HLL operates through 250,000 individual entrepreneurs in villages).
Julio Moura, GrupoNueva president told students at the London Business School that his company's aim to reach to such markets represented a new frontier for corporate responsibility. It could well be that his conviction in this area will be the first of many. Prahalad's book could well turn out to be one of the most influential books of its time, and it is certainly required reading for anyone serious about the role of business in society.