Can businesses really improve the quality of life of the poor?

In a 2002 article, C.K. Prahalad and Stuart L. Hart argued that businesses could sell to the poor and help them improve their lives by “producing and distributing products and services in culturally sensitive, environmentally sustainable, and economically profitable ways” .

The authors believed that doing businesses with the world’s 4 billion poorest people living on less than US$2 per day (two-thirds of the world’s population) would require innovations in technology and business models.

Four years later, in his paper “Fortune at the Bottom of the Pyramid: A Mirage How the Private Sector can Help Alleviate Poverty”, Aneel Karnani challenged Prahalad’s and Hart’s thinking. Karmani pointed out that some of their argument was based on flawed empirical evidence and that some of the case studies referenced in the article were not actually benefitting the poor. Karmani argued that the emphasis should not be in selling to the poor bur rather enabling them as producers or employees. He concludes, “the only way to alleviate poverty is to raise the real income of the poor”.

Despite some of its flaws, Prahalad’s and Hart’s Bottom of the Pyramid (BoP) thinking - or Inclusive Businesses as some organisations might call it - has been adopted by many businesses around the world and is being promoted by institutions such as The World Business Council for Sustainable Development, The Word Resources Institute, The World Bank, and The United Nations.

As with any management approach, no one size fits all and for this reason the purpose of this paper is not to discuss the failings of BoP but rather to examine case studies that have improved the living conditions of the poor and identify the factors that have enabled their success.

Amanco

Amanco is a Latin American leader in the production and marketing of integrated solutions for the construction, infrastructure and irrigation industries.

In 2003, the President of Grupo Nueva (Amanco’s holding company at the time), Julio Moura, proposed that 10% of the firm’s turnover should originate from the low-income market segment, and for this to increase to 15% by 2010. Not only was this morally right but also important if the company wanted to grow its customer base .

In 2003, a competition was organised, in which employees were encouraged to come up with a business plan aimed at the low-income segment. The projects had to be innovative and economically sustainable.

The result was the design of a drip irrigation system that would meet the needs of small-scale farmers in Guatemala and that would use water more efficiently. This was particularly important for this country as in Guatemala 87% of the poor population depend on agriculture as the main source of employment .

AMANCO then partnered up with Guatemala’s Ministry of Food, Agriculture and Livestock, who agreed to finance the installation of the drip irrigation systems and provide technical assistance and training programmes .

According to Ethical Corporation Magazine, after only one year of the project’s implementation “participating farmers have cut labour costs by an average of a third and have seen their water use halve during irrigation. Improvements in production (up by over a fifth) and quality have translated into long-term contracts with foreign buyers and, in turn, increases in the standard of living. Farmers’ incomes have doubled to about $1,950 a year, enabling them to integrate into the formal economy and to pay for their children’s schooling” .

For its part, AMANCO estimated that for Latin America as a whole, by 2015 annual sales could total 14,000 irrigation systems with a total value of US$28 million. Not bad considering that the irrigation systems’ estimated gross margin is estimated to be around 31% .

Danone

In 2005, Professor Muhammad Yunus, the founder of Grameen Bank met with Franck Riboud, the chief executive officer of Groupe Danone. Yunus proposed to form a joint venture between Grameen and Danone with the objective of supplying nutritious food to poor children of Bangladesh and alleviate poverty through the implementation of a unique community based business model.

Accordingly, the two men entered into an agreement to form a company called Grameen Danone Foods. Today, Grameen Danone Foods produces a special yogurt called Shaktidoi from pure full cream milk that contains protein, vitamins, iron, calcium, zinc and other micronutrients to fulfil the nutritional requirements of children of Bangladesh and contribute in improving their health. The price of each 80 gram cup of yogurt is about €0.05; an affordable price even for the poor.

Grameen Danone Foods is helping to reduce poverty by creating business and employment opportunities for local people since raw materials including milk needed for production, are sourced locally. The companies that make up Grameen Danone Foods have agreed not to take out any of the profits out of the company. Instead they invest these for creation of new opportunities for the welfare and development of people. For this reason the venture is referred to as 'social business enterprise'.

The whole of the production and distribution system of Grameen Danone Foods has been constructed with the clear objective of creating as many jobs as possible within the local community. Use of machinery is kept to a minimum in its factory plant in order to promote the use of labour which should mean that the plant will be able to employ 50 full-time workers within four years.

Grameen Danone Foods also relies on developing micro-farms which supply the raw materials (milk, sugar, date molasses) used to produce Shaktidoi. Local farmers also benefit from micro-credits offered by the Grameen Bank to start up or expand their businesses, while Danone provides its expertise to help farmers improve the quality of their production. Lastly, Grameen Danone Foods has created an original distribution system based on the so-called "Grameen Ladies" who, supplied by small wholesalers, make sales door-to-door. This activity should provide income to more than 1,600 persons within a radius of 30 km around the plant .

Mi Farmacita Nacional

Mi Farmacita Nacional is a for-profit, Mexican owned pharmacy franchise with a social imperative. The company’s mission statement is "to bring medicines and special services to the regions of most necessity in the Mexican Republic and to provide health, well-being, communication and accessible prices to the majority of homes."

Mi Farmacita was established in Tijuana, Mexico, in 2003, and employs a classic franchise business structure. As of March 2007, Mi Farmacita had established 57 franchises in over 15 Mexican states.

In Mexico, low-income communities often have no convenient access to quality, affordable medicines or doctors. This is due to inefficiencies in Mexico’s healthcare system. It is estimated that 52.9% of total health spending in Mexico is out‐of‐pocket, compared to 19.9% in the US and 25.9% in Colombia. An estimated “2 to 3 million households in Mexico spend more than a third of their income on healthcare each year‐‐an expenditure that can easily lead to or exacerbate poverty” .

Mi Farmacita tries to close this gap by selling certified generic medicines for common illness such as cold, flu, allergies and pain relief. The majority of Mi Farmacita medicines are sold at a price of over 50% less than the prices of comparable patented, name brand medicines . In addition, many franchises offer doctor consultations for only US$2, where customers may receive basic check‐ups and prescriptions.

Lessons

As demonstrated above, BoP initiatives can improve the quality of life of millions of people. However, there are certain conditions that need to be fulfilled in order for this to happen. These are:

• Job creation: Prahalad, Hart and Karmani all agree that in order to meet the needs of the poor, businesses need to develop new and innovative business models. In order for this to happen, the poor need to be empowered and be integrated into the firm’s added value chain. These could be in the form of producers, suppliers, employees, or distributors. For those that advocate that the poor should be seen as a market opportunity then this is even more relevant as distribution of products and services in remote areas would be difficult to achieve without them. More importantly, as with any other customer, the poor need to be consulted in order to understand what their real needs are.

• Productivity: Products or services designed for the poor should focus primarily on helping them increase their productivity and, thus, their disposable income.
• Lower prices: By definition BoP products and services need to offer lower prices than existing alternatives. Some argue that this will help the poor as they will be able to save a higher percentage of their disposable income. However, it is likely that if a non-essential item such as a flat screen TV is offered at a lower price, this will result in the poor spending their savings, as they will still need to purchase essential items such as food. This would be counterproductive since those savings should be used for productive means.

• Access: BoP initiatives should also provide access to basic services such as education and health. Seventy-three million children around the world are not attending primary school, and more than 500,000 women still die during pregnancy, childbirth or in the six weeks after deliver . These numbers, as well as the Mi Farmacita Nacional case study, suggest that businesses can have a roll in development, particularly in countries where the government does not have the resources to guarantee basic Human Rights.

To conclude, BoP initiatives do have the potential to improve the quality of life of many people around the world. These can be by generating new employment opportunities, enabling entrepreneurs, facilitating access to basic services, or lowering prices. Companies that look at the BoP as a market should make sure that by doing so they will be raising the disposable income of the poor. Otherwise they will be accused of profiteering at the expense of the poor.