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Monday, December 31, 2007

Article Review: Value at the Bottom of the Pyramid

By Abigail Keene-Babcock

Business Strategy ReviewLast fall, Business Strategy Review published an interesting piece by Juan Luis Martinez and Maria Carbonell called "Value at the Bottom of the Pyramid."? The article, available on the journal?s web site, warrants some serious discussion, especially in light of the recent profit versus social motives debates for businesses targeting the BoP.? I?m specifically thinking about microfinance institutions, where this has received a lot of media attention and heated discussion (Forbes and BusinessWeek both recently published a series of articles, available in the NextBillion Newsroom).

Martinez and Carbonell?s piece, however, is not part of the polemical debate at all. They set out to refute common misconceptions about doing business with the BoP.? They also propose that, by shifting perspectives about the capabilities of poor consumers, and by integrating openness to caring about society, companies can enhance their value chains.The authors use the Colombian energy company Codensa (a model that NextBillion has covered in detail) as an example to illustrate how a need to create greater shareholder value, a willingness to explore informal markets, and a commitment to tailoring products to BoP needs combined to fill a major gap in products and services available to millions of low income households.

The only trouble with this argument is that nowhere does the Codensa example really prove Martinez and Carbonell?s assertion that there are two ?tracks? to keeping a business going in the BoP market segment: solid business performance and social action.? Nor does it necessarily support the theory that ?the two tracks? create a forward-moving momentum for the company, one that enhances the concept of doing business (making a profit) with doing good (making a difference).?

This isn?t to say that social change was not (or is not) part of Codensa?s overall corporate vision, but I?d like to point out that Codensa would not have pursued the development of BoP products had it not been pushed to find new markets to create shareholder value in the first place ? and this initially had nothing to do with the integration of social action into the corporation?s value chain. Codensa also would not continue offering a product or service, even if it proved to be of great social value, if it were causing a decline in shareholder value in the long run.

The article suggests that ?the social action represented by adding a corporate commitment to BoP opportunities? should be integrated into the corporate value chain, while also keeping profitability front and center. I agree that it is valuable for companies to incorporate social considerations into their decision-making, especially when it comes to awareness of a corporation?s impact and long-term image and vision. But I don?t think that this proposed integration is bound to be very productive, and this is for two reasons.

One, is that I share the view that Nitin Rao also expressed in his recent NextBillion blog: at the end of the day, the "moral imperative" is not as efficient as the economic one for producing net social benefits ? and the moral imperative sometimes runs the risk of paralyzing the economic one.

Two, my familiarity with a slew of CSR (Corporate Social Responsibility) reports from the last decade tempts me to conclude that most changes made as a result of imposing CSR theory on already-established corporate practices have been largely one-dimensional and often cosmetic. The real changes have come with economic motivation ? consumer and investor demand for greater social (and environmental) impact awareness.? The corporate CSR stars have tended to be companies that had a social agenda integrated with their profitability from the beginning, or ones that began to see the economic risk involved in not taking a more proactive approach to social engagement.? Social benefit is part of the value chain for these companies, but it wasn?t just put there as a good idea ? it was an economic decision.

The core merit of a BoP-focused business lies in bringing economically sustainable and desirable products and services to the BoP ? whether or not this is motivated by a social action agenda is irrelevant. Social benefit may be part of the value chain, but it should be an effect rather than a driver of decision-making.

Thanks to Juan Luis Martinez for supplying NextBillion with the article text so we could review it.
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