Inclusive business model could serve the poor

Thursday, July 3, 2008

Doing business with the poor need not be about philanthropy. Nor does it necessarily mean wafer thin margins. When the bottom of the pyramid is represented by 4 billion people with combined income of about $5 trillion, can companies choose to completely ignore them? Individually, they may be living on less than $8 a day, but as a group their income is equivalent to the gross national income of Japan, the world?s second largest economy.

Importantly, the poor are willing to pay for goods and services that take care of their basic needs ? food, clean water, sanitation, electricity and healthcare. ?But too often they suffer from a ?poverty penalty?. Sometimes they pay more than rich consumers for essential products and services,? notes UNDP?s new report Creating Value for All: Strategies for Doing Business with the Poor.

The report reinforces C K Prahalad?s argument that companies can make profit, even a fortune, by doing with business with the poor, i.e., by producing goods and services for them and employing them.

?The opportunities to do so are vast, and so are the obstacles,? note the authors of the report. In many instance, rates of returns can be higher than on ventures in the developed markets.

The greatest challenge to delivering goods and services required by the poor is the lack of information, the report states. Businesses know very little about the poor ? what poor consumers prefer, what they can afford and what products and capabilities they have to offer as employees, producers and business owners.

Another stumbling block is that consumers may not know the use and benefit of particular products, or may lack the skills to use them effectively. At the supply end, suppliers, distributors and retailers may lack the knowledge and skills to deliver quality product and services consistently, on time and at a set cost.

Lack of credit, insurance and transactional banking services are also seen as obstacles that prevent companies from doing business with the poor or reaching out with their goods and services. For want of credit, poor producers and consumers cannot finance investment or large purchased, and without insurance, they cannot protect their assets or income against natural calamities, theft and illness.

Factors such as lack of regulatory frameworks that allow business to work, enforce rules and contract, lack of access to opportunities and protection afforded by a functioning legal system also prevent business from serving the poor. So does lack of infrastructure such as roads, water, electricity, sanitation and telecommunications.

Yet, the world is replete with examples of companies that have overcome these obstacles and managed to build successful businesses around providing goods and services to the poor. For instance, the Narayana Hrudayalaya hospital group, a cardiac health care provider to the poor in India, earned a 20% profit in 2004?almost four percentage points more than the country?s largest private hospital?helped by high patient volume and an innovative payment and financing scheme.

In another case from India, a low-cost sanitation provider in India Sulabh reported a $5 million surplus in 2005 from its earned income strategy of building and operating public toilets and installing private toilets; its facilities were used by an estimated 10 million people.

Elsewhere in Philippines, mobile phone banking company Smart Communications, became the country?s leading telecommunications provider with a business model based on the mission to make mobile phones affordable and accessible. Of Smart?s revenues, 99% came from prepaid cards in 2006.

In 2003, with a net income of about $288 million, Smart was the year?s most profitable of the 5,000 largest corporations in the Philippines.

Clearly, these companies and many others (50 listed in the report) that succeeded in creating commercially viable business with the poor as their core consumers identified and implemented appropriate strategies.

Clearly, there is room for many more inclusive business models. ?There is room for more inclusive markets. And there is room for much greater value creation,? the report notes. At the end of the day, doing business with poor people is necessary to bring them into the marketplace. For governments, it is a critical step to bring people out of poverty.

Source: Economic Times (link opens in a new window)