NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, April 1, 2011

For a company to do business at the base of the pyramid, it must see financial upside. For the past several years, that upside has been conceived as a “fortune” to be tapped largely by selling goods to poor customers.

Indeed, many companies believe that growth will come from this market. However, many have struggled to find the right products, prices, and distribution routes through which to make this fortune materialize. With the exception of a tenacious few, most companies have not been able to make low-income markets work.

Often, due to a one-dimensional or short-sighted approach, they have not been able to scale their projects and attain profitability. While these companies may be tempted to seek easier profits, they would be remiss to walk away just as we are refining our understanding of this demographic.

In the last several months, major business thinkers and academics have released new research and theories that offer a more nuanced understanding of how we can do business at the base of the pyramid. Ashish Karamchandani and his team at Monitor Inclusive Markets write in the Harvard Business Review this month about how to overcome barriers that have previously prevented companies from innovating in this market.

The article emphasizes the need to look at the entire value chain, pointing to examples of companies that have developed business ecosystems, created new distribution channels, and designed multi-sector partnerships to yield meaningful growth in revenues. These disruptive models have required companies to completely rethink both the product offering as well as how that product reaches this segment.

This emphasis on investing across the value chain marks an important shift from simply viewing the poor as consumer or producer, and instead looking at the system in which this demographic lives. Using the simplistic dichotomy of producer/consumer is dangerous, said Ted London, senior research fellow at the William Davidson Institute and University of Michigan faculty member, in a recent phone interview. Why? Because it overlooks the mutual value produced by working with the poor as partners in a larger system.