Net Impact Soap Box

Sunday, November 16, 2008

Capitalism Next: Sustainable Capitalism in Emerging Economies

On November 10th, as part of Capitalism Next, an innovative speaker series organized by the NetImpact Chapter at Haas in collaboration with the Sustainable Products and Solutions Initiative, three eminent practitioners shared with us how they were combining the power of business with the needs of consumers at the Bottom of the Pyramid (BOP) to create sustained social impact. It was a great experience to hear live from people who were practicing the groundbreaking model that was described in C.K.Prahalad’s seminal book “The Fortune at the Bottom of the Pyramid”.

Mosse Lee from the William Davidson Institute at the University of Michigan (http://www.wdi.umich.edu/) , shared with us the work his organization was doing in the field of social impact measurement. When Mosses described the opportunity that currently exists in the BOP market - $5 trillion, it was very difficult for me to understand why any levelheaded businessperson would want to ignore this tremendous opportunity. However, Mosses descried some of his reservations about thinking of this market as a market in the traditional sense where BOP consumers are purely purchasing “stuff”. Instead Mosses laid out the foundation of Co-creation, an innovative concept where the poor are treated as colleagues, entrepreneurs and innovators just as much as they are consumers. In my view this is a much better model of serving the BOP market as it not only provides the poor access to goods and services that improve their lives, but it also enables job creation and true economic development at the BOP.  In his mind the most important challenge in advancing BOP strategies, which I agree, is the challenge of attracting professional talent – MBA’s , Lawyers etc who are traditionally leery of building their careers in organizations that focus on such non-traditional business models.

Katie Schmitz, from WaterHealth International (WHI) (http://www.waterhealth.com/), had a different experience set in serving the BOP. Her organization, through public-private models is revolutionizing the delivery of water, the #1 global source of preventable diseases with more tha 2 Billion people lacking access to clean sources of drinking water. The success that WaterHealth achieved was due their unique ability to combine technological innovation while transforming consumer behavior. Having grown up in the developing world, the scarcity of water is not new to me. Long lines, and once a week supply of drinking water was all part of my life growing up and the lives of many millions even today across the world. The lost productivity in terms of time spent securing and transporting water by people at the BOP is an opportunity cost that cannot be ignored and left to the public sector alone to solve. Innovative ways where the private sector can collaborate and enable a sustainable solution for critical resources such as water is vital and WaterHealth is doing just that. Katie echoed Mosses regarding the key challenge that BOP organizations were facing is the acquisition of professional talent.

Israel Moreno, the General Manager of Patrimonio Hoy (http://www.cemexmexico.com/se/se_ph.html), the innovative BOP program initiated by CEMEX considers the role of CEMEX at the BOP is not just to sell more cement in order to make the poor build more rooms and walls and roofs, but instead it is about creating communities through creative approaches where economic development becomes part of the core business strategy. For example, CEMEX in addition to enabling low-income people realize their dreams of a quality dwelling, it also enables public education to spur true sustainable economic development at the BOP. According to him the key challenge facing BOP initiatives is scale. CEMEX is exploring ideas by collaborating with NGO’s and other public sector agencies to develop plans to scale up the tremendous double bottom-line success they have realized.

A healthy discussion session helped the audience get into depth and ask critical questions to the panelists. Some very interesting insights came up when Isha Ray, the moderator, who is an Assistant Professor at ERG (http://bie.berkeley.edu/), questioned the tensions that arise from various stakeholders in BOP initiatives. WHI has had several tradeoffs to make as they served their customers at the BOP, which brings a different set of constrains as compared to serving consumers in traditional markets. On one hand NGO’s were slowing things down by arguing that water should be delivered for free to the BOP, on the other hand local governments pushed WHI to expand faster when they took notice of the successful water delivery models and finally investors were pushing for quick returns on their investment. Such a challenge is inherent in BOP models due to the private-public aspect of the business model. According to all 3 panelists, the only way to approach this is to get clear buy-in and commitment from Senior Management, hire people in the organization who “get BOP” and finally have a cohesive organization that is strongly committed to the social cause and thus doesn’t sideline BOP initiatives when the “going gets tough”.

There were a few points that I felt was not very consistent among thee 3 different panelists. A key question was the extent of social impact assessment that was done. I was surprised to find that WHI does not measure the social impact of their BOP business initiative and instead relies on general indicators such as every $1 spent in water and sanitation yields $3-$30 in benefits. While the positive social impact of clean water is obvious, this however comes at a cost to the consumer who in this case is paying a certain fee for water. On the other hand CEMEX has a very systematic impact assessment requirement as part of their Patrimonio Hoy program.

Another key question that concerned me was that as much as BOP was universally defined as “Bottom of the Pyramid”, WHI talked about their model impacting the “Base of the Pyramid” which is traditionally defined as a higher income and thus higher willingness to pay segment of the population in the developing sector. When pushed by the moderator, all 3 panelists confessed that ultimately serving the true “Bottom of the Pyramid” using a private sector approach is truly difficult and the role of aid and subsidies must be considered in serving the poorest of the poor. After all not one among us who live in the US pay full price for water, and if we can avail subsidies the poorest of the poor most definitely should get their part.

I came to the meeting with the notion that the BOP model is the cure-all, but I walked away with the realization that the fate of poverty and the poor cannot be left to the impersonal economics of dollars and cents alone, and the age old factors of human empathy, service, giving and hope is alive and much needed in the solution to ending poverty in the world.

- Vijesh Unnikrishnan


Read more!

Thursday, November 13, 2008

Who is the BOP?

I will share a few insights from my experiences working with enterprises in small communities in Africa and India, as well as the Capitalism Next Seminar held at Berkeley on Monday. Regardless of whether it is the public or the private sector who is providing services, it is important to distinguish which segment of the population we are truly targeting. The term “Base of the Pyramid” has gained popularity for both private and public sector funds. World Resources Institute identifies the BOP as those households making $3,000 or less per year. (about $8/day) Although in India the average household size is 5 people, not all of those are income generators. The United Nations has always considered the very poor as those making less than $2 per day (in PPP). I often find BOP ventures to draw a fuzzy line around who they are truly targeting.

When we target customers are we targeting the BOP, or rather mislabeling those who are indeed lower-middle class? If it is the latter, what then happens to the true BOP? Are they marginalized even further?

For the true BOP, once the most basic needs are covered, such as food, water, fuel for stoves, and cooking basic health needs, it is very difficult to generate substantial savings. Most of India’s BOP population lives in rural areas – 500 million people – where income is heavily dependent on farming. Farming incomes are highly cyclical, making the steady payback periods required for long-term financing very difficult. Given income cyclicality, it is rare to find microfinance institutions, the only institutions providing financing to the BOP, providing loans that are longer than a few months, and over 90% of all micro loans go for business needs that are quickly paid back through sales.


Two types of products in BOP markets perform well outside of the most basic categories such as food and fuel: 1) products that increased earning potential and 2) aspirational products. The first category is straightforward: if a product can increase the productivity or income potential of a BOP consumer, such as farming equipment or goods for a small shop, it has a natural and accepting market. The second category is more controversial, but important. Some companies, such as Proctor & Gamble and Coca-Cola, sell products in very small quantities that are considered luxury items for BOP consumers. However, a very small packet of detergent that may be used to clean clothes is not as controversial as selling an unhealthy product that may displace more important nutritional purchases. While permanent shelter structures can be both income generating – such as mixed use business/home structure – and aspirational, it is still very difficult to scale down a permanent building structure to a cost level where it makes sense to invest for business or purely pleasurable reasons.  

Government subsidy or slum improvement programs could alleviate the gap in the market between cost and disposable income, but government projects are problematic for multiple reasons:
  • Government money/subsidies are typically available on a project-by-project basis; 
  • Government money/subsidies are not consistent; 
  • Various governing bodies require that construction dollars are allocated to the lowest bidder, regardless of quality; 
  • The building industry is characterized by high levels of corruption, particularly around government project schemes. 
In contrast, the lower middle class have characteristics which make them an attractive opportunity for solutions that both do ‘good’ and are good business. This group is repeatedly identified by microfinance institutions, builders, NGOs, and research reports as the low-income group with the greatest potential for private sector services. A typical worker in this segment holds many of the jobs that support the higher income brackets such as drivers, in-home maids and cooks, and office servers and. This group is benefiting greatly from the rapid economic expansion in India, and its people are upwardly mobile. Heavy expenditure in child education is one of the first investments made by people moving out of subsistence living, and a key driver of the dramatic growth in the “Working Poor” and the middle class in India. As income rates climb, a new ability to generate savings drives demand for housing.

-Mira

Read more!

Tuesday, November 4, 2008

Announcing Partnership with Indian School of Business

Announcing Partnership with Indian School of Business Net Impact Chapter

We are thrilled to announce a new Sister Collaboration with the Net Impact Chapter of the Indian School of Business, Hyderabad. ISB is a top-ranked, research-driven business school with leading thinkers on social and environmental issues in emerging economies. The Net Impact Chapter in Hyderabad has been working since 1993 to examine the intersection of business and social responsibility through educational seminars and pro-bono consulting projects. http://www.isb.edu/pgp/life/NetImpact_club/Index.html

Over the summer we met with the Hyderabad Net Impact President and the ISB Center on Emerging Markets. We are now launching a program to share seminars from our clubs via video webcasting and a joint blog. Both Haas and ISB students will blog their reflections on the Capitalism Next Seminar Series. We will also blog about seminars hosted by ISB.
Please visit the ISB blog to read their entries: http://isbweblog.com/
Read more!