Wednesday, February 11, 2009

Investing in Communities: Opportunities at the “Base of the Pyramid’?

by Michelle Brown / CSR Asia

Faced with recession, the response of companies to global development challenges will need to be more strategic. For many years, companies have been called on and expected to ‘do more’ in tackling global and local development challenges. At the same time, there is a growing enthusiasm for new approaches to addressing social and environmental challenges that embed a spirit of entrepreneurship and good business practices. Can strategies to engage new markets at the ‘base of the pyramid’ help make a real difference?

Charity and philanthropy alone is not going to get us there. If we want to improve the impact that business can have on communities and on development we can’t rely on charity. Many global companies use a guideline of ‘one percent of pre-tax profit’ to guide their community contributions. With this equation, despite some companies arguing otherwise, it is reasonable that with falling profits we could see ‘falling contributions’. This is not to say there is not an important role for philanthropy – I believe there is; but there is also ‘good philanthropy’ and ‘really bad philanthropy’. It also can’t be used to define an overall approach to CSR. Community investment can be one part of CSR. Like other aspects of business, companies should be able to track and measure their community investment and understand the value for both communities and for the business. Investing to build sustainable communities is a must for business. While we can continue to encourage companies to not forget about the community and to work to address poverty and underdevelopment, we need to help create new partnerships for business to have a positive and sustainable impact on communities.

Alongside this trend, companies have been looking to understand how to engage with new markets. CK Prahalad pointed to the potential ‘fortune at the bottom (or base) of the pyramid’ (BOP) in his influential book, a reference to the billions of people who are not recognized in traditional companies’ target customer audience. This book and the other writings of Prahalad and Hart were also influential for business audiences stressing the need to recognize the poor as creative entrepreneurs and not as ‘victims’. This also follows good practices espoused over the decades by development agencies. BOP theory presented itself as a strategy for companies to alleviate global challenges and tap into potential markets at the same time.

For those concerned with pro-poor development and poverty alleviation there have been some interesting reports released in 2008. All of them call on companies to focus on building sustainable communities with their core business. Last summer the UNDP released a study on ‘Growing Inclusive Markets’, which was a compilation of case studies written by 50 authors throughout the world. Recognising the contribution that micro-finance has made in this area, the authors looked for case studies from across other sectors. Cases from Asia included in the research were:
  • Coco Technologies: a Philippines company that produces geo-textiles from waste coconut husks. It is a growing and viable business that has created an additional income stream for coconut farmers, helped to empower rural women, and reduces waste.
  • Huatai’s work in China’s wood-pulp production for the paper industry is referenced. They provide alternative income sources for local tree farmers and add to the incomes of about 6,000 rural households.
  • Lafarge’s work in Indonesia is noted for the positive outcomes in rebuilding cement-based homes and businesses in post-tsunami areas. The structures provided homes for employees and the wider community and also helped the company showcase cement structures.
  • Narayana Hrudayalay, the Indian Hospital group has developed an insurance programme for low-income patients.
  • Tsinghua Tongfang’s affordable computer for rural areas in China
  • Smart in the Philippines provides mobile telecom products and services for low income and overseas communities. Its distribution system, using SMS technology, allows merchants to re-sell minutes, taking a commission on every sale; in essence creating a business opportunity for 450,000 entrepreneurs and proving telecom access to communities previously underserved.
Another interesting partnership in the region is between Danone and Grameen in Bangladesh. In 2006 they joined to form a new company called Grameen Danone Foods, which is a social enterprise. Initially focusing on affordable dairy products, the enterprise also plans to get involved in biogas and solar energy. Clearly these are examples that are ‘good for business’ and ‘good for communities’.

In reference to the BOP strategies of multi-nationals, Prahalad and Hart (2002) note that “it requires a radical new approach to business strategy”. Their research pointed to the fact that initial strategies of large companies to tap into the BOP failed because they looked at the poor only as consumers as opposed to partners in production and distribution. The strategy cannot be alien to the communities in that it wishes to serve. While early attempts were applauded for making an effort, many simply didn’t work. Many BOP strategies have not been successful because they saw the poor as a homogeneous group of consumers and, by their strategies, often created excess packaging and engaged in unsustainable business practices (Welford, 2006). Learning from the past, companies that are successfully engaging the ‘BOP’ are shifting from ‘selling to the poor’ to ‘business co-venturing’.

A useful and recently updated resource is The Base of the Pyramid Protocol: Toward Next Generation BOP Strategy by Erik Simanis and Stuart Hart (Cornell University: 2008). ‘First Generation’ BOP attempts failed because they did not adequately understand the market or consumers. The BOP protocol points to a ‘Second Generation’ of BOP initiatives, which brings MNCs into partnership with local communities creating lasting value and measurable impact. Companies can help to develop social enterprises that can in turn help them to better understand and reach a new market. But for some companies, this can mean a very different way of doing business. Local participation and a ‘bottom-up’ approach to product development are seen as crucial for such ventures to work. Furthermore, success will be measured not just on the financial viability but also on the social value created.

The Protocol walks readers through both a preliminary research and development phase and a community based planning phase. Research and development involves selecting the project site; creating multi-disciplinary teams and selecting community partners. The planning phase involves working together with communities to develop and build an initial prototype. The protocol also provides a Code of Conduct on BOP business strategies that calls for the following:
  • Design businesses that increase earning power, remove constraints, and build potential in the BOP
  • Ensure that wealth generated by the business is shared equitably with the local community
  • Use only the most appropriate – and sustainable – technologies
  • Promote the development of affected communities as broadly as possibly in ways defined by the local people themselves
  • Track the “triple bottom line” impacts associated with the entire BOP business system
  • Monitor and address any unintended negative impacts associated with the business model
  • Share best practices with local partners to the extent possible
  • Report transparently and involve key stakeholders in an on-going dialogue
  • Commit to increase community value regardless of the business outcome
Those working in this arena argue that we need to understand and measure the social, economic, and relational aspects of communities that engage in BOP projects in order to understand the full impact.

Interest in this continues to grow; even the Journal of Consumer Marketing recently had a whole edition dedicated to engaging with poor consumers. Will more companies use the ‘slowdown’ as an opportunity to ‘get ahead’ in new markets? Can co-creating social enterprises provide the answers? Thoughts? Ideas? Good examples? Lessons learned in Asia? Please get in touch.

Reports and publications mentioned in this article:
  • CK Prahalad and Stuart Hart. 2002. ‘The fortune at the bottom of the pyramid’. Strategy + Business. January edition.
  • CK Prahalad. 2005. ‘The fortune at the bottom of the pyramid: eradicating poverty through profits’.
  • Erik Simanis and Stuart Hart. 2008. The Base of the Pyramid Protocol: Toward Next Generation BoP Strategy.
  • Richard Welford ‘MDGs and BOP’’ in CSR Asia Weekly, Vol.2 Week 34 (23 Aug 2006). ■

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