"Vince Besier" - Save the Poor by Selling Them Stuff — Cheap
April 27, 2011 The bottom-of-the-pyramid marketing movement tries to profit the developing world and make a profit at the same time.
The first slide comes up on the white-walled lecture room’s double display screens. In capital letters, it declares: “EMPATHY.”
The 40-odd Stanford students gathered in a semicircle of plastic chairs on the cement floor blink at the screen, awaiting explanation. Almost all of them are pursuing graduate degrees in some form of engineering or business — disciplines known more for unemotional logic and bare-knuckle competitiveness than getting in touch with someone else’s feelings.
Erica Estrada, a recent Stanford mechanical engineering grad with long, loose black hair, clicks to the next slide. “You need to experience what you think the end users of your product experience,” she says. “Immerse. Observe. Engage,” read the screens. Estrada brings up a photo of herself with a Burmese farmer in a rice field in Myanmar. It was taken a few years ago, when she was a student in this same class. Her team’s project had been to invent a product to help the rural poor in the isolated Asian nation. The next few pictures show her and her fellow students politely watching the Burmese farmers at work. But soon, one of the Americans has taken off his shoes and is hauling giant watering cans through ankle-deep mud alongside the villagers. “That’s what I’m talking about,” Estrada says.
The class, dubbed “Entrepreneurial Design for Extreme Affordability,” is premised on a counterintuitive idea: You can enrich the poor by selling them stuff. It brings together teams of graduate students from business, design, engineering and other disciplines to research a specific problem in developing-world communities, design a product to address it, and then, with the help of local and international organizations, sell that product as cheaply as possible to as many people as possible. The course has yielded some impressive results. Students have designed low-cost solar-powered lanterns, extra-efficient irrigation pumps and other useful products now being used by tens of thousands of people from India to East Africa.
“We are not treating the poor as recipients of charity, but as customers,” says Jim Patell, a professor at the Stanford Graduate School of Business who founded the program. “That means you need to figure out what they really want. That means treating them as equals. Charities don’t have to do that.”
For decades, the main model of Third World aid has been the obvious: Give stuff to poor people — be it hydroelectric dams, surplus food or medical equipment. But Western countries have poured some $1.5 trillion into such efforts over the last 60 years, and more than 1 billion people worldwide still live on less than a dollar a day.
The Extreme Affordability program is an experiment with a dramatically different approach to fighting poverty, one that in recent years has generated tremendous buzz among academics, development workers, entrepreneurs and corporate executives. It’s called “bottom of the pyramid” marketing. The idea is to harness capitalism to solve the problems of the world’s poorest — those at the bottom of the global economic pyramid. If you design a useful product for a market rather than for charity’s sake, the theory goes, the target population is more likely to actually want it and use it. If businesses can turn a profit making that product, it not only creates jobs but will keep getting made even if Western donors lose interest. And there should be colossal profits to be made: The world’s poor don’t have much money individually, but there are billions of them.
Get rich by helping the poor. It’s a powerfully alluring idea. A surge of books, symposia, blogs and corporate annual reports champion it. Major organizations, including the World Bank and the United Nations Development Program, have set up programs that support it. Venture capital funds are giving millions to startup firms trying to implement it. MIT, Penn State, Cornell and other top universities in the U.S. and other countries are teaching MBA students about it. “It’s picking up, big time,” says Luiz Ros, manager of a $250 million Inter-American Development Bank fund dedicated to supporting bottom-of-the-pyramid ventures.
But despite all the hoopla, a couple of key questions have yet to be fully answered: Can companies really make money from the destitute? And if they can, is that always a good thing?
The notion of targeting products to the poor to help everyone get richer isn’t entirely new. Henry Ford famously raised the salaries of his assembly line workers so that they could buy his cars. More recently, microfinance — tiny loans to would-be entrepreneurs in poor communities, as pioneered by Muhammad Yunus‘ Grameen Bank — has sparked a worldwide industry that now serves some 25 million people.
The phrase “bottom of the pyramid” was coined in 2002 in a groundbreaking paper by Stuart Hart, a professor at Cornell University’s Samuel Curtis Johnson Graduate School of Management, and the late C.K. Prahalad, a prominent management specialist at the University of Michigan. “At the time,” Prahalad later wrote, “the proposition that the private sector had a critical role to play in alleviating global poverty was generally met with skepticism. The idea that they could have the greatest impact through creating profitable businesses serving the 5 billion people who represented the ‘invisible, unserved market’ was even more radical.” Nonetheless, the theory attracted considerable attention, even more so after Prahalad expanded it in 2004 into a best-selling book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.
“What is needed is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win-win scenarios where the poor are actively engaged and, at the same time, the companies providing products and services to them are profitable,” Prahalad wrote in the book’s first chapter. “Market development at the bottom of the pyramid will also create millions of new entrepreneurs at the grass root level — from women working as distributors and entrepreneurs to village level micro enterprises.” He detailed several successful examples, such as companies selling single-serve packets of shampoo and tea and others that have developed low-cost but high-quality soap, banking services and even eye operations aimed at the poor in developing countries.
Prahalad’s book caught fire. Global luminaries from Bill Gates to Madeline Albright gave it admiring reviews. In the book’s 2010 reissue, top executives of globe-spanning corporations, including GlaxoSmithKline, Philips Electronics and Unilever, added glowing comments on how Prahalad has influenced them.
“Ten years ago, no one in multinational corporations was thinking about poverty as a business opportunity,” says Hart, who recently published his own follow-up, Next Generation Business Strategies for the Base of the Pyramid. “Today, there are hundreds upon hundreds of businesses focused on the bottom of the pyramid.”
Patell, who launched the Stanford program in 2003, is a solidly built man with a softening midsection, a dimpled chin, flat blue eyes and a no-nonsense, blunt-spoken manner verging on gruffness. He’s always been a hands-on kind of guy. He worked in his father’s tool-and-die shop in upstate New York as a teenager, then trained as an engineer at MIT and Carnegie Mellon. He designed Navy destroyers for a defense contractor before joining the faculty of Stanford’s Graduate School of Business. Teaching stints in Zimbabwe and South Africa got him interested in the problems of doing business in the Third World.
But he brushes aside questions suggesting that he might have an altruistic motive in running this course. Building warships or baby incubators — it’s all just engineering, he says. “I’m not going to say designing products for poor farmers in Burma is good, but doing it for writers who want a nice bag is less good,” he scoffs, gesturing at my undeniably handsome leather satchel as we talk on a classroom couch. “That’s not my job.”
Nonetheless, it’s clear he’s deeply, personally invested in the course. He and his wife host some of its events at their home. He pays for the students’ travel on his own credit card, taking it upon himself to get reimbursement out of Stanford. And he has helped several of his students launch companies after they graduate.
The course attracts a wide range of students. Timnit Gebru, for instance, fled civil war in her native Ethiopia with her parents when she was 15. “I liked the sound of this course because you actually build an actual product to help people,” says Gebru, who is studying electrical engineering.
“Yeah, it’s not hypothetical; it’s the real thing,” chimes in Will Harte, an earnest 23-year-old from Portland, Maine, who is studying for a degree in Earth systems.
During the two-quarter course, the 40 students are divided into teams and partnered with nonprofits working in Cambodia, Myanmar and Indonesia and on Arizona’s White Mountain Apache reservation. Some of the students spend their spring break in those places, essentially doing in-depth market research. They immerse themselves in the culture, talking to locals about their needs and documenting in notes, photos and video how they meet those needs — how they irrigate their fields and heat their homes, where they get their materials. “Engineers are usually told to make a specific product,” says Patell’s co-instructor David Beach, a gray-bearded, excitable professor of mechanical engineering. “What we try to do is figure out who needs something and what is it that they need in much more general terms: better light, more efficient ways to get water to their croplands. We abstract the problem back to a level like that and then go out and explore what solutions there might be with the help of people who live and work there.”
The team uses those findings to come up with an idea for a product or service. The students then design and prototype it back in the workshops and whiteboard-and-Post-It-crammed brainstorming spaces of Stanford’s design school. At course’s end, the teams deliver the result — along with a business plan for marketing the product they have designed — to their partner organizations.
Many of the products never go further than prototype. But more than a few have been successfully adopted by in-country organizations or pushed forward by companies, for-profit and nonprofit, launched by the students themselves. Estrada’s team, for instance, came up with a solar-powered LED-based lantern to replace the dangerous, inefficient kerosene lanterns they found Burmese shopkeepers using. She turned the idea into a commercial venture, co-founding a company called D.light, which has since sold more than 250,000 of the lights in some 40 countries. The company recently hauled in $5.5 million in investment to help it toward a goal of lighting the homes of 100 million people by 2020. Other students have set up organizations to market other products from the course, including paper asthma inhalers, a premature infant incubator that costs just $25 and a $20 prosthetic knee.
“We’ve done 60 projects so far,” Patell says. “Fifteen, easy, have been good. That’s a better hit rate than most Silicon Valley startups.”
Why make the poor pay for such items, rather than giving them away? “If you don’t buy it, you don’t value it,” says Stuart Coulson, a Silicon Valley investor who volunteers as a lecturer with the Extreme Affordability course. There are, he points out, all kinds of examples of donated humanitarian goods being misused — mosquito nets turned into wedding veils, energy-efficient cook stoves converted into planters. “If someone buys something, it’s much more likely it will be used and kept in good order. And then they have the right to demand that it works and works better than the competition, so there’s an incentive to keep improving the product. It’s sustainable, because the manufacturers are making money. You’re not depending on some donor’s largesse.”
To hold on to their business, entrepreneurs also need to provide maintenance and spare parts, something nongovernmental organizations often fail to do. And businesses are naturally driven to expand, a pressure that doesn’t often apply in the nonprofit world. With a for-profit model, Coulson says, “you build this organic thing that just spreads on its own.”
But all of that reasoning holds true only if one major condition is met: The business must actually be profitable. For several reasons, profit is where the bottom-of-the-pyramid principle runs into trouble in practice.
First, it’s hard to make a quality product that’s cheap enough for poor people in the developing world to buy. D.light’s lanterns, for instance, cost from $10 to $45 – a major outlay for someone living on $2 a day. “It’s not yet at a price where most of the people we’re targeting can afford it,” Estrada admits.
Distribution is also a massive challenge. “Companies here can just assume that FedEx or a trucking company will carry their products to wherever they need to go,” Coulson says. But in the developing world, there’s no guarantee that there will be trucks to move your goods — or even roads for the trucks to drive on. Coulson once visited a village in Indonesia that wanted to install a micro-hydropower station to generate electricity from a nearby river. “It was an eight-hour jeep ride from the nearest town and then another mile from the asphalt, and then you had to cross a rope bridge over the river to get to the village,” he says. The generator had to be designed in pieces small enough to be carried by hand over the bridge.
Market research, a key component of any business plan for the Western world, is another hurdle. Bottom-of-the-pyramid consumers often lack the education to answer written surveys, and the marketplace has few comparable products from which to extrapolate potential sales. “Solar technology is a brand-new concept for most of our customers,” says Dorcas Cheng-Tozun, a D.light spokesperson. “Some have never even seen electric light before. Our marketing efforts have to incorporate an extra level of information that helps our customers understand what the product is, how it is used and how it can benefit them.”
As a result, so far, there are precious few major success stories for bottom-of-the-pyramid products. “Only a handful of enterprises in low-income markets are commercially viable and operate at scale,” note the authors of a 2009 study by the Monitor Group, a Cambridge, Mass., corporate consulting outfit. With all that in mind, Aneel Karnani, a professor at the University of Michigan’s Steven M. Ross School of Business, concluded in a 2010 paper that “there is no fortune at the bottom of the pyramid. Marketing socially useful products to the poor offers only limited business opportunities.”
Hart draws a different conclusion: Businesses have been doing it wrong. Most corporations that have tried selling to the bottom of the pyramid have done so simply by making cheaper versions of their existing products, he says. “That doesn’t work well,” he says. “What we’re discovering is we need to move from a mentality of finding the fortune at the bottom of the pyramid to creating the fortune with the bottom of the pyramid.”
To create products the developing world will buy, Hart says, companies must more or less do what Patell does: send their people into urban shantytowns and rural villages so they can connect with locals and figure out what they really want and how it can be made and sold to them — with the help of local entrepreneurs. He has even developed a research protocol to guide companies through this process.
There are at least a few clear-cut cases of corporations doing very well with, while also doing good for, the bottom of the pyramid. The astonishing proliferation of cell phones throughout the developing world is the standout example. Eight million new users sign up for mobile service in India alone every month; more than 60 percent of the population already has one. China’s biggest mobile carrier boasts more than half a billion subscribers.
That growth is generating big profits for established mobile providers and spawning new ones, while also creating countless jobs for local vendors that sell prepaid calling cards and electric chargers for phones. There are other benefits: Farmers, fishermen and small entrepreneurs use their phones to keep abreast of local weather and market conditions, and mobile phones hold out great promise for better delivery of financial, educational and government services to the poor.
The story of the mobile industry seems to prove the bottom-of-the-pyramid theory. But, as the scientific adage goes, the plural of anecdote is not evidence. It’s possible that other products might sell in the developing world but do more harm than good for the people who live there.
Prahalad took pains to praise the consumer savvy and entrepreneurial acumen of the poor. “The process must start with respect for bottom-of-the-pyramid consumers as individuals,” Prahalad wrote. “The process of co-creation assumes that consumers are equally important joint problem solvers.”
But research indicates that poor people are just as likely as anyone else to throw money away on useless and even harmful junk, whether it’s lottery tickets or cigarettes. The poor may be even more prone to do so, Karnani points out, given their lower levels of education and access to information. There are also fewer restrictions on marketing vices like booze and smokes in the Third World. “DOM Benedictine, a French liqueur that contains 40 percent alcohol, touts its health-giving and medicinal properties to poor people in Malaysia. United Kingdom-based Diageo likewise assures Malaysian consumers that Guinness Stout promotes virility,” Karnani writes. That may help explain why a 2007 MIT study found that people living on $2 a day or less in several developing countries spent 5 percent or more of their incomes on alcohol and cigarettes.
Corporate executives’ primary allegiance is to shareholders, not customers. Cigarettes, soft drinks and junk food — products that are already widely sold to the poor — may add something to the local economy by enriching local suppliers and vendors, but their overall impact on the community is surely a net negative. “Simply selling to the poor does not necessarily improve their welfare or reduce poverty,” writes Nancy Landrum, an associate professor of business at the University of Arkansas at Little Rock, in a paper critiquing Prahalad’s work. “In fact, one can question whether multinational corporations are serving a need or creating a need where none previously existed.”
Even seemingly benign products can have disastrous impacts in the context of extreme poverty. Swiss Food giant Nestle successfully promoted its baby milk powder products for years to women in Third World countries — even though many poor mothers lacked the sanitary conditions, refrigerators and clean water necessary to use formula safely. The World Health Organization estimated in 1981 that the accompanying shift to bottle-feeding in the developing world may have boosted infant mortality rates by as much as tenfold in some areas. Nestle finally curbed its formula marketing campaign in 1984 after enduring a seven-year international boycott.
There’s also the possibility that introducing a new product into an economy will displace a locally made one, costing jobs rather than creating them. One of the Stanford program’s projects, in fact, did exactly that. Students came up with a metal band that greatly strengthens mitads, the clay disks Ethiopian villagers cook bread on, tripling the disks’ life spans. The Stanford-designed bands save villagers money — but cut directly into the livelihood of mitad makers.
“There are winners and losers,” Patell says. “We try to have our students understand that there may be difficult consequences that they need to think through, and talk to those that will be affected.” In that case, he says, mitad makers were licensed to sell the bands along with their clay disks.
Hart acknowledges these pitfalls, but on balance, he says, bottom-of-the-pyramid strategies deserve a chance. “It’s absurd to say there’s no opportunity in a market where two-thirds of humanity is underserved,” Hart says. “Or to say it’s up to governments or aid agencies to cure poverty. We’ve been doing that for 50 years, and it hasn’t worked. There is a role for NGOs and governments, but we need more arrows in the quiver. I think this new model has enormous potential.”
The evening after Estrada’s lecture, the Extreme Affordability class gets into gear with a crowded buffet dinner in the classroom. The first few weeks were preparation. Now, the students will actually meet representatives from the partner organizations and choose which projects they’ll spend the next several months working on. Students, teachers and visitors jostle together on stools and folding chairs, paper plates loaded with chicken cacciatore and tortellini. Patell briskly introduces one speaker after another.
First up is Jim Taylor, a balding, 60-ish man wearing a blazer over a striped shirt; he is director of Proximity Designs, a Myanmar-based organization that helps poor farmers. “We sell all our products — we don’t give anything away,” he tells the room. “We give people the right to say no. That makes it a much more reciprocal, dignified relationship.”
The Extreme Affordability classes’ greatest successes so far have come from partnering with Proximity Designs. Flashing one slide after another up on the screens, Taylor explains how earlier classes developed foot-operated irrigation pumps that Proximity has gone on to sell to tens of thousands of local farmers. With the productivity boost they get from the pump, he says, the farmers typically see their incomes double or even triple. “We have countless stories of lives that have been changed,” Taylor says.
He is followed by a half dozen other do-gooders. Not all the projects are exactly sexy. One group wants a gadget to efficiently plant fertilizer pellets. Another needs help coping with excess human excrement; might there be a business model to profitably remove and treat it — even convert it into fertilizer?
No one seems surprised when the last speaker to take the floor is from ITT, the giant U.S. corporation best known as a defense contractor. Engineering manager Humberto Meza explains that ITT is also the world’s biggest manufacturer of pumps. Irrigation pumps, boat pumps, septic pumps — pretty much anything that moves fluids. Meza is volunteering to be a resource to the students; they can visit ITT’s facility in San Diego for mentoring and ideas, he tells them.
The presentations over, the lights come on and the room wells up with energy and excitement. The students swarm around the presenters, asking questions, swapping ideas. Patell beams at the scene like a parent at a high school play in which all the parts were performed by his kids. “This is what I live for,” he says.
ITT’s Meza is also pleased. He’s not embarrassed to say that ITT is hoping to find ways to produce their pumps cheaply enough to sell in the developing world. “The management team, including myself, wants to do something to help those in need,” he says. “And it could be good business. Even if you only make $1 on every pump, if you sell 10 million of them, that’s a lot of money.”