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9.6 The Bottom of the Pyramid Business

As mentioned earlier, BOP signifies the lowest level in the income class distribution pyramid. Of the global population of approximately six billion people, two-thirds or four billion live on only a few dollars a day. The BOP business derives profit from these poorer classes, but at the same time, it involves the people in these lower classes in the process of operating this business by providing opportunities to participate in society to those who otherwise have no stable employment. In addition, some companies have businesses that aim to improve the living conditions of those who struggle with poor nutrition or sanitation; they often partner with international organizations or NGOs that are working on poverty issues. Companies expanding their global business are expected to contribute to society through work on environmental issues or in other areas. Global corporations face the growing need of balancing their traditional for-profit businesses with non-profit activities, and thus can gain some important suggestions from the BOP business model.

The BOP model does not merely comprise activities that contribute to society. A business must generate profits, therefore requiring companies to understand from where value is derived. Simply put, a value added is created by eliminating the “poverty penalty” of the poor who live in conditions without a reliable social system or business environment. For example, in Mumbai, India, there is a large slum area called Dharavi, as well as a wealthy neighborhood called Warden Road. The book Next Market (Prahalad 2005) compares no collateral consumer financing for both of these areas and notes that whereas annual interest rates in wealthy neighborhoods are 12–18 %, they are 600–1,000 % in the slums. Similarly, the book compares prices for water, telephone, diarrhea medicine, and rice, and observes that all of these prices are higher in the slums, where a “poverty penalty” is imposed. Highquality public utility services are not provided in slum areas, and higher credit risks imply higher service fees. If some sort of system can be implemented to enable credit transactions in these areas, new businesses can be established to promote value creation.

Microfinance is an example of a business system that reduces the poverty penalty in financial services. In such a system, locals become bankers and provide small loans. Borrowers use this funding to finance small businesses such as shops or individual services, thereby contributing to the creation of new businesses in that region. Key to this service are the reduction in credit risk whereby local citizenry become bankers as well as a personal relationship with borrowers. Bankers receive income from the interest generated when loans are paid back, creating incentives for the lenders to make loans corresponding to their ability to repay. Having many locals acting as bankers reduces the risk of bad debt, and the system generates a profit from the low interest. The system of microfinance is relatively simple, and though it began in Bangladesh through Muhammad Yunus and his Grameen Bank, it has since spread to countless operations in India as well as across the African continent. It has been accompanied by criticism as well, owing to the unreasonable amount of profit made by some banks by charging high interest rates, and the accumulation of excess debt by some borrowers, thereby becoming unable to repay their loans.

Marketing costs can become an entry barrier for manufacturers wanting to expand to a BOP business. First, a solid business cannot be built around BOP without products that have the prospect of a certain amount of demand from the poor who make up the target market. These people often live in limited communities, making it difficult for companies to understand market needs. In addition, many people are simply living day to day, causing large fluctuations in demand. Furthermore, creating distribution channels to deliver products to customers entails exorbitant costs. In such a business, where low-priced products are sold in large volumes, high demand volatility can be fatal. Thus, partnering with various players is ideal for running a successful BOP business. For example, market needs of the poor can be obtained from detailed information held by NGOs that provide local assistance. Product distribution can be built through tie-ups with banks that provide microfinance and by leveraging the local banker network.

Hindustan Unilever (the Indian subsidiary of the European CPG manufacturer Unilever) formed alliances with multiple parties to create a successful soap business in India. It first launched a global public–private partnership (PPP) to promote the idea of washing hands with soap to improve hygiene in India. It held promotional activities to instill the custom of using soap when washing hands in conjunction with the World Bank and USAID. In the process, it partnered with approximately 400 NGOs and conducted local seminars on how to use soap. It employed saleswomen in rural areas referred to as shakti, who educated locals on hygiene and offered advice in addition to selling products. The company led with the societal goal of improving rural hygiene and was successful in generating royalties and creating a brand image for its products.

Several Japanese companies have also begun similar efforts, such as Ajinomoto's nutrition improvement program in Ghana. However, only a few companies have been successful in BOP businesses. P&G invested USD ten million worldwide in a project to sell a powder that cleans water, but later realized the difficulty of generating profits from the sale of the product and instead turned it into a philanthropic enterprise (Karamchandani et al. 2011). BOP businesses benefit society by solving poverty issues that invigorate rural areas or improve nutrition and hygiene; however, companies must balance these efforts by actually creating a profitable business. BOP businesses require the creation of ecosystems that involve a broad range of players, from public organizations for developmental assistance and NGOs to local communities. Thus, companies that run these businesses must first understand the objectives of each organization they work with, and then act as coordinators in win– win joint efforts.

 
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