World is Green

The Base of the Pyramid concept was first suggested by Prahalad and Hammond as a way to tap into the consumer power of the poor people around the world.

In a scathing review of their work,  Dr. Aneel Karnani provides an alternative.

Atanu Dey provides a good summary of the paper and the possible solution.

The consumption issue:

Karnani’s paper argues against the BOP proposition. He summaries the BOP proposition as: there are profits to be made by selling to the billions of the world’s poor, and by doing so, bring prosperity to them, thus alleviating poverty, and that multinational corporations (MNCs) should sell to the poor to do good while doing well for themselves.

Production opportunity:

Karnani denies that the BOP claim that there is untapped purchasing power at the BOP. He says that the way to help is to raise the real income of the poor. The poor must be seen as producers, rather than as consumers. That is, buy from the poor instead of selling to them. He cites Amul and ITC e-Choupals as examples of more efficient markets–where the poor are the producers—that increase real incomes. And if you have to sell to the poor, then make available lower quality goods which can be priced lower so that the poor can have greater choice along the price-quality spectrum.

Possible solution:

I agree with Karnani that you have to increase the real incomes of the poor by seeing them as producers. This I believe can be done by two ways. First, the “distribution” route: produce (possibly more) stuff, and give them a larger share. This lump-sum transfer will increase their real incomes. Second, the “production” method: help them produce more and also become more productive. The former is unlikely to appeal to the rich.

To do the latter, you have to make markets for the production of the poor more efficient so that they retain more of the value they produce. To make them capable of producing more, you have to educate them. There is where I believe the fortune at the bottom of the pyramid lies. Education has positive returns in today’s world. The return on investment in education is positive. That means, the cost of the education will be more than paid for by the subsequent increase in the real income. But the poor are credit-constrained. So the way to help the poor is to release that credit constraint through financing education. How to do that is a different kettle of fish which we will leave for a later date.

Another way of looking at this is:

The essential requirements of this model are:

1. The productive capacities of the poor are organized, developed and leveraged as inputs to business;
2. Such process contributes to creation of commercial value for business;
3. Such commercial value yields economic surplus i.e., the commercial
value exceeds all costs involved in its creation, and / or strengthens
the competitiveness/growth of business; and
4. The poor are remunerated in a fair manner for the goods/services that they provide.
Consequently, the poor do become an important part of the definition of business, to the benefit of business and themselves.

It should be a very clear case that consumption decreases incomes. It is work and production that can produce income. Then, the challenge is to create a way to facilitate this income generation for the poor.

The Financial Times business education section has a small video lecture series from the Indian School of Business on the “base of the pyramid“. Reuben Abraham, a friend of mine, is a Professor at ISB and Director of the Base of the Pyramid Learning Lab. He provides the introduction and has some interesting ideas.

Reuben Abraham points to an article in Knowledge @ Wharton on Euvin Naidoo, president and CEO of the South African Chamber of Commerce in America where he talks about the potential of Africa in terms of business and new technology.

…with the world pushing for alternative sources of energy such as windmills or geothermal power, it will be easier to develop and implement these new technologies from scratch in Africa than to impose them on the entrenched power grid in the West. “The key about disruptive technology is that it really has a chance to innovate at the base of the pyramid,” Naidoo said in his keynote address at the 15th annual Wharton Africa Business Forum. “The base of the pyramid is the bottom — the millions who are underserved.”
[...]
Naidoo showed his audience a map of global Internet connectivity, with bloated depictions of web-savvy western nations from Japan to Portugal to the United States. But the massive African landmass is virtually invisible. He insisted that the African void today represents a massive future opportunity for an entrepreneur who can develop a scalable solution for multiple nations on a continent that is currently divided into 53 different governments.

“Africa is in … a unique position. It almost has a competitive advantage due to that very situation of not having the connectivity, of not having the electricity grid,” Naidoo said. He cited the example of windmills as a low cost and innovative power solution that would work better in a local, start-up situation, such as a remote African village, than it would in the West, with all its regulatory and economic obstacles.

Like the previous post on Africa it provides a good example of business opportunities. More importantly, Naidoo provides a framework in which to capture the opportunities by connecting Africa’s lack of electricity and connectivity as opportunities.

This is true to most other bottom or base of the pyramid markets. Like the example of Harish Hande who provides the numbers where solar energy is cheaper to poor people than the current prices they pay. Disruptive innovation makes sense in “base of the pyramid markets”. (BOP)

Disruptive Innovations compete against nonconsumption – that is, they offer a product or service to people who would otherwise be left out entirely or poorly served by existing products and who are therefore quite happy to have a simpler, more modest version of what is available in the high-end markets.

- Stuart Hart and Clayton Christensen (Sloan Management Review)

If any technology entrepreneurs are looking for new markets, they should check out the BOP markets.

In the current Climate Change talks in Bali, there is a great debate about the role of India and China in cutting down their greenhouse gases. This story provides a good viewpoint of the current problem facing India.

The Mint has an interview with Harish Hande, the founder of SELCO-India and the winner of the 2007 Social Entrepreneur of the Year award in India.

The problem: In a country where we spend thousands of watts of electricity for a day and night cricket match, use the power greedy heater to ward off the winter chill, there lies another India where villages are dimly lit by paraffin lamps and dim lights battling darkening chimneys. For this cash-strapped India an ignited filament powered by current is a rare luxury, for they cannot even afford electricity.

Finding basic electricity is still an issue in India. How do you convince those people that they need to cut down their carbon emissions?

Hande is working towards building solar home systems for poor people in India with technicians on the ground understanding the actual requirements. He is collaborating with banks to provide an affordable way to own these systems.

In terms of economics, Hande has some interesting cost figures.

For example, there are 20 million street vendors in the country. In Delhi, a street vendor pays Rs15-20 everyday for an incandescent light. We do not pay Rs600 a month for a single light, neither do we pay Rs2,400 a month for four lights. That means poor people pay more for energy. It is the same case with Bangalore street vendors who pay Rs15 every evening for a kerosene lamp they use for four hours whereas solar costs Rs5-6, that too for five to six hours. It is a grave reality that the poor end up paying more for energy. Surely, this needs far more serious intervention.

And on the role of government.

In terms of central and state governments, the biggest plus is that they are not interfering. I have seen it in other countries like Dominican Republic where the government suddenly appeared on the scene, subsidized it, and spoiled the whole programme. However, the government can help by replicating our work on a mass scale. For that, we need many similar social enterprises and government policies that can creating caps in financial institutions, in much the same way as they did for agricultural financing 40-50 years ago.

The Mint reports on D.Light and its plan to provide LED lighting to Base of the Pyramid markets in India.

‘We don’t think it’s right that families are using kerosene in 2007,” said Tozun, who added that kerosene and candles are polluting, bad for respiration, can cause fires, and often have very dim lighting. “With today’s technology available, it is possible to have safer, better lighting. We want to provide that.” The product, called Forever Bright, will have a retail value of about Rs500 and is small enough to hold in your hand, said Tozun.

Uused in modern appliances such as the numbers on digital clocks, images on a television screen, and traffic lights, LEDs are tiny light bulbs that fit into an electrical circuit, but unlike ordinary bulbs, they don’t have a filament or get too hot.

According to Light Up The World, an international humanitarian organization whose goal is to light up the world’s poor, benefits of LEDs include ultra low power usage, durability and extended lifetime.
[...]
The for-profit company was formed a year-and-a-half ago, after Tozun and a few colleagues took the “Entrepreneurial Design for Extreme Affordability,” class at Stanford University’s design school. They learnt to design for folks who earn a dollar or two a day.

D.Light’s plan is a good example of socially motivated, highly educated entrepreneurs to target a base of the pyramid market. And it’s just not easy.

Sam Goldman, the CEO and founder, is sharing his experiences on his blog.

Some lessons to sell in India from him.

There’s plenty of budget airlines and a quarter million cell phones being made a day. India is ‘calling all entrepreneurs.’ And yet its not that easy. Razor thin margins, an older bureaucracy, whole neighborhoods of C&D (copy and develop instead of research and development), and the little things - like trying to get a cell phone present constant challenges. I was shocked by how demanding the Indian consumer is - requiring high quality, low price, and service guarantees even or $10 purchases. If we can crack this market - we can crack any.
[...]
India is the ultimate retail market and quite a challenge. As far as base-of-the-pyramid and rural marketing is concerned, I have found a few surprises. The first is how sophisticated the market has become. For example, the Chinese imports coming in as emergency lights have received a terrible reputation for low quality, and although they are still sold by the tens of thousands, newer Indian brands are springing up. Although the Indian brands are higher priced (often 2X) they come with guarantees (6mo-1yr) and often service warranties (up to 3years). Consumers are not only demanding high quality at low prices, but they want to be able to easily and inexpensively repair their products. If you are offering products that cannot be easily repaired – it is going to be hard to crack this market.

Bill Drayton: these “hybrid value chains” are a no-brainer; the divergence of the consumer and citizen sectors was a “nonsensical historical accident” in the first place, and their reintegration is “profoundly important for the health of both.” Business must use social networks to reach new markets. And the citizen sector needs the marketplace to gain financial sustainability.

Understanding the Indian Consumer Market is a tough ask. Apart from the complexities of the language, size and cultural differences in various parts of India we have the non-uniform growth pattern in all the parts of the country.

Economic Times has an Interview (I don’t know with whom) on the consumer markets in India.

What’s happened in India is different from in a market which typically would have grown in pyramid form: first FMCG, then durables, then electronics, then luxury goods. In an emerging economy, if you look at a hierarchy of needs, there’s FMCG which is akin to basic needs, in the initial stages of development.

Funnily, in India, you actually have large businesses in durables and services, which are larger than FMCG. In category after category, the top-end is where the growth is coming from — fancy TVs, music systems… The market is the top 10 million people. So growths are coming from a dubious small base, but they’re becoming larger categories.

I think if you now look at the last five years, there are entry level employees who are drawing Rs 25,000 a month. Now you’re creating markets — because this is an individual income, being spent on lifestyle goods and services that are superior in nature. So now there are maybe about 60 million people who can afford goods and services, but it’s still a very narrow class of 5% of the population, therefore they don’t become the growth drivers of mass categories like FMCG — the base is too small.

Even though India is a large population of 1,200 million people, the real market for goods and services is a very small part of the population. This is where Innovation is required to provide goods and services to the vast majority of the unserved population.

One issue which is being missed in all this discussion in India is the “sustainability” of the growth. The executive in the interview mentions that “When 100 million people can afford Tropicana every morning, that’s when the FMCG sector will start booming.”

This is good in one sense, but if these Tropicanas are created and sold like in the west then we may be looking at a large scale environmental damage scenario.

This weblog’s previous version concentrated on rural India and the base or bottom of the pyramid markets. In the coming days, I will write more on these issues.