The bottom of the pyramid

Indians have a different everyday life than people in the West. They go a long way, work in moist rice fields and walk barefoot in the temple, something that western dentures are not designed for. Jaipur Foot understood these needs and limitations. They were based on raw rubber, which is not destroyed in water and is more flexible than other materials and pre-fabricates the "foot" using India's many and cheap craftsmen. In India, there are over two million disabled people without arms or legs. Jaipur Foot now assembles 16.000 dentures per year, of which 99 percent for people living below the poverty line.

In 1932, the President of the United States, Franklin D. Roosevelt, stated the following: believe, once again, in the forgotten man at the bottom of the economic pyramid ».

A profitable market?

We have long lived with a dangerous and limiting assumption: Business serves the rich with products and services, while the poor are taken care of by states and organizations. Put at the forefront, the business leader's idea is that the poor can impossibly be a profitable market. What happens if we reject this assumption – can we create a market-driven paradigm for poverty reduction? Can we imagine that poverty reduction can also be business development?

For many, such a thought would be the same as cursing in church. But this is exactly the curse you need to move the world. And the curse is best done by attacking prejudice.

Author and professor CK Prahalad describes in his book "The Fortune at the Bottom of the Pyramid" about the opportunities that await companies that face this challenge.

At least three billion people living on less than two dollars a day (the "bottom of the pyramid") are today seen as a poverty problem to be solved, rather than a market to be served. Many companies that have tried their hand at these "emerging markets" have started at the wrong end. There is no point in taking our western products and business models, adjusting and reducing costs and then exporting to other markets. Such an attack method results at best in reaching the elite in these countries, at worst in a losing project. And it is based on the following three prejudices:

1. "The poor lack purchasing power".

This is an assumption that the poor will not be able to afford to buy any of the products and services that companies can offer. This does not match the numbers. As Gro Harlem Bruntland said: "It is expensive to be poor." If you look at the cost of living in Indian Mumbai, for example, it is more expensive to live in the poor district than in the rich. Water costs 37 times as much, medicine 10 times as much, often due to poor infrastructure and many intermediaries. This is often called the "poverty penalty" – the unfair extra price that is added to an already low income. Here is a business opportunity for companies that can improve infrastructure, efficiency and quality and thus deliver better products and services at cheaper prices. The Economist wrote in January this year about a successful launch of reading glasses in Guatemala: Farmers depend on sight to see and remove ugliness on their plants, tailors to sew. Poor eyesight results in lower incomes. Relatively cheap reading glasses make it possible to see and thus maintain income – an investment worth the price even when the cash flow is small.

2. "The poor do not need our advanced, expensive products."

This is an assumption that citizens in developing countries are less sophisticated and interested in technology than the rest of us. This has also turned out to be wrong and is one of the reasons why it is not enough to send discarded telephones to the South. The explanation lies partly in the fact that these consumers lack our "hang-ups" because they do not have the same product history. It is easier to go from nothing to mobile telephony than from fixed to mobile telephony. For example, Indian "housewives" send 60 text messages a day, according to Prahalad. These markets require high performance in relation to price. It is not the absolute price level, but the total value that is important to the consumer. The cost of a soybean's internet access is less important than the strengthened negotiating position he gets against his buyer after checking the soybean price in real time on the Chicago Board of Trade.

3. «Growth comes from western markets».

Large companies have built their and their owners' prosperity on growth in the western world, especially with a focus on "heavy users" – those who buy a lot of a product and "high net worth individuals" – those with a lot of money. These markets are maturing and companies need new growth. The smart ones understand that much of the growth comes from developing countries. In October last year, Unilever's CEO Patrick Cescau said the following: “Enormous, untapped opportunities combined with lower growth in saturated markets mean that developing and emerging markets have a higher growth potential. For Unilever, such markets already account for 40% of our sales. "

The weekly Monday Monday wrote in January that the growth for the Nordic banks will come from international operations. Companies need to get out of their traditional markets and into more demanding, less well-off, but also fast-growing terrain to find new sources of growth.

A business model driven from the ground up and with a focus on the needs of the poor can and should be an important part of companies' value creation. It is also an opportunity for companies to understand what role they can and should play in the world – and how they contribute to sustainable development. To realize such opportunities, innovation and an understanding of companies' role in social and economic development are needed. And answers to three questions:

What are the needs and limitations of the people we want to reach? This requires the will and ability to understand markets with different structures and different dynamics than we are used to.

How can we rethink to serve these needs and break down barriers? What can we do today, where do we need to get better?

Who do we have to work with to make this happen? Partners – organizations, governments and companies – are a prerequisite for understanding the market and building effective business models that also contribute to development.

The big companies need to replace an attitude of gradual improvement and replace it with entrepreneurship – these markets are not something you enter, but something you build. The products must be available – both in terms of price and physical. The poor are often themselves involved as distributors and innovators at the same time as being a customer is something new.

What does this mean in practice? Two examples:

Soap education:

Every minute, two children in the world die of diarrhea. Hand washing with soap reduces diarrhea by up to 40 percent. Unilever is one of the world's largest producers of soap. Prahalad describes how the World Health Organization and the World Bank established a partnership in India – "Health in your hands" to spread knowledge about hand washing and diarrhea. The result was increased hand washing, reduced diarrhea and a solid growth in the soap market. This can be called an ecosystem for value creation – the participants have different motivations and skills, but by bringing their strengths to the square, they can achieve both a bottom line and development. The term ecosystem says something about the fact that the various components are interdependent and that development presupposes that all parties grow, albeit in different ways.

An Indian Ford:

In "The 86% solution", Mahajan and Banga write that Ford tried to expand in India by importing cars from the West. But it was only when they developed a Ford specifically for Indian and Indian conditions that sales took off. This was a car that tackled bad roads, dust and traffic jams. It had to be taller than a western car so as not to get stuck in the road dumps, and it had to have the ability to get in and out of the car without the traditional Indian garment sari getting stuck anywhere.

The strength of these strategies is that they are not projects that need constant replenishment of new funds. Because they are opportunities for both business and development, they are self-sufficient and can finance their own growth and expansion. The value also goes beyond this. A company that with its core business contributes to development and poverty reduction will have a motivation beyond the traditional bottom line. It is also an exciting challenge for employees and managers – to build new markets, models and to think new.

Such strategies – which are based on the idea that business development can contribute to poverty reduction – are instruments for economic development and growth. But growth has its limitations and challenges, not least in the form of resource consumption. Strategies that address the needs and constraints at the bottom of the pyramid cannot be built on our resource-intensive, often polluting models. The planet will simply not tolerate that western living standards and consumption levels are also achieved in Asia and Africa.

We must see the connection with sustainable development. Not only does success require innovation in terms of product and distribution, it also requires innovation in terms of resource efficiency. This is a challenge that few companies have been able to meet, even those that have built otherwise successful strategies for the bottom of the pyramid. The best strategies help to solve the developing countries' major challenges – lack of clean water, infrastructure, food, health, financial services and communication technology. But if this growth is to be valuable in the long term, the growth must be sustainable from an environmental perspective. Climate is one of the great challenges of our time – the growth that will help three billion people out of poverty cannot come at the expense of the environment. And this solution is not yet on the table.

Of course, it is not the case that the invisible hand will replace aid as an instrument for poverty reduction. Poverty reduction and development do not have easy answers. Bilateral and multilateral assistance and other instruments have been and will continue to be central to development. But if we are to achieve development, the business community must be a central part of the solution. Minister for Development Aid Erik Solheim said at the Business Development Aid Conference in February that a healthy business community is a prerequisite for combating poverty. NHO's Finn Bergensen agreed touchingly – socialism and the market in beautiful union on the really big issues!

This agreement is another building block for us to see the potential at the bottom of the pyramid. Companies that think beyond traditional business models are discovering new opportunities – which also help to solve the really big challenges. It is time for more Norwegian companies to be inspired and develop their own, innovative models that can contribute to both development and the bottom line.