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Fortune at the Bottom

Business can profit while benefiting the poor

Photo by Mervin Malonzo

Illac Diaz has found a way to make money while helping the underprivileged. He watched Filipino seamen hanging around the backstreets near Manila’s Luneta Park for days and even weeks while waiting for their next job. Many would run out of savings before their papers were processed or before their next sail date. Some would squat in shanties or sleep rough in the park.

To meet the needs of these “urban refugees,” as he calls them, Diaz established in 2000 the Pier One Seafarers’ Dormitory, where seamen can stay for P100 ($2.20) a night. The facility also provides, through partner agencies, job-matching programs, seminars, and counseling. Since then, Diaz’s enterprise has grown to three branches with more than 1,500 beds. Pier One has become the largest migrant shelter in the Philippines.

Diaz is also gaining from his project. He invested an initial P2.5 million ($50,000), FEATURE l Fortune at the Bottom Mervin Malonzo and recovered it within 14 months. “If this project is not earning, how can I sustain it?” he asks.

The project shows that by pricing goods or services at the low end but gaining volume in return, an entrepreneur can make handy profits while helping the poor.

This is essentially the message of C. K. Prahalad’s bestselling book, Fortune at the Bottom of the Pyramid, in which the author targets the 4 billion in the world who live on less than $2 a day and who occupy the “base of the pyramid.”

By asserting that business can help the poor and make a profit, Prahalad is offering an alternative to the long-held view that the poor can only be served through handouts or subsidies. His idea of reducing poverty through a market-based approach is not new. But his book may have made an impact because it includes official data, in addition to anecdotes, to support his argument.

The bulk of the 4 billion people at the base of the pyramid, who account for 75% of the world’s population, live in Asia. According to the World Resources Institute, Asia’s base of the pyramid market is a whopping $3.47 trillion, far above that of Eastern Europe ($458 billion), Africa ($429 billion), and combined Latin America and the Caribbean ($509 billion).

Prahalad translated such data into a language that capitalists understand: profits and markets. He popularized the notion that businesses can profit by working with the poor in expanding markets and building new business units.

Converts seem to be increasing. According to a 2007 survey of the 100-plus member-countries of the World Business Council for Sustainable Development, almost 90% of respondents believed that business can be profitable while serving the needs of the poor. Two of the world’s richest men, Microsoft founder and now full-time philanthropist Bill Gates and investor guru Warren Buffet support the concept.

Prahalad’s book is instructive as to why some business approaches succeed more than others.

Annapurna Salt, a branded product of Hindustan Lever Ltd, a unit of multinational Unilever, seemed to have all the ingredients for success. Hindustan reformulated its product to ride the Indian government’s campaign to combat the iodine deficiency that affected an estimated 70 million people. It targeted poor mothers between 25 and 40 years old, who bought the food and did the cooking. Yet Annapurna Salt remains a distant second in India’s iodized salt market and its penetration among the poor is miniscule. Its price of 7.5 rupees (Re) per sachet (or $0.85 per kilogram) is almost the same as that of iodized salt pioneer and market leader Tata Salt. But it is way above that of small regional producers who sell iodized salt at Re2 per kilo.

“Annapurna Salt may be a good product embodying a valuable technology, but it is not an example supporting the base of the pyramid proposition,” says Aneel Karnani, an associate professor of Strategy at the Ross School of Business at the University of Michigan. An executive of competitor Tata Salt was more specific in a speech to investors: Annapurna Salt had not “co-created” a market around the needs of the poor.

This “co-creation,” as Prahalad puts it, involves engaging the base of the pyramid community in a company’s decision-making process. Businesses need to take consumers and their community into account when making strategic decisions.

“For this concept to work, there needs to be strong collaboration between firms, governments, nongovernment organizations (NGOs), and social entrepreneurs,” says Francois Perrot, base of the pyramid project manager of the Lafarge group, emphasizing this bottom-up and multi-stakeholder approach.

Companies can better understand the needs of the local base of the pyramid market by partnering with NGOs that have grassroots connections with the poor. French yogurt maker Groupe Danone knows this well. In Bangladesh, it teamed up with the Grameen Group, whose pioneer microfinancing earned a Nobel Peace Prize for its founder, Muhammad Yunus, in 2006.

The partners, through Grameen Danone Foods, began offering Sakti Dai (Power Yogurt)—fortified with iron, zinc, vitamin A, and iodine—to low-income and nutritionally deprived people. Key to its buoyant sales was that it was priced at $0.07 a cup, lower than other similar products.

For success, economies of scale are critical. But keeping the product cost low enough to generate sales volume needs “co-creation.” The partnership involves other Grameen units for raw materials, distribution, marketing, and sales. The factories get milk from Grameen microborrowers who used loans to buy cows. Grameen microvendors sell the yogurt door-to-door and Grameen’s 6.6 million members buy it for their kids. Thus, directly or indirectly, the yogurt provides income for almost 2,000 individuals within a 20-mile radius of the plant.

In another example of “co-creation,” Globe Telecoms looked for someone like Alice Elesio in the fishing village of Oslog in central Philippines when they wanted to increase their penetration of the cell phone market. Elesio is neither tech-savvy nor is she a premium mobile phone customer. But the housewife-cum-soap entrepreneur has become one of the company’s marketing tools.

Globe engaged Elesio in a “Bridging Community” social project to develop relationships with local communities where Globe has a base or business center. In Oslog, the company provided skills training seminars for livelihood projects, including a soap- and candle-making business. These projects were always in partnership with a microfinance institution, which provided the capital, and a client, such as a nearby beach resort, that buys most of their products.

Globe is using people like Elesio—who is persuasive in getting people to switch to Globe cell phones—as community “gatekeepers” to open up new markets at the base of the pyramid, says Jeffrey Tarayao, the firm’s community relations head. The payback for community projects, he says, is that the use of their cell sites is quick to rise when livelihood projects start.

In another example, Reuters, which offers news and financial information to bankers and investors, made a smart departure from tradition when it offered a text message service for poor Indian farmers last year. The service, called Reuters Media Light, allows rural farmers to check weather reports over a 50-mile radius, obtain crop-spraying information, and find out how much crops are fetching at local markets within a 5-hour journey. All this information is available on the farmers’ mobile phone for Re175 ($5.50) a quarter. As of April 2008, about 250,000 farmers had subscribed to this service and if enough of India’s millions of farmers sign up, it will spell big profit.

These experiences show that business models can thrive at the bottom of the pyramid if they also improve education for the poor, create jobs for them, or unlock their entrepreneurial potential. In other words, it works best when both business and the poor benefit. •