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Business Innovations at the Base of the Pyramid

A breakout session with Professors V. Katsuri Rangan and Michael Chu Monday, October 13, 2008

The 4.5 billion people in the world at "the base of the pyramid" (who live on $5 per day or less) represent a $15 trillion economy. Panelists describe their ventures at the base of the pyramid and respond to a range of questions from attendees.

Nancy Barry, MBA 1975 President, Nancy Barry Associates - Enterprise Solutions to Poverty

Christopher Crane, MBA 1976 President & CEO, Opportunity International Inc.

Jaime Augusto Zobel de Ayala, MBA 1987 Chairman & CEO, Ayala Corporation

Carlos Labarthe Costas Co-CEO, Compartamos Banco

S. Sivakumar Chief Executive, ITC agri-business India

Yong Tao Chairman, SDR Group

Simpiwe Tshabalala Chief Executive, Personal and Business Banking, Standard Bank of South Africa Ltd.

Executive Summary

Overview

The 4.5 billion people in the world at "the base of the pyramid" (who live on $5 per day or less) represent a $15 trillion economy—a huge under-tapped opportunity and one poised to expand as these people join global markets as consumers and producers. Capitalizing on this opportunity requires bringing basic services to poor communities in developing economies.

Increasingly, it is private-sector companies rather than NGOs or philanthropists that are able to best meet these social needs. The innovative, for-profit business models these panelists are pursuing are capitalism at its best—creative low-cost solutions to massive societal problems; generation of profit which makes these undertakings sustainable, provides capital to invest in growth and infrastructure, and attracts investors; and partnership with local communities.

Context

These panelists described their ventures at the base of the pyramid and responded to a range of questions from attendees.

Key Takeaways

These panelists are all pursuing opportunities in the $15 trillion base-of-the-pyramid economy.

The 4.5 billion people in the world who live on $5 per day or less represent a $15 trillion economy—and a huge under-tapped market opportunity. This opportunity is poised to expand, because of not only what these people consume, but also what they can produce. Bringing needed services to their communities—water, sanitation, energy, health care, education, and finance—will help develop this opportunity and integrate these people into global markets.

Pursuing opportunities at the base of the pyramid is exactly what each of these panelists is doing, each in his own country and environment but with many similarities.

Philippines (Zobel): Supplying water 24/7. Before Manila Water Company was privatized in 1997, only 3 million of Manila's 5 million residents had access to water, and those who did had it for only six hours per day. (Those who lacked water often had to pay middlemen ten times the price for water.) Since privatizing Manila Water, 99% of Manila's citizens can now access water 24/7. Manila Water, which retained 97% of its employees after going private, produces 15% to 20% operating margins, resulting in profits of $50 million per year; its market capitalization has grown from 2 billion to 132 billion pesos.

Mr. Zobel sees the keys to Manila Water's success as:

  1. Finding solutions for the base of the pyramid being seen by management as a core business strategy.

    Management did not view the communities at the base of the pyramid as needing to be "taken care of" through philanthropy. They saw it as a business opportunity. They realized that pursuing this opportunity required focusing the company's strategy on this opportunity and developing trusted relationships with the community. (These relationships are now so strong and the benefits seen by communities so great that the communities would not want to go back to public water systems and are cooperative regarding rate increases.)

  2. A corporate culture that encourages ownership and customer connection. With virtually all of the same employees who were previously part of the highly inefficient government bureaucracy, Ayala Corporation, by changing the management—in particular bringing in an HR expert from another Ayala company—created a strong sense of pride among all Manila Water managers. They feel ownership over their territories and integrate themselves into their communities, working with community leaders on solutions.
  3. The structure of the public-private framework that was created. The financial structure of the deal is a win/win for the government and the company. It enables the company to make a profit while also encouraging the company to invest in rebuilding the aged infrastructure and to implement efficiencies. The structure enabled the privatized company not only to get water service to many more people but also to earn a good return, which in turn allowed it to reinvest in the business.

India (Sivakumar): Equipping rural farmers with Internet access. Rural farmers in India, who both buy goods (such as seeds) and sell their crops, have been largely constrained in their options for commerce. Choices have been limited and transaction costs high.

The agribusiness division of ITC has brought 7,000 Internet kiosks to 40,000 remote Indian villages (100,000 are targeted), equipping 4 million farmers with communication capabilities and all types of information, such as information on price/weather. Making farmers more informed and more efficient buyers and sellers has decreased transaction costs by almost 67% and brought far greater efficiency to previously inefficient supply chains and markets. This has allowed farmers to capture greater value (on average, 78% more) without necessarily charging more. With efforts targeted on growth, overall profitability has not yet been achieved for this roughly $4 billion business, but in geographies where the company has been for a few years, it is profitable.

China (Tao): Wiring the countryside with cell phone telecommunications. The base of the pyramid in China consists of 800 to 950 million residents, some of whom live in cities but many of whom are farmers living in the country's 600,000 villages. Currently, China Mobile (owned 75% by the government and 25% by investors), the world's largest telecom company, has 400 million customers, 150 million of whom live in the countryside. Use of mobile phones has given these people at the bottom of the pyramid access to information and the ability to communicate.

The keys to the successful and rapid expansion into rural areas are: low prices, which have been made possible by a massive and efficient operating system; and the company's tremendous distribution network, which entails having one person per village operate a China Mobile store in each village (600,000 people operating 600,000 stores across 600,000 villages). Creating this channel is a massive undertaking, but helps create a sustaining model of economic development.

South Africa (Tshabalala): Bringing banking to the people. Mr. Tshabalala is CEO of Standard Bank, South Africa's largest bank, with assets of $180 billion, operations in 38 countries (18 in Africa), and strong profits. Standard Bank is using innovative means to target customers at the base of the pyramid, a right the company feels it has earned through the success it has achieved in operating its existing business.

The bank has made it a priority to make a difference to those parts of society that have been marginalized. The bank's approach is to innovate outside of its usual command-and-control structures; to incubate businesses in partnership with communities. The people running these fledgling ventures have more freedom to think out of the box than would normally be afforded within the bank's normal structures. Once these innovative ventures start succeeding, they are brought back into the bank's usual structures. A key part of the innovations focused on the base of the pyramid is that they have to be more cost effective than services delivered through the bank's branch system, requiring social innovation (using retailers in the community as part of the bank's distribution network) and IT innovation.

Mexico (Labarthe): Empowering female entrepreneurs through microfinancing. Mr. Labarthe and his brothers founded Compartamos Bank as a nonprofit in 1990. Compartamos is a specialty bank that just does micro-finance. Its average loan is $450 and 98% of its loans go to women who use the funds for working capital. Now it is a publicly traded company with 1 million clients, 300 offices, and 50% profit growth and return on equity each year for the past decade

The bank is successful because it has a very profound and important sense of purpose. Compartamos strives to simultaneously deliver three kinds of value: social value (determined by the number of clients reached), which gives clients options for a better life; economic value (profitability); and human value, offering clients and staff the opportunity to grow as individuals, e.g., via increased self-esteem, and to create a better country. In addition, Compartamos' success has come from applying commercial principles to solve social problems.

The commonalties in each of these models include:

Seeing the opportunity in the base of the pyramid.

Applying business principles to solve social problems.

Delivering low-cost solutions.

Thinking differently. Providing services for the base of the pyramid using the same infrastructure, distribution system, and cost structure won't work. An entirely different way of thinking, distributing, and marketing is necessary.

Partnering with the community.

Pursuing profit is not inconsistent with delivering social value.

Several questions challenged panelists to defend "making a buck" by profiting from the poorest segments of society. The specific answers varied, but supported the notion that a profitable private-sector business provides a sustainable way to provide services to the bottom of the pyramid, a far more sustainable approach than philanthropy.

– Mr. Labarthe said that growing his Mexican bank successfully for investors adds the most value to society. Generating profits has enabled the bank to attract investors and capital, which in turn has enabled the bank to grow faster, serve more customers, and pursue its mission of providing ever more loans and increased product/service options.

– Asked whether Standard Bank's community development activities were core to its business strategy or simply PR-motivated CSR (corporate social responsibility), Mr. Tshabalala said that the fate of his bank and that of society are inextricably linked. Standard's social initiatives aimed at the poor are not interventions but are investments in mitigating political and market risks that could hurt shareholder value.

– Asked about the legitimacy of making money from delivering water to poor people—arguably a basic right—Mr. Zobel said, "Profitability has allowed us to invest heavily in the infrastructure needed to take the public utility to the 21st century." The people and communities have become great supporters, grateful to no longer be purchasing bottled water from exploitative middlemen. (Record complaints to the call center after the privatization surprised leaders, until they heard the reason: People began calling when they thought someone would finally listen.)

– Mr. Sivakumar of ITC is facing more pressure achieving profits along with social value. ITC sources commodities from Indian farmers, but empowering them with information does not always accrue to the company's bottom line. Profitability may come more readily when the firm leverages its infrastructure into new product opportunities.

The win/win business models described by the panelists are replicable throughout the developing world.

Professor Rangan and colleagues are creating intellectual capital and developing frameworks for "ideas that were gut instincts on our part," said Mr. Zobel. The basic ideas behind the panelists' ventures are similar—such as the need to integrate with and engage communities in finding win/win solutions. "We're all on the same wavelength, just adjusting to different circumstances."

The panelists were optimistic about future base-of-thepyramid opportunities available to their companies by:

Scaling and pursuing adjacent opportunities. The panelists see ways to use their company's infrastructure, distribution channels, and capabilities to pursue other adjacent opportunities, thereby leveraging their existing investments. For example, Mr. Tao sees great opportunity in leveraging his company's distribution network to introduce financial services (microfinance) to Chinese farmers. Mr. Zobel said his company's experience with Manila Water has caused them to think about an integrated approach to community development, bringing utilities and infrastructure to low-income communities.

Reapplying. They were also optimistic that the success of these ventures can be replicated in other parts of the world, with adjustments based on local conditions.

Speaker Biographies

V. Kasturi Rangan (Moderator)

Malcolm P. McNair Professor of Marketing, Director of Research

Kash Rangan is the Malcolm P. McNair Professor of Marketing and director of Research. A member of the HBS faculty since 1983, he previously served as the chairman of the Marketing unit (1998–2002). He is now cochair of the Social Enterprise Initiative. He has taught in a wide variety of MBA courses, including the core first-year Marketing course and the second-year electives Business Marketing and Channels-to-Market. He has also taught marketing in the Advanced Management Program for senior managers. He now teaches the elective courses Customers, Commerce, and Society: Business Value and the Private Creation of Social Value, and Business at the Base of the Pyramid.

Rangan's business marketing and channels research has appeared in the Journal of Marketing, the Harvard Business Review, the California Management Review, the MIT Sloan Management Review, the Journal of Retailing, Management Science, Marketing Science, and Organization Science. Rangan is a coauthor of Going to Market, which deals with distribution systems for industrial products, and Business Marketing Strategy, which presents approaches for managing industrial products and markets over their life cycle. Rangan's book Transforming Your Go-to-Market Strategy presents a framework on how to evolve a firm's goto-market strategy with the changing needs of customers. His most recent book is Business Solutions for the Global Poor: Creating Social and Economic Value.

Besides his interest in business marketing, Rangan is involved in studying the role of marketing in nonprofit organizations, specifically, how it influences the adoption of social products and ideas. He has written a number of case studies and articles on the topic and was one of the founding cochairs of the Social Enterprise Initiative at HBS, whose faculty study and teach the challenges of nonprofit management. He also founded and chaired the Executive Education program Strategic Perspectives in Nonprofit Management from 1994 until 1998. His research on this topic has appeared in Nonprofit Management and Leadership and the Harvard Business Review. His current research focuses on understanding the needs and wants of the global poor, those living on less than $5 a day. The aim is to capture the lessons of successful models of businesses, nonprofits, and governments serving that segment.

Rangan received a bachelor of technology degree from IIT (Madras) in 1971, an MBA from IIM (Ahmedabad) in 1973, and a Ph.D. in marketing from Northwestern University in 1983. From 1973 to 1979, he held several sales and marketing positions for a large multinational company in India.

Michael Chu, MBA 1976 (Moderator)

Senior Lecturer of Business Administration

Michael Chu was appointed a senior lecturer in HBS's Initiative on Social Enterprise of the General Management unit in July 2003. He is also managing director of the IGNIA Fund, an investment firm in Monterrey, Mexico, dedicated to investing in commercial enterprises serving low-income populations in developing countries, which he cofounded in 2007. He is also the senior advisor and a founding partner of Pegasus Capital, a firm in Buenos Aires dedicated to deploying equity capital in Latin America.

Chu teaches the second-year MBA course Business at the Base of the Pyramid, which he developed and teaches with Professor Kash Rangan. He is faculty cochair of the Executive Education program Strategic Leadership for Microfinance. He has taught the MBA courses Investing and Managing in Emerging Markets and Effective Leadership of Social Enterprises. Chu is cohead of Project Antares, a collaboration between HBS and the Harvard School of Public Health focusing on commercial approaches to delivering high-impact primary health care to low-income populations in developing nations. Project Antares is part of the Social Enterprise program on Global Health and Low Income Populations.

As president and CEO of Accion International, a nonprofit corporation dedicated to microfinance, Chu worked to develop financial services for the working poor as a new segment of banking capable of outstanding returns. He participated in founding several microcredit financial institutions and regulated banks throughout Latin America, including Banco Solidario, one of the premier microlending institutions in the world, which under his chairmanship has been the most profitable bank in Bolivia, and Banco Compartamos, which, after its IPO on the Mexican Stock Exchange in April 2007, has been incorporated as part of the exchange's index.

From 1989 to 1993, as a limited partner in the New York office of Kohlberg Kravis Roberts & Co., Chu helped deploy KKR's $5.7 billion private-equity fund and manage an investment portfolio with aggregate annual revenues of over $60 billion. He joined KKR from Pace Industries, a KKR-sponsored LBO, where he served as senior vice president and CFO. Chu serves on the boards of Sealed Air Corporation, Accion International, and BoardSource and is a trustee of Dartmouth College. Chu graduated with a BA (honors) from Dartmouth College and received an MBA with highest distinction (Baker Scholar) from HBS. He was born in Kunming, China, and grew up in Montevideo, Uruguay. He and his wife reside in West Newton, Massachusetts.

Jaime A. Zobel de Ayala II

Chairman and CEO, Ayala Corporation

Jaime Zobel is chairman and CEO of Ayala Corporation, one of the most respected business groups in the Philippines. He is also chairman of the Bank of the Philippine Islands, Globe Telecom Inc., and Integrated Microelectronics Inc. and co– vice chairman of Ayala Land Inc. and the Ayala Foundation Inc.

Zobel is a member of various international and local business and sociocivic organizations, including the JPMorgan Chase International Council, the Mitsubishi Corporation International Advisory Committee, the Toshiba International Advisory Group, and the International Business Council of the World Economic Forum. He is also a member of the Harvard University Asia Center Advisory Committee, the board of trustees of the Asian Institute of Management, and a national council member of the World Wildlife Fund (U.S.).

Zobel was chosen as one of the World Economic Forum Global Leaders for Tomorrow in 1995 and was a Ten Outstanding Young Men awardee in 1999. In 2006 he was named Management Man of the Year by the Management Association of the Philippines and received the prestigious HBS Alumni Achievement Award in 2007. Zobel earned his BA in economics, cum laude, from Harvard College in 1981 and his MBA from HBS in 1987. He is married and has four children.

Carlos D. Labarthe Costas

Co-CEO and Cofounder, Compartamos Banco

Carlos Labarthe is co-CEO and cofounder of Compartamos Banco, a social enterprise firm in Mexico committed to providing adequate financial services to low-income entrepreneurs, creating social, economic, and human value. Compartamos Banco is one of the main institutions providing loans to rural women in Mexico, serving a customer base of over 940,000 clients through 300 branches in all regions of the country. In 2005 Compartamos Banco received an award for excellence in microfinance for regulated institutions, granted by the Inter-American Development Bank's microenterprise unit.

Labarthe is chairman of the MicroFinance Network steering committee and for five years was a member of the executive committee of the Consultative Group to Assist the Poorest.

Labarthe has a BS in industrial engineering from the Universidad Anáhuac and has studied business and microfinance at the Economics Institute (Boulder, Colorado), HBS, and IPADE (Mexico).

S. Sivakumar

Chief Executive, Agribusiness Division, ITC Ltd.

S. Sivakumar is chief executive of the Agribusiness Division of ITC Ltd. (www.itcportal.com), one of India's foremost private-sector companies with a market capitalization of nearly US$20 billion and a turnover of over US$5 billion. ITC is known for its thought and action leadership in triple bottom-line focus.

Sivakumar spearheads ITC's famous eChoupal initiative, a unique click-and-mortar channel that facilitates the two-way flow of goods and services in and out of villages. Servicing the production and consumption needs of some 4 million farmers in 38,000 villages, ITC's eChoupal is the largest Internet-based intervention in rural India by a corporate entity. The initiative has won numerous awards, including the United Nations Development Programme World Business Award, the Stockholm Challenge Award, and the Development Gateway Award.

After graduating from the Institute of Rural Management Anand (IRMA), Sivakumar served a farmers' cooperative for six years before joining ITC in 1989.

Yong Tao

Chairman, Strategic Decision Resources Group (SDR)

Yong Tao is chairman of the Strategic Decision Resources Group (SDR), dedicated to helping corporations operating in China to create world-class quality products and services. Before founding SDR, Tao had been managing director of Greater China for Navigant Consulting Inc. and vice president of the Strategic Decisions Group, responsible for the Asia-Pacific.

In recent years, Tao has been leading SDR's focus on helping China's mobile phone developments. He is heading an initiative to expand coverage and increase the depth of microfinance in China, working with financial institutions, policymakers, and telecom operators. Tao is a frequent speaker at business forums and business schools. He holds a Ph.D. from Stanford University.

Simpiwe Kenneth Tshabalala, AMP 174 (2008)

Chief Executive, Standard Bank of South Africa

Sim Tshabalala was named chief executive of the Standard Bank of South Africa and to the SBSA board in March 2008.

Tshabalala has been with Standard since 2000, when he joined the then Standard Corporate and Merchant Bank as director of structured finance. He was appointed to the group executive committee (Exco) in 2001 and that October became managing director of Stanbic Africa. In November 2003 he moved to retail banking operations as deputy managing director of personal and business banking (PPB), South Africa; in August 2006 he was promoted to chief executive of PPB, South Africa.

Born in South Africa, Tshabalala studied at Rhodes University, earning his bachelor of arts and bachelor of laws degrees. He received his master of laws from the University of Notre Dame and a higher diploma in taxation law from the University of Witwatersrand, Johannesburg. Before assuming his duties as chief executive in June 2008, Tshabalala attended the Advanced Management Program at HBS.

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