Social Enterprise Initiative

Global Poverty: Business Solutions and Approaches - Abstracts

Panel 1: Understanding BOP Markets
Panel 2: Innovative Solutions
Panel 3: Managing Business at the BOP
Panel 4: Measuring Success at the Base of the Pyramid
Panel 5: Civil Society & Social Entrepreneurship
Panel 6: Government Regulation & Public-Private Partnerships
Panel 7: Pre-conditions, Limitations & New Models
Global Poverty Home

Panel 1: Understanding BOP Markets

Panel 2: Innovative Solutions

Panel 3: Managing Business at the BOP

Panel 4: Measuring Success at the Base of the Pyramid

Panel 5: Civil Society & Social Entrepreneurship

Panel 6: Government Regulation & Public-Private Partnerships

Panel 7: Pre-conditions, Limitations & New Models

Panel 1: Understanding BOP Markets

Marketing Programs to Reach India's Underserved

Kunal Sinha, Executive Director, Discovery, Ogilvy & Mather India
John Goodman, CEO, Ogilvy & Mather India
Ajay Mookerjee, Executive Director, HBS India Research Center
John Quelch, Professor, Harvard Business School

PowerPoint Slides (PDF)

Until the 1990s businesses in India focused only on the 50 million rich and middle class consumers, leaving the nation's 500 million poor underserved. As income levels of the poor have risen dramatically over the past decade so has demand for the sorts of products and services purchased by higher income consumers, creating a huge market potential.

To capture this opportunity requires an entirely different marketing approach. Logistically, distribution must be accommodated across more than 100,000 geographically dispersed rural areas as well as 3,700 urban centers. To understand consumer behavior requires not merely studies of individual behavior but immersion in community activities. Ogilvy India has adapted participatory appraisal techniques including wealth and village mapping and timeline methodologies and developed media reach indices by socio-cultural and purchasing power segments to tailor mass and new media choices. Interviews conducted with sales and marketing managers in the course of varied client assignments at companies that market goods and services ranging in sales velocity from fast moving consumables to durables to vehicles to financial services revealed that approaches required to market to the poor masses differ significantly from marketing approaches employed with higher-income markets. Among the companies studied were Hindustan Lever Limited (HLL), CavinKare, Castrol Engine Oils, Kodak, Bajaj Auto, and State Bank of India Credit Cards. Products for poor markets must be cheaper and therefore simpler, reduced to the key elements most important to the end consumer. Distribution is likely to be more reliant on direct, relationship-oriented channels, often leveraging the power of third parties. Reaching the poor relies more heavily on targeted promotions and support services than on brand-building advertising, although the degree to which the marketing mix must be adapted is a function of product sales velocity. High velocity, fast-moving consumables tend to require less customization—typically only at the market segment level—than low velocity products and services that must be mass customized or tailored to the individual. Low price per unit sale, often accomplished by simply reducing unit package size, is often sufficient for fast-moving consumables, whereas low velocity products must lower cost of use as well as purchase price to ensure affordability. Sales of low velocity products are also dependent on more customized relationship selling to individual consumers than can be achieved through third party direct channels. Finally, sales of high velocity, mass-market products are more reliant on promotion, sales of lower velocity products on ancillary services.

As organized competition in the poor market is scarce, market entrants, lacking requisite support infrastructure such as suppliers, distributors, and consumer education, must create their own business eco-systems from scratch. In this process, significant social value is created.

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Nestlé's Milk District Model: Economic Development for a Value-Added Food Chain and Improved Nutrition

Ray Goldberg, Professor, Harvard Business School
Kerry Herman, Senior Researcher, Harvard Business School

In January 2005, leading food authorities from around the world met to discuss ways to address poverty and nutrition. Convened by the World Bank, the group included institutions from various sectors that, separately, had been asked to address these issues over time. Each had developed local and global supply chains that could effectively address nutrition and poverty issues while remaining commercially consistent with their respective institutional priorities. To augment public sector aid, the group proposed that private sector initiatives might also provide new and effective models to address poverty and nutrition.

Nestlé had perhaps the most extensive global experience in addressing these issues. It held a leadership role in the global dairy system and had a long history of building supply chains by working with producers directly or through farmer cooperatives and governmental institutions. Nestlé, the world's largest milk company, and the world's largest provider of vitamin-and mineral-fortified foods in the world, especially milk, cereals, bullion and culinary products had over the years, consistently built food systems that contributed positively to the financial well-being of producers, the nutritional needs of consumers, and the economic development of many countries. These food systems were developed in keeping with Nestlé's long-term commercial strategy of being a wellness company — an important element of the success of the model; each initiative was a win-win for the partners involved, as well as for the local constituents.

Nestlé CEO Peter Brabeck-Letmathe agreed to the development of a case study of the company's dairy system. He designated vice president, public affairs Niels Christiansen, along with Hans Jöhr, Nestlé's corporate head of Agriculture, Martial Genthon, technical director of global dairy operations, to develop the case. As a former Harvard School of Public Health Nutrition department faculty member, Christiansen had a long-time interest in the questions at hand; he knew Brabeck-Letmathe wanted the case to be useful for the World Bank. The case needed to provide leadership to all segments of the global dairy system while acknowledging the significant achievements of others. Developing the case also offered Christiansen's and Jöhr's team the opportunity to assess Nestlé's milk district model and future plans.

The group faced the questions of how the success of a commodity-specific model like Nestlé's might be multiplied across broader constituents, and perhaps adapted to other food systems. Further, could the model have an even greater multiplier effect if undertaken in partnership with others in the food system? Some argued Nestlé and other food companies could make progress in the fight to reduce malnutrition and poverty if they worked in partnership with each other, or in collaboration with the World Bank. These questions remained unanswered.

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Patrimonio Hoy: A Groundbreaking Corporate Program to Alleviate Mexico's Housing Crisis

Arthur Segel, Professor, Harvard Business Schools
Nadeem Meghji, MBA Student, Harvard Business School

In December 1999, CEMEX, a leading global building solutions company based in Mexico, launched Patrimonio Hoy (PH), a sales, distribution, and savings program intended to serve Mexico's large self-construction housing market. CEMEX created the program with the dual purpose of alleviating Mexico's housing crisis and creating value for the company. Patrimonio Hoy has proved to be a tremendous success, reaching more than 100,000 Mexican families in its six years of operation and intending to reach more than one million by 2010. The program emphasizes the promotion of social and economic development in low-income Mexican communities while also generating profits and growth for CEMEX. But conducting business with this traditionally underserved customer segment has posed some significant challenges for CEMEX.

Every key stakeholder has derived both direct and indirect benefits from participating in the program. Families served by PH gain access to credit, better living conditions, increased net worth, greater opportunity for entrepreneurship, increased confidence and agency, and improved savings behavior. Moreover, the program is now profitable, having generated net income of approximately USD$1.3 million in 2004 and total sales of USD$42 million since its inception. PH has also served to enhance CEMEX's reputation as a socially responsible company. Finally, PH employees, who tend to come from low-income communities, have experienced direct economic benefits and personal empowerment through the program.

Mexico's existing housing shortage is discussed and the program's overall design described. An examination of the value created for PH's various stakeholders includes analyses of the benefits and costs to CEMEX as well as the benefits to distributors, promoters, customers, and the community at large. The program's impact was assessed via a survey conducted with a random sample of 160 customers and conversations with numerous other stakeholders. The paper concludes with a discussion of the program's expansion outside of Mexico.

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Understanding Consumers and Retailers at the Base of the Pyramid in Latin America

Guillermo D'Andrea, Professor, IAE School of Business, Universidad Austral
Gustavo Herrero, Executive Director, Latin American Research Center, Harvard Business School

PowerPoint Slides (PDF)

Our research attempts to understand the vast segments of consumers who make up the low to middle-low socioeconomic strata — the base of the pyramid — in Latin America and the retailers that serve them. The project covered six countries — Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico — that are the home to 71% of the region's population and represents 81% of its GDP. Data from four focus groups conducted in each country and 217 retailer interviews were supplemented with macroeconomic information for the region. We drew heavily on Booz Allen &Hamilton's field work and focus groups conducted by IBOPE under the sponsorship of the Coca-Cola Retailing Research Council, Latin America.

After determining that low-income segments represent a larger share of the consumer goods market than their more affluent counterparts, we set out to identify the patterns that characterize the purchasing habits and preferences of these emerging consumers as they relate to: brand preference; frequency of purchase; size of ticket items; store selection criteria; social validation of their role as buyers, preferred assortment of goods; assessment of the "total purchasing cost" beyond product prices; and reliance on credit.

We then looked at the retailers where emerging consumers shop and analyzed their attributes vis-à-vis other business formats. We paid special attention to the value proposition of neighborhood stores from the consumers' perspective. Next, we delved into the business model of smaller retailers and analyzed their economic feasibility. While it is widely argued that neighborhood stores owe their competitiveness mainly to irregular fiscal behavior, we reached a different conclusion.

A better understanding of the needs and consumption habits of emerging consumers and of the value proposition posed by the retailers that serve them will hopefully enable manufacturers and service providers to reach out to this important segment, successfully. The ability to access better products and services will help crack the exclusion of those that live outside the boundaries of well-studied conventional markets. Our research is a step in the direction of addressing these billions of consumers on the basis of sustainable (i.e. lucrative) business propositions designed to suit their particular needs.

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Panel 2: Innovative Solutions

Energizing the Bottom of the Pyramid: Scaling-Up Successful Business Models to Achieve Universal Electrification

David Jhirad, Vice President for Science and Research, World Resources Institute
Annie Woollam, Business Research Analyst, World Resources Institute

PowerPoint Slides (PDF)

An assessment of the role of business and markets in accelerating the path out of poverty for the approximately 1.6 billion people living largely in South Asia and sub-Saharan Africa who lack electricity services reveals that successful business models for delivering electricity services to poor populations in developing nations are operating on a limited scale and that significant replication will require major innovations in policy, governance, financing, and institutional delivery mechanisms. Such replication is vital to the development of such base-of-the-pyramid enterprises as connectivity, communications, media, healthcare, and financial services.

Four enterprises that provide modern distributed energy services to poor communities—a large multinational that serves the household sector via an individual systems ownership model, two local entrepreneurial enterprises that serve income-generating end uses via fee for service and village ownership models, and a non-governmental organization (NGO) that couples seed capital with business mentoring—have demonstrated that there is a viable market for energy and electricity services in poor communities. These enterprises are entering the market at the top of the base-of-the-pyramid using successful business models with the following common key characteristics:

  • In-depth understanding of the local market, community, and specific customer needs
  • Low-interest loans and initial government or donor grants to meet financing challenges
  • Parallel development of productive, entrepreneurial enterprises that require electricity

Two of the enterprises are addressing the challenges of scaling their operations by driving down to markets at lower levels of the pyramid. These enterprises are implementing innovative projects that build consumers' capacity to pay for services by expanding income through productive end-uses. Grid extension and grid connected networks have major potential in underserved areas, but the role of the grid in extending access to electricity requires a different albeit complementary approach to technology, policy, installations, and investment.

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Into the Local: Technology in Support of Local Economic Productivity

Tony Salvador, Design Ethnographer, Intel Corporation
John W. Sherry, Joydeep Bose, Herman D'Hooge, Louis W. Agatstein, Lawrence Carr, Intel Corporation

Intel Corporation has enacted a radical transformation of its approach to new market opportunities in the developing world. The direct ethnographic experiences of the first two authors are related in an "overture." Three subsequent "acts" trace how a particular product, announced as "under development," is wending its way through the corporation with the goal of addressing the emerging part of emerging markets.

Multinational corporations might have sound business reasons for engaging with global populations in which aggregate rather than individual wealth is of primary interest. Firms in the information technology industry, in particular, seem to have obvious reasons: information and communication technologies (ICTs) are crucial to delivering the efficiencies and reach needed to enable new product and service offerings, new business plans, and engagement of previously untapped market segments. New technologies play an important role in market-driven approaches to economic development by facilitating aggregation of demand, reducing the costs of communications, travel, and other expenses, and enabling new forms of entrepreneurial activity.

Intel Corporation has long engaged in projects and activities conceived to have an impact on so-called emerging markets. Indeed, many new technology offerings, in particular those developed around wireless networking, seem to offer the promise of a leap-frog effect. Yet most such offerings were the happy by-products of other market segment strategies. Only recently has the company established an organization with an explicit focus on creating innovations to serve the "bottom of the pyramid," or at least the "next billion" people.

A case history of how this came to be begins with ethnographic research grounded in practices and theories derived from the social sciences in places where digital technologies have not established themselves. This research was conducted by the first two authors, then members of a group of social scientists (People & Practices Research Group), to drive strategic and technical innovation at Intel from a deep understanding of the daily practices, beliefs, and values of ordinary people from all walks of life. The work began as a project conceived to provide Intel with a better understanding of what it would take to radically increase the reach and benefits (whatever they were) of digital technology. Among other outcomes, this research identified many elements that must be in alignment to support the ownership of and derivation of value from ICTs. A Community PC was developed together with four "platform definition centers" (located in Bangalore, Cairo, Sao Paulo, and Shanghai) charged with doing the qualitative, end user, market, and technical research to enable, through the creation of locally relevant ICT products, the development of local ecosystems of economic production.

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ITC's E-Choupal: A Platform Strategy for Rural Transformation

Ravi Anupindi, Professor, University of Michigan, Ross School of Business
S. Sivakumar, CEO, International Business Division, ITC Ltd.

PowerPoint Slides (PDF)

Seven hundred million people, a majority of whom survive on subsistence earnings as either marginal farmers or laborers, live in more than 600,000 villages spread across a rural India barely supported by a weak infrastructure. These rural poor are trapped in a "vicious circle" of low equilibrium characterized by low margins, low risk-taking ability, low investments, low productivity, and low-incomes. Private businesses can build a profitable business model out of streamlining the rural value chains and facilitating empowered market access for the poor. Profits captured from the process of streamlining the value chains can fund the creation of a market infrastructure that can be leveraged to provide a host of products and services to these traditionally under-served consumers and concomitantly increase shareholder value through this service to society.

An ongoing endeavor by the ITC Group of India called e-Choupal is building a market ecosystem in rural India. Key characteristics of this business platform and the business principles that guide its operation bind the ecosystem together. The power of the platform is illustrated with reference to a wide spectrum of value chains including procurement, distribution, retail, and financial services. "Before-after" process scenarios are documented for each of these value chains, as are the economic and social benefits to stakeholders. The platform is being leveraged, in partnership with the government and non-governmental organizations, to upgrade resource capability in rural India to increase farm incomes and livelihoods and to enable ITC to capture in the process, on a sustainable basis, some of the value generated. The e-Choupal platform empowers the community with real-time information and customized knowledge, facilitates the development of a responsive grassroots organization built on freedom of choice and local management with self-interest, ensures efficiency through competition, overcomes the challenges of the rural landscape through virtual aggregation giving it the power of scale, and delivers the benefits of specialization through collaboration. Through this process ITC sets in motion, to capture the latent value in the dormant markets of the economy of rural India, a "virtuous cycle" created by larger incomes and founded on trust. Perhaps most important, the platform approach of e-Choupal has proven to be scalable—more than 5,000 e-Choupals are servicing some 3.5 million farmers—giving a multiplier effect to its economic and social benefits.

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Photography and Low-income Classes in Brazil: A Case Study of Kodak

Paulo Cesar Motta, Professor, IAG Business School, PUC-Rio
Melchior Dikkers, Researcher, IAG Business School, PUC-Rio

In 2004, Kodak Brazil began targeting the low-income classes that account for 60% of Brazil's population and 38% of its consumption. Brazil's low-income classes have an average daily income of $8.7 on a purchasing power parity basis and most possess televisions, radios, and refrigerators and want to buy mobile phones and washing machines. But Kodak research had revealed that only 35% of Brazilian households owned a camera. Why had Kodak largely ignored the low-income segment of the market until 2004? First, many Brazilian marketing professionals within the company did not understand the low-income classes, the business opportunity they offer, and the importance of formulating a distinct marketing strategy to tap that opportunity. Second, Kodak Brazil had little autonomy with respect to doing things differently; all advertising campaigns, for example, were produced in the United States and translated. Kodak Brazil would have had a difficult time convincing headquarters that it needed a different a strategy to market to the low-income classes. Third, Brazil's general manager had little incentive to target the low-income classes; financial results were good despite focusing exclusively on the upper and middle classes. Moreover, Kodak headquarters did not measure whether Kodak Brazil was taking advantage of all opportunities.

However, several years of declining profits, film sales, market share, and brand loyalty spurred Kodak to appoint a new general manager, and the adverse context created by these poor results and the threat of digital photography finally forced Kodak to seriously consider any alternative that could extend the life cycle for conventional photography. Two other factors prompted Kodak to belatedly target the low-income classes: a general manager who believed in the opportunity and had the leadership skills to exploit it; and various indications that Kodak could do more business with the low-income classes.

Kodak's strategy was to create an organizational culture that values doing business with the low-income classes, selling low-end cameras at no profit and making photography more accessible to the low-income classes. Kodak targets the low-income market with cameras that are easy to use and sells them in kits that include film and batteries, enabling consumers to use them without incurring additional expense. Because even the cheapest Kodak camera represents a large expense for the low-income classes, Kodak Express stores permit consumers to pay in installments. Kodak's first truly local advertising campaign was created to appeal to the low-income classes. In addition, Kodak began to sell cameras through Casas Bahia, a store frequented by poor consumers, only at the end of 2003, shortly after the new general manager took over. Kodak's objective in targeting the low-income classes was to take advantage of an ignored opportunity, but also offset the drop in film demand due to the upper and middle classes switching to digital technology. In 2004, Kodak's conventional camera sales increased by 60% and film sales declined significantly less than the market (Kodak -6%, market -20%).

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Panel 3: Managing Business at the BOP

Building New Business Value Chains with Low-income Sectors in Latin America

James Austin, Gabriel Berger, Maria Cristina Fedato, Rosa Maria Fischer, Francisco Leguizamón, Gerardo Lozano, Patricia Márquez, Andrea Prado, Ezequiel Reficco, The Social Enterprise Knowledge Network (SEKN)

The experience of eleven companies operating in Latin America revealed distinct economic roles for consumers, suppliers, and business partners in low-income sectors and raised the following questions. What leads companies to address low-income groups? What challenges must they overcome? What management practices do they employ to overcome them? What social and economic value have these engagements generated? Among the reasons given by companies for engaging the poor were pursuit of business opportunities, emergence of contextual threats, and experience with philanthropic ventures. Whatever their reasons for engaging the poor, all of these businesses had to overcome significant individual and organizational culture gaps. A starting point to transcending such barriers was to connect with the low-income sector via the company's own workforce, ties with nonprofit organizations, and links with community leaders. Social sector organizations can offer distinctive knowledge, competencies, and credibility to companies seeking to explore business opportunities with low-income consumers, suppliers, and service providers. The experience of the subject companies suggests that productive and mutually beneficial business value chains can be established with the low-income sector. But to overcome economic, physical, and social barriers companies must forge new strategies, alter business structures, develop new products and services, and place low-income sector protagonists on an equal footing with traditional consumers or business partners. The latter might entail providing a means for the poor to effectively make long-term commitments and organize themselves as they join the new value chain and close monitoring of the governance of these new relationships. Indeed, the engagement process might well involve nurturing new sets of stakeholders.

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The Complex Business of Serving the Poor: Insights from Unilever's Project Shakti in India

V. Kasturi Rangan, Professor, Harvard Business School
Rohithari Rajan, Market Development Manager, Hindustan Lever Ltd.
Dalip Sehgal, Director of New Ventures, Hindustan Lever Ltd.

PowerPoint Slides (PDF)

Unilever, the $60 billion (in 2004) global leader in consumer packaged goods with products ranging from cleaning agents (such as soaps and detergents) to packaged foods and beverages, operates in India through its 51%-owned subsidiary Hindustan Lever (HLL). HLL launched in 2003 a highly innovative program that targeted an additional 250 million consumers from the base of India's population of nearly one billion people, nearly 750 million of whom live in rural villages. Previously, the company had served primarily the top 250 million consumers who live mainly in cities, towns, and urban areas. Interestingly, the initiative, named Shakti, meaning Power or Empowerment, was launched entirely for strategic reasons; it was a coincidence that the market opportunity happened to be at the BOP (base-of-the pyramid).

The Shakti case study thus provides an interesting perspective on the barriers, opportunities, and challenges that attend entry to BOP markets. The consumer and market infrastructure for the goods marketed by Shakti is briefly described and the company's potential model for gaining economic value discussed. Among many innovative features of the latter is a sales model that involves training rural women in micro-enterprise. But the model, despite such innovations, is shown to be capable of generating only limited economic value for shareholders. Moreover, although the fullest possible rollout of Shakti could conceivably be a source of tremendous social value, the possibility of negative externalities (e.g., competitors free-riding on the company's missionary work) must be considered in light of how much the company might be willing to invest in "building a market" for its goods. Ultimately, the cost of building BOP markets among private investors, the government, and civil society will likely have to be shared. Which of these collaborators is more appropriate will be contingent on the nature of the product or service, needs of the BOP consumers, and nature of the competition that characterizes the industry. A company's BOP strategy must thus include a strategy for promoting the appropriate cost-sharing to build a robust primary market structure. Absent such a "macro" approach, private sector approaches to serving the base-of-the-pyramid are almost bound to deliver not only below average economic returns to investors, but lower social value as well as a consequence of the threat of discontinuation. Firms that continue such programs would do so more out of a sense of corporate citizenship and for defensive reasons than for reasons of creating real economic or social value. An attempt to generalize the model built on the Shakti case study extends the discussion to its implications for policy makers and others engaged in economic development.

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Corporate Citizenship, Entrepreneurship and Poverty Reduction in South Africa

Frederick Ahwireng-Obeng, Professor, Wits Business School
Mthuli Ncube, Professor of Finance, Wits Business School

PowerPoint Slides (PDF)

South Africa is a bizarre case of socially engineered, inter-generationally transmitted and large-scale chronic poverty. The poverty landscape is uneven by racial distribution, the black population bearing the brunt of worsening inequality within and between the various population (race) groups. The historical antecedents to this situation include deliberate stripping of the black population of basic livelihood (entrepreneurial) assets—financial, human, natural, social, political, and cultural—and their exclusion from mainstream economic activity. Even though these entitlements have been restored since the country achieved political independence in 1994, the majority of blacks still lack the opportunity to empower themselves with the capability and security that should enable them to escape poverty. The South African government is determined to transform society by redressing inequality and alleviating poverty largely through fiscal transfers and basic service provision. But its efforts are paralyzed by resource constraints and poor service delivery. Meanwhile, the white-dominated, well-developed, growing private sector is seeking to expand its domestic market in the face of increasing global competition.

A business solution to the South African poverty problem is possible if business will review, re-orient, strengthen, and expand its somewhat antagonistic relationship with the bottom of the economic pyramid (BOP), or poor sector, in innovative, entrepreneurial ways that develop and transmit entrepreneurial (livelihood) assets to the poor without compromising the commercial motive of private business. Such an entrepreneurial approach to poverty alleviation is mutually beneficial to the extent that transmitting entrepreneurial assets that sustain the capability of the poor to access resources, institutions, and basic needs fuels innovation, cost-reduction, and revenue growth in the business. This proposition is demonstrated through two case studies of South African companies — Anglo America and South African Breweries — that have developed commercially profitable programs that stimulate entrepreneurship in ways that alleviate poverty among previously disadvantaged persons. A third case study reviews the South African banking sector's development of a commercially viable product for the poor, not only to boost their saving habit, but also to stimulate an investment culture among them. The policy implication of the paper is that poverty alleviation strategies can be effective and sustainable if they incorporate private sector approaches that foster the development of entrepreneurship within the target population.

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Developing Viable Business Models to Serve Low-Income Consumers: Lessons from the Philippines

Jaime Augusto Zobel de Ayala II, President and CEO, Ayala Corporation
Chris Beshouri, President, McKinsey Philippines
Gerardo Ablaza, Jr., President, Globe Telecom
Antonino Aquino, President, Manila Water Company

An analysis of the business models of firms that have as their core business the delivery of products or services to low-income segments including the poor was undertaken in a effort to understand what it takes to profitably run businesses that serve these segments and determine whether there are common, exportable principles and key success factors that might be relevant to companies operating in other industries and geographies. The motivation for this analysis was three-fold. First, because low-income communities represent an enormous potential revenue pool, it is in the interest of corporations to find viable ways to serve them. Second, private sector capital and skills are critical to developing key infrastructure and institutions. Third, breakthrough business models for core products and services can have enormous developmental impact.

Three arguments are advanced regarding the viability of business models that focus on low-income consumers. First, unique insights into the distinct characteristics of the low-income segment must be developed and translated into actionable business models. Second, crucial and common to all the business models examined is the use of "community-based agents," individuals or groups drawn from the communities themselves to help businesses align incentives and promote the partnerships required to meet the challenges of serving the low-income segment. This model works for a wide range of principal-agent problems such as those that arise from, or are associated with, low disposable income, asymmetric information, or security. It also provides a critical web of relationships and support structures at the micro-market level. Third, there are natural limits to CSR initiatives. Firms will not build social initiatives into their strategies simply out of a desire to "do good." Sustained investment in social causes will occur when firms see these causes as central to strategy. Firms do not, however, always recognize when this is the case. Too often, firms neglect emerging topics or trends in the social sphere that are shaping the competitive environment in which they operate and fail to recognize that investing in social initiatives can directly improve performance and profitability. Collectively, the findings of this analysis have a provocative implication: that addressing social issues is not adjacent, but central, to strategy.

The analysis employed a case-based approach and standard, objective measures of financial performance. A basic framework was developed to surface key characteristics with which businesses serving the low-income segment must contend. Some are familiar in type (e.g., income level) but distinct in form (e.g., day laborers with low-quantities of disposable income at any one time), others are unique to a low-income demographic (e.g., culture, geography). Globe Telecom and Manila Water were examined with respect to how they adapted their approaches to reflect the familiar and unique characteristics of the low-income segment. "Community-based" solutions and how the subject firms used them to address the "unique" characteristics of the low-income segment are closely examined. The effectiveness of the broad principles derived from this work in serving both business and community is assessed and the findings placed in the broader context of the CSR dialogue.

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MULTIAHORRO: Successful Business Model Innovations to Better Serve BOP Customer Needs for Goods and Services, Profitably

Wilson A. Jácome, Director of the Advanced Management Program, IDE Business School
Luis E. Loría, Director of the Research Center on Economic Environment & Enterprise, IDE Business School
Luis Reyes, General Director, TIA-Ecuador

PowerPoint Slides (PDF)

It is common practice in business, especially in emerging market economies, to target customers at the top of the socioeconomic pyramid because they have high purchasing capacity. The less privileged segments of the population, which in the case of Ecuador amounts to nearly three quarters of its habitants, have traditionally been neglected. Some opportunistic entrepreneurs (e.g., loan sharks and many informal businesses and stores) exploit the needs of those in the poorer market niches with low quality products and services offered at unreasonably high prices. These poor segments consequently differ dramatically from the middle and high-income segments of the population in terms not only of monetary income and purchasing capacity, but also adequate access to quality products and services, many of which are desperately needed.

In 1960, TIA Stores opened its first store in Guayaquil, Ecuador with a highly unorthodox strategy: to target customers at the lower half of the socioeconomic pyramid. By the end of 2005, TIA will be operating 63 stores using three different business formats and be the third largest retailer in the country, with estimated annual revenues in excess of US$130 million. TIA's growth strategy has been driven by a successful business model innovation: MULTIAHORRO, a "barrio store" that better serves BOP customer needs for goods and services. The MULTIAHORRO barrio stores, located in some of the poorest and most densely populated neighborhoods of Ecuador, offer limited assortments of goods at the lowest price in their area of influence. The ordinary life of the poor has been improved through small, but extremely important, details such as increased savings on purchases, access to clean and hygienic shopping spaces, and pleasant and helpful customer service. Feeling cared for in an appropriate environment might be expected to elevate self-esteem and stimulate aspirations to self-improvement in the local population.

This case study of MULTIAHORRO illustrates how owners and managers of national or international corporations willing to serve BOP customers can make a real difference in terms of improving not only the quality of life, but entire reality, of millions of poor people in the world, and make a profit, even under adverse business, social, and political circumstances, through successful business model innovations.

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When Giants Discover the Disadvantaged: Managerial Challenges and Success Factors in Building Capacity to Serve Underserved Markets

Rosabeth Moss Kanter, Professor, Harvard Business School

Case studies of inner city banking in the United States and Brazil illustrate managerial dilemmas that accompany the entry of established companies into underserved markets and how they can successfully be resolved. Underserved or underdeveloped markets exhibit challenges that reflect characteristics of poor communities and interaction between these communities and the more affluent society that surrounds them (which established companies often represent). Service providers such as banks and retailers, for example, face particular challenges in three key areas.

  • Financial issues — transaction size and efficiency. Poor consumers are more likely to engage in large numbers of small transactions and fixed costs per transaction can limit the margin on sales. Metrics used in the mainstream businesses are often inadequate to capture the value inherent in serving this kind of market. Processes applied to the mainstream businesses to increase efficiency and margins, such as substituting technology for human interaction, might be difficult to introduce in areas that lack technological infrastructure.
  • Operations issues — complexity. Poor consumers and communities sometimes differ from those served by mainstream businesses not only quantitatively (in terms of wealth and income), but qualitatively (with respect to language, knowledge of products and services, access to transportation, and residential stability). Companies try to reduce complexity in their mainstream businesses in the interest of efficiency. Serving poor consumers might not only increase complexity but also require provision of auxiliary services that make it possible for poor consumers to access the products or services being offered.
  • Relationship issues — mutual distrust. Potential consumers in an underserved market are often culturally different from employees in large companies (e.g., in race or ethnicity) and suspicious of large companies for political and other reasons. Company employees can be skeptical about the market potential and reliability of the underserved and concerned about personal safety in unfamiliar neighborhoods or hold inappropriate stereotypes about the population.

To build the requisite capabilities to serve the poor entails change that is effective (for poor consumers) and profitable (for the company). First Community Bank, the banking initiative for poor communities at BankBoston (later Fleet and now Bank of America), and ABN AMRO Banco Real in Brazil succeeded in building ventures to serve the poor by using some or all of these managerial solutions:

  • Committed leadership able to articulate the venture's value
  • A management structure that insulates new ventures from mainstream pressures
  • Alliances with external intermediary organizations
  • Investments in community development and community service, including education
  • Expanded metrics and new and different ways to assess customer value
  • Staff who understand the community and its culture
  • Diversity training for employees
  • Accommodating variation and associating it with innovation
  • Widespread internal communication about the purposes and needs of new ventures

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Panel 4: Measuring Success at the Base of the Pyramid

Alleviating Global Poverty through Microfinance: Factors and Measures of Financial, Economic, and Social Performance

Christopher Crane, CEO, Opportunity International
Marc Epstein, Professor, Jones Graduate School of Management at Rice University

Microfinance has been used as a tool for alleviating global poverty for about 40 years. Billions of dollars have been loaned and the success stories are impressive. But, though microfinance institutions have made many important contributions, the precise nature of these contributions is less clear. Moreover, the question of whether microfinance might be a vehicle through which even greater and more critical contributions to global poverty alleviation might be made wants further research. Two primary sets of questions motivated the present research:

  1. What are the primary determinants of success for microfinance institutions? This question addresses why microfinance has been more successful in some cases than in others. Is it the political or business environment? Is it the microfinance institution's leadership? Is it the organization's strategy, structure, or management systems? Is it the characteristics of the borrowers? Better articulation of the key drivers of success might improve the performance of microfinance and its access to additional capital for growth.
  2. What are the appropriate measures of success? To answer this question entails answering many other questions. Is the primary goal of microfinance institutions to provide the poor with access to capital? Or is it to provide additional income for the poor? Is it necessary that borrowers not only increase their income but also improve their living conditions (i.e., housing, nutrition, education for their children, and so forth)?

Existing evidence on the contribution of microfinance is mixed. Is it (a) that microfinance has a minor impact at best, or (b) that the research methods have been inadequate, or (c) that the wrong variables are being measured, or (d) that the variables are not being measured well? For much of its history, microfinance has primarily been conducted as an act of faith. If microfinance is to become a larger force in alleviating global poverty and provide more scalability, better evidence of the payoffs of microfinance investments and of the impact on both the economic and social welfare of the borrowers is required. Hence, this paper attempts to carefully specify the antecedents and consequences of investments in microfinance, examine the nature and amount of existing contribution, and consider how to enhance the contribution of microfinance to the alleviation of global poverty by thoroughly reviewing the literature, examining prior impact studies and data, interviewing senior officers at Opportunity International, and analyzing data and field interviews of microfinance activities in Ghana. The present research has yielded a microfinance contribution model that articulates the antecedents and consequences of investments in microfinance in order to identify both the key success factors and key performance indicators of microfinance success. The model includes a specification of the performance drivers and set of measures for the inputs and processes that lead to success, as well as measures for both outputs and outcomes.

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Economic Returns & Social Value: The Case of Microfinance

Michael Chu, Professor, Harvard Business School

PowerPoint Slides (PDF)

After thirty years of development, commercial microfinance — the provision of financial services to low-income populations on a financially-sustainable basis — has many lessons to offer to the study of business and the global poor. Recent years have seen growing evidence, both in the literature and in capital markets, of the ability of leading microfinance institutions, particularly in Latin America and Asia, to generate superior economic returns. Less clear is the contribution successful microfinance makes to the reduction of global poverty. The following aspects of the creation of economic and social value in microfinance yields insights applicable to all endeavors to address the needs of the poor on a commercial basis.

Economic value:

  • Solely from a business perspective, low-income populations constitute a legitimate market segment and experience has demonstrated that microfinance is capable of generating profitability levels similar, and superior, to activities in the traditional business sector.
  • The differences between the base of the socio-economic pyramid, or low-income segments, and the top of the pyramid are substantial, as are the barriers that separate one from the other. This results in the coexistence of two segments of markedly different market conditions (such as pricing). Understanding and taking those differences into account is essential to effectively serving the base of the pyramid.
  • Commercial microfinance is a highly dynamic industry and the business models that drive growth, cost, and profitability have evolved continuously over time. The capacity to innovate is likely to continue to be a key success factor long after the introduction of the "killer concepts" (such as base of the pyramid) that open new and undeveloped markets.
  • The key drivers of success in commercial microfinance are common and cross geographic boundaries.

Social value:

  • To critically assess the creation of social value by businesses that serve the base of the pyramid relies on the elaboration of a conceptual framework. A first attempt at such a framework is used to view microfinance.
  • From a social perspective, a key question is how effective is microfinance as a response to global poverty. The difficulty of measuring the impact of initiatives such as microfinance using traditional approaches argues for an approach designed to meet the requirements of decision-making by practitioners rather than the research objectives of social scientists.

Economic and social value:

  • • The introduction of business models in social development anticipates the role of profits in the reduction of global poverty. The author reflects on the advantages and disadvantages inherent in the microfinance business model and conditions under which superior financial returns are a positive force and those under which they are a negative force in the lives of the poor.

The author further reflects on the potential to extend the lessons of microfinance to other business opportunities for providing goods and services sought by the poor and why they are likely to come from protagonists other than today's leading companies.

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Private Development Banking: Managing the Tensions

David Porteous, Principal, Bankable Frontier Associates

PowerPoint Slides (PDF)

Businesses face growing pressure to combine profit maximizing behavior with concern for social impact in a so-called "double bottom line approach." Since Adam Smith, the two bottom lines have been seen as aligned in theory, but often in tension in practice. Recently, C.K. Prahalad demonstrated that the tension might not be inevitable to the extent that a positive social impact on the poor can emerge as a by-product of the normal profit seeking activities of firms in low-income markets. Private businesses that seek to integrate profit maximization with achieving a positive social impact are nevertheless usually thought to be dynamically unstable, stunted in their growth, and vulnerable to single-minded competitors on one hand, and diluted in their social impact on the other.

Three privately owned development banks on three continents—Plantersbank (Philippines), ShoreBank (United States), and Triodos Bank (Netherlands)—have from the outset explicitly sought to have a positive social impact in underserved banking niches in their respective markets and also produce at least positive real returns for shareholders. This approach, in which the two intentions are blended, might be termed a "strong double bottom line." Conventional measures of financial and social outcomes are used to show that these banks have achieved positive social impact and also surpassed their peers in financial performance. Being long established (with an average life of around 30 years), these banks cannot be described as unsustainable. Nor, with balance sheets that range from $600 million to in excess of $2 billion and recent rapid growth in revenues and assets, can they be described as small or stunted. Because they are active in three very different regions of the world, they also cannot be dismissed as local anomalies. Together, they make a compelling case that the apparently empty zone between profit maximizing businesses and entities that seek to have a social impact is not only habitable, but can even be hospitable.

The success of these banks is attributed in part to conventional factors such as economies of scale and market specialization. But reaching scale has required careful management of the tensions inherent in the private development banking approach. Moreover, specialization has taken the form of building new markets rather than competing only in existing ones. Sustaining factors have included a stable, committed shareholder coalition, the guiding influence of founders that has suffused the organizational culture, and careful management of growth. Two of the three banks are active mainly in developed countries, albeit in historically underserved segments of these markets. The third serves small and medium enterprises in a developing country rather than the global poor directly. The paradigm of private development banking demonstrated by these three banks is nevertheless highly relevant to reaching the global poor. Building sustainable and robust retail financial service markets in developing countries will in many cases require a deliberate double bottom line approach if it is to be successful and sustainable. Privately owned and run development banks such as these three are well placed to do this.

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Utilities and the Poor: A Story from Colombia

Carlos Rufín, Assistant Professor of Management, Babson College
Luis Fernando Arboleda, Independent

PowerPoint Slides (PDF)

The injection of private capital and competitive market mechanisms into the supply of utility services such as potable water and electricity holds the promise of helping the poor by facilitating cheaper access to some of the essentials of life. But private ownership of utilities confronts negative past experiences, conventional wisdom, and hostile ideology. The apparent conundrum between private ownership and serving the poor can be addressed by applying the ideas of the emerging "base of the pyramid" (BOP) framework, with some important caveats. Indeed, for private network utilities operating in developing countries, serving the BOP is not merely an opportunity, but a strategic imperative due to the need to legitimize private ownership and prevent indirect expropriation through social and political backlash.

The experience of AAA, a water and sanitation utility in Colombia's Atlantic Coast region in operation since 1996, confirms to a large extent the lessons of the BOP framework. AAA reaches the poor through a combination of newly developed approaches. First, it established informal partnerships with local and non-traditional actors, namely, poor communities, and with the government to decrease the cost of doing business and make serving the poor a viable option. Second, AAA's outreach initiatives were matched by innovative measures conceived to meet customer needs and provide superior service. The company asked poor customers to pay for service, offering in exchange a better quality of service than any alternatives, subsidies to make service more affordable, and commercial policies designed to address the particular needs of the poor. Increased collections, lower losses, and a variety of subsidies enabled AAA to generate adequate profits. The poor also benefited from significant expansion of service coverage and improvements in service quality, especially the quality of water. AAA's story also shows the importance of BOP strategies for legitimizing multinational companies' operations in developing countries. AAA's success in serving the poor prompted successive expansions of its service area as other municipalities requested service.

Yet AAA's successes and legitimacy are fragile and require constant reinforcement. Most troubling is a dependence on subsidies in a political environment characterized by rampant clientelism and corruption, which are inconsistent with BOP recommendations. Whether network utilities can provide service to the urban poor without subsidies remains a key issue for private ownership in developing countries, and a potential limitation for the usefulness of the BOP framework in these settings.

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Panel 5: Civil Society & Social Entrepreneurship

The Expansion of Public Services into Poor Areas: The Case of Piped Gas in Cuartel V — Moreno

Marcelo Paladino, Deputy Dean, IAE Business School, Universidad Austral
Lisandro Blas, IAE Business School, Universidad Austral

Social inequality in South American countries is often reflected in the absence or inadequacy of basic infrastructure for public services in poor and socially complex neighborhoods. The Argentine public services infrastructure suffered a collapse of infrastructure in such an area. Community involvement emerged as an innovative idea in the face of a discouraging perspective. A proposal was formulated that involved all of the social actors in a process of social capital creation. There being a scarcity of theory on the subject, we present a case study of a low-income area of Buenos Aires that was permitted to establish a social management model that made effective public access to the services. The model supported a process whereby 4,000 families were able to gain access to natural gas, solving an infrastructure problem that seemed both structural and lacking any possible solution. An important consequence of this experience is that the provider, Gas Natural Ban Co., recognized the need to develop a new way to manage the project. The case corroborates some of the proposals that emerge from the theory and suggests issues that warrant further investigation.

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A Gentler Capitalism: Black Business Leadership in New South Africa

Linda Hill, Professor, Harvard Business School
Maria Farkas, Sociology Doctoral Student, University of Michigan

In detailing the findings of a field-based study of new black business leaders working towards "a gentler capitalism" in post-apartheid South Africa, this paper explores the ways in which business can be used as a tool to address societal inequities. For many South African business leaders (of all races and ethnicities), the crucible of apartheid and the ensuing transformation of their country have prepared them to engage some of the most intractable ethical challenges of our times. They define these challenges as being at the very heart of business leadership, and they aspire to build the capacity of people who were previously marginalized. Yet the leaders know that in order for this deep societal transformation to occur, the approach to and role of business must be changed.

This paper grew out of a study on Black Economic Empowerment (BEE) that was grounded in hundreds of interviews with black and white South African leaders in the business, government and non-profit sectors. Based on these interviews, four black business leaders whose paths to business are representative of those followed by the majority of their peers were chosen for further study. These individuals are all revolutionaries in the true sense of the word; they were actively involved, at great personal risk, in the overthrow of apartheid. This paper will examine the experiences of one such individual, Dr. Iqbal Survé.

The cornerstone of Survé's leadership approach is the advancement of marginalized groups through employment, skill transfer, and leadership development. Survé, a physician by training, was a youth leader in the anti-apartheid struggle. He and his wife were very active in the rehabilitation of torture victims for which he received an award from Amnesty International. In 1995, Survé founded an investment holding company, called Sekunjalo (which means "Now is the Time"). Concerned that BEE was enriching only a few, he and other activist friends founded their company with a clear "manifesto" to improve the lives of the previously disadvantaged. The company has received scores of awards, and Survé himself is continually cited by international and South African media as one of the country's businessmen who has contributed substantially to the growth and success of South Africa's business development while also achieving excellence in broad-based empowerment, development, and social investments.

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How Social Entrepreneurs Enable Human, Social and Economic Development

Christian Seelos, Management Zentrum St. Gallen (MZSG)/IESE Business School
Johanna Mair, Professor, IESE Business School

PowerPoint Slides (PDF)

Sekem is a social enterprise that was established to make a contribution to Egyptian society on several dimensions, namely, economic, social, and cultural. The setting for Sekem is a poor country context characterized by a lack of political and economic institutions that cater to the needs of the poor and create conditions that foster response to economic opportunity. Central to this case is the story of an entrepreneur with a powerful vision who created Sekem by transforming a piece of desert into fertile land that today houses several commercial companies as well as cultural and social institutions such as a theatre, medical center, and schools. Social entrepreneurs such as Dr. Ibrahim Abouleish overcome the hurdles to socio-economic and sustainable development in poor countries by building necessary infrastructure, creating social capabilities that enable people to respond to economic opportunity, and establishing conditions that support scaling up and financial viability. In exemplifying entrepreneurial value creation along multiple dimensions in a developing country, the Sekem case yields new insights into social entrepreneurship. It demonstrates the nature of social entrepreneurship at different stages (start-up, growth, and consolidation phases) and enables us to disentangle the notions of resourcefulness and innovation. Finally, the case supports an interesting debate on the broader role of entrepreneurship and companies in developing countries around the themes of catering to basic human needs, institutionalizing new rules and norms, and filling voids created by inefficient and corrupt governments.

The case of Sekem also invites a rethinking of existing models of development and poverty eradication. People at different levels of poverty have very different needs. Understanding that poverty is a symptom rather than a natural state is vital to eliminating the poverty trap by creating human (education, health, and so forth) and social (organizing people in new ways and changing norms and behavior) capital. The example of Sekem is also a source of valuable learning points for development agencies. It suggests that development is not a linear outcome of the provision of isolated inputs and that experimenting and learning at the local level are fundamental to development. It also offers a number of insights for companies willing to compete at the "bottom of the pyramid." In the eyes of Sekem, the poor are not only potential customers but also represent vital resources for value creation models. This suggests that it might be necessary to invest in building the social capabilities needed to enable the poor to participate in economic life in all its forms before large-scale consumption of corporate products and services can occur. Supporting social entrepreneurs and collaborations for scaling up their initiatives might speed up the process and contribute to long-term sustainable development.

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Hybrid Value Chains: Social Innovations and the Development of the Small Farmer Irrigation Market in Mexico

Valeria Budinich, Vice President, Full Economic Citizenship Initiative, Ashoka
Kimberly Manno Reott, Mexico Country Director, Full Economic Citizenship Initiative, Ashoka
Stephanie Schmidt, Senior Program Manager, Ashoka

PowerPoint Slides (PDF)

Today millions of people still do not have access to products and services that meet their basic human needs. Over one billion people live in inadequate housing, two billion do not have access to electrical power and as many are unbanked without access to any type of financial service. However, the unprecedented growth and rapid increase in productivity of the citizen sector in the last three decades - spearheaded by social entrepreneurs and their innovations - have created a foundation for a different type of highly-leveraged partnerships to better serve low-income markets and foster human development.

Through a mosaic matrix, this paper introduces examples of market-based social innovations and synthesizes the experience of Ashoka; Innovators for the Public, in distilling the main principles emerging from the work of its global network of 1,600 social entrepreneurs. Through a case study of small-scale farmers in Mexico and their access to irrigation systems, Ashoka's concept of "Hybrid Value Chain" (HVC™) explores the multiple needs of small farmers and the market opportunity for companies as well as why current value chains that serve large farmers are unlikely to be transferable. The paper outlines the challenges ahead for the widespread adoption of HVC™ in multiple industries, in a way that could deliver significant and sustainable economic and social impact for all the actors involved.

Long-term commercial partnerships between large companies and citizen-sector organizations with a focus on low-income populations have the potential to create mutual value for all and ensure deeper social impact. Businesses can enter low-income markets segments more effectively by leveraging the innovations, market knowledge and assets of citizen sector organization's (CSOs) primary constituent markets. On the other hand, CSOs can scale their impact significantly if they learned to leverage the infrastructure and resources of large businesses. While providing affordable and adequate products and services to their low-income communities, CSOs can also generate additional sources of revenues for their organization to reinvest in development programs. Hybrid Value Chain™ partnerships are distinct from current models of collaborations between companies and social sector organizations. Unlike philanthropic relationships, an HVC™ is commercial in nature and is based on the premise that company and social entrepreneur can interact commercially as equals. An HVC™ relationship is a long-term relationship where both parties recognize their own organizational strengths as well as weaknesses — and join together to create sustainable, lasting value and profits for all players. Hybrid Value Chain partnerships are indeed replicable across sectors and particularly in industries serving basic human needs such as water, shelter healthcare or education that guarantee a greater alignment between the partners' missions. Another key component of these partnerships is the commitment to leverage the production potential of low-income communities as much as possible to create new business models that contribute to local economic development while creating new wealth for businesses, investors and CSOs.

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Understanding Low-Income Market Business Models: Process Development and Main Components

Joan Enric Ricart, Professor, IESE Business School
Miguel ángel Rodríguez, Lecturer, IESE Business School
Pablo Sánchez, Research Assistant, IESE Business School

PowerPoint Slides (PDF)

Current business activities address mainly the needs of premium markets. Because basic needs of the poor population remain largely unsatisfied and unattended by the private sector, most MNCs ignore the reality of low-income markets and the development of business models that satisfy the real needs of poor people in a profitable manner. A framework for understanding the development process and components of business models in this context was conceived by analyzing and contrasting two ventures, Amanco Guatemala and Philips India, both of which recently inaugurated projects at the base of the economic pyramid. Corporations that change their current dominant logic have been observed to be in a stronger position to start new ventures in these markets and companies that have embedded the sustainable development concept into their corporate culture and values to be better able to effect this change. Top executives should lead this process to achieve the deepest possible influence in the organization. Finally, MNCs must develop learning processes that foster understanding of the cultures and social and economic contexts of these markets. Among the sources of learning that can generate knowledge and understanding of local landscapes are market research activities, experimentation during pilot projects, and knowledge shared by partners and social networks. Three elements that seem to be especially critical to business models for profitably serving the underserved poor are the use of new and advanced technologies adapted to local contexts and customers' needs, pursuit of partnerships; and integration of the corporation into local social networks. In the cases of Amanco and Philips, all of these elements have contributed to the development of innovative business models that radically reduce MNCs' traditional cost structures even as they increase customer value.

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Panel 6: Government Regulation & Public-Private Partnerships

Banking Regulation, Public-Private Collaboration, and Local Leadership: How a Community Development Bank Promotes Local Economic Development in Low-Income Neighborhoods in Washington, D.C.

Carolyn Welch, Community Affairs Team Leader, Federal Reserve Board of Governors of the Federal Reserve System
Ann Scoffier, Vice President for Resource Development, City First Bank of D.C.

PowerPoint Slides (PDF)

For more than three decades, policy makers and regulators have encouraged banks and bank holding companies to help address the vexing economic and social challenges that have beset lower-income communities. Many of these efforts have been aimed at encouraging banks to apply their unique business perspective and position to serve markets that have been traditionally underserved for a variety of reasons, including a history of discrimination and the perception of a lack of profit opportunities. Bank regulatory efforts aimed at promoting business-based approaches to serving low-income communities have focused on the use of strategic partnerships and innovative organizational and capitalization strategies to reduce risk, leverage capital, and maximize revenue potential. Public-private collaborations play a critical role in the process of creating viable ways to meet the credit and banking needs of lower-income communities and populations. One such structure is the community development bank, a mission-driven financial institution that serves low-income communities and populations. City First Bank, N.A., a grassroots community development bank in Washington, D.C., has employed innovative collaborations to capitalize the bank and develop new business that leverages the regulatory and strategic needs of financial institutions in its market. These partnerships enable the bank to identify profit opportunities in financing the development of affordable housing, small businesses, and new schools in some of the city's poorest neighborhoods.

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Fighting AIDS, Fighting Poverty

Rohit Deshpandé, Professor, Harvard Business School
Zoe Chance, Doctoral Student, Sloan School of Management, MIT

PowerPoint Slides (PDF)

It is more than mere coincidence that the incidence of HIV/AIDS occurs in the world's poorest countries. Of the more than 40 million people currently living with HIV, 95% are in the developing world. Various models have been proposed to reduce the incidence of the pandemic. Most have not been very successful. An examination of three strategies for distributing antiretroviral drugs (ARVs) to patients in three countries on three continents, Africa, Asia, and South America, suggests a customer centric marketing paradigm. Each case is based on identifying patient needs and working backwards to develop profitable solutions rather than starting with the government, pharmaceutical or healthcare industry or NGO. The examination is undertaken on two levels, a macro level that focuses on governments and healthcare providers, and a micro level focused on the key corporate players. There having been much writing and discussion at the macro level, the present contribution focuses specifically on the role of the modern corporation in dealing with poverty-related problems such as HIV/AIDS.

An examination of the role of corporations involved in finding solutions to the HIV/AIDS crisis must take into account the economics of ARV pricing strategies, the politics of the patent environment, and the strategic choices that have enabled these organizations to be profitable while serving the poor. A new dedication of public support and the collaborative expertise of South African generic drug manufacturer Aspen Pharmacare are shown to be ameliorating misguided policy decisions by the South African government; communications campaigns, operational synergies, alternative distribution channels, and innovative product and program policies enabled the small Indian pharmaceutical company, Cipla, to bring down the annual per-patient cost of an ARV triple cocktail from $12,000 to under $250; using ARV development as a key component of its prevention and treatment strategy the Brazilian National AIDS Program has managed to reduce AIDS mortality and demand for hospital services by more than 50% in Sao Paulo and Rio de Janeiro, saving the government more than $3 billion. These cases offer suggestions for global strategies for confronting AIDS and other problems faced by developing countries, with guidelines for setting customer centric, profitable business strategies.

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Health Services for the Poor in Developing Countries: Private vs. Public vs. Private and Public

David Bloom, Professor, Harvard School of Public Health
Tarun Khanna, Professor, Harvard Business School

In much of the developing world, poor health is a major impediment to both quality of life and economic development. The poor are particularly vulnerable to the economic impacts of ill health, as they lack the savings to pay for prevention and treatment, and often rely on their own physical labor for their livelihoods. As a result, long-term illnesses strip families of income and assets. At the same time, the public health systems of most developing countries tend to focus their modest resources on treatment rather than prevention, and often give higher priority to diseases that afflict the wealthy rather than the poor.

This paper discusses ways of addressing these obstacles and meeting the need for healthcare in developing countries. It looks at different types of health interventions and the different actors (government, for-profit companies and non-profits) involved and then discusses three major health problems — heart disease, HIV/AIDS, and childhood illnesses — to show the different levels of private sector involvement in health. We focus in particular on partnerships between public and private sector organizations and on how such partnerships can be most effective.

The paper finds that in most cases the benefit to developing world populations of business intervention in health heavily outweighs the incentives for firms. In these circumstances, partnerships between public and private sectors offer the best solution. Governments have expertise in identifying social goals and designing programs to achieve them. They also have funds, which can create incentives where there would otherwise be none. Businesses, on the other hand, have skills in implementation and innovation, as well as the proven ability to reach targets and deliver products and programs to large numbers of people.

Such partnerships are still at a fledgling stage, though there is increasing recognition by all parties that they are needed. Investment in health care can help both private and public sector organizations achieve their goals. If they can find effective ways to work together, the health gap between rich and poor countries may at last begin to close.

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Houses for the Poor and New Business for Banks: The Creation of a Market for Affordable Housing

Doug Guthrie, Professor, Harvard Business School
Michael McQuarrie, New York University

In the mid-1980s, American banks suddenly discovered the market for low-income housing. Today, the same large American banks that assiduously avoided the inner city in the 1970s and early 1980s are the largest investors in low-income urban housing markets, committing hundreds of billions of dollars in loans and development funding over the last decade. But the view of scholars who trace this change to the Community Reinvestment Act (1977) is mistaken. The CRA, when it was introduced, did little to change the business logic of banks in the low-income urban housing market. What did was a mistake in the tax code passed as part of the Tax Reform Act of 1986. Originally meant for individuals, the Low-Income Housing Tax Credit (LIHTC) became the single greatest boon to corporate America in the last 30 years. Through the LIHTC corporations were able to access a double benefit in the tax code explicitly denied to individuals. Banks, being corporations, stood to benefit the most from the double-dip in the tax pool. But banks were also under additional pressure that dated back to the CRA to invest resources in the low-income communities in which they did business. The LIHTC provided a vehicle for doing so. The combination of the LIHTC and the CRA provided banks not only with a double tax break, but also the mechanism for safely increasing CRA ratings. It was the synergy between the CRA and the LIHTC that provided the institutional basis for the creation of the low-income housing market for banks.

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The South African Financial Services Sector Charter

Bruce Scott, Professor, Harvard Business School
Robert Tucker, Director, Standard Bank of South Africa
Thomas Mondschean, Professor, DePaul University

PowerPoint Slides (PDF)

In August 2002, the South African Banking Council, facing the threat of government imposition of a mandatory charter of black empowerment and repeated protest demonstrations in front of its offices, decided to negotiate directly with black employee and community representatives under the auspices of the government and thereby avert a series of meetings in which it would inevitably be in a defensive and largely adversarial position. Ten months later it had reached an agreement on a set of principles for a voluntary affirmative action charter covering the financial services sector. The charter, which creates an addition to the market framework for the financial services sector through which banks can compete with one another to gain competitive advantage by addressing societal concerns not previously included in the market framework, differs significantly from charters imposed by the government on six other sectors and, unlike the U.S. CRA legislation, which sets targets and penalties for compliance failure, establishes rewards for superior performance that offer the possibility that it will harness the competitive energies of the various financial institutions.

The charter has nothing whatsoever to do with macroeconomics, being, in effect, a supplementary set of regulations that brings within the market framework certain positive externalities. It now includes, for example, certain public benefits for which private clients are not normally willing to pay such as having more black employees in a bank or providing more services to black communities. These modifications in the market frameworks for financial services help align private incentives with societal costs and benefits. The primary direct beneficiaries will be black, predominantly poor, people. The charter is thus a way to adjust the market framework so as to harness the energy of the private sector to achieve societal goals. By changing the frameworks, it makes provisions to reward firms that implement affirmative action programs and punish those that do not. The most serious punishment is expected to be loss of business-to-business transactions inasmuch as low charter (affirmative action) scores will induce suppliers and customers to take their business to a bank with a higher score. By the same token, banks will be looking to buy from suppliers with good scores. This should produce a virtuous spiral for the more enterprising firms. A charter council created as a supplementary regulatory authority to monitor progress under these regulations is to evaluate and certify differences in the performance of the firms. Appointed directly by the government, reporting to the government, and presumably backed by the full authority of the government, the charter council represents an approach to inducing business to serve the poor as a business proposition by changing the market frameworks in which business operates instead of waiting for firms to take a more enlightened position on their own.

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Panel 7: Pre-conditions, Limitations & New Models

BENEX: Business Effectiveness - the Next Level: Being Served by the Poor, as Partners

Kapil Marwaha, Adjunct Faculty, S.P. Jain Institute of Management and Research
Anil Kulkarni, Professor, S.P. Jain Institute of Management and Research
J. Mukophadyay, Professor, S.P. Jain Institute of Management &Research
S. Sivakumar, CEO, International Business Division, ITC Ltd.

PowerPoint Slides (PDF)

Creation of a progressive, equitable society has been a central concern of thought leaders from every field. A recent proposition in this direction, "Serving the Poor, Profitably," aims to propel business growth in a manner that alleviates poverty by advocating that businesses should make their goods and services affordable by the poor. This, it suggests, would increase the capacity of the poor to consume while enhancing the market for business. But selling goods and services to those enmeshed in poverty is, per se, a weak business proposition, and many instances of selling goods and services "to the poor" are instances of selling to low-income segments and not to those enmeshed in poverty. Such low-income segments can constitute viable markets for business, but claims that such engagement directly alleviates "poverty" are debatable.

A higher economic and social value can instead be created by a self-reinforcing process, "Being Served by the Poor, as Partners," whereby business invests to develop the productive capacity of the poor and then leverages such capacity as inputs to strengthen business competitiveness and growth. The essential requirements of this process, its underpinnings and challenges, and the further opportunities it offers were revealed by research on and field visits to seven enterprises in India that ranged across the rural, urban, corporate, and non-corporate landscapes, scales of operation (small to large), and period of existence (established to new). This research suggests that it is indeed possible to create an economically feasible, in fact, competitively superior value chain for business through a self-reinforcing process of developing and leveraging the productive capacity of the poor as inputs to strengthen business competitiveness and growth. This process, driven by committed leadership and administrative mechanisms, begins with a buy-in by business and the poor to the idea of creating self-reinforcing interest and culminates in consolidation of efficient value chains as well as higher scales of operations for business and reduction of poverty and of economic dualities in society. It suggests that businesses can create unprecedented economic and social value by moving to the next level of effectiveness of "being served by the poor, as partners."

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Brcko and the Arizona Market

Bruce Scott, Professor, Harvard Business School
William Nash, General John W. Vessey Senior Fellow for Conflict Prevention, Council on Foreign Relations

PowerPoint Slides (PDF)

In December 1995 NATO troops entered Bosnia to enforce the Dayton Peace Accords. Almost immediately they insisted that all barriers to free movement along the highways be removed and established a checkpoint to monitor traffic on the major north-south highway, which was renamed Route Arizona. This largely defensive step would soon set in motion a series of developments that would transform the checkpoint into a self-sustaining market and a rural area into a bustling site of commercial activity. The decision to nurture the Arizona Market was made when the local commander noticed that Bosniacs, Croats, and Serbs were using the roadblock as a meeting point for "interethnic" gatherings. Soon cigarettes were being sold, then other items, and within a few days coffee. Over time the Arizona Market grew from an informal, wide spot in the road into a rough and tumble market with off road parking that drew buyers from more than a hundred mile radius and merchandise from much greater distances. By 2005 it comprised an estimated 2,000 small retail establishments covering some 300 acres and stretching for approximately half a mile.

What lessons might a private sector entrepreneur draw from this experience? Although the NATO commanders had some forms or power not available to most entrepreneurs, namely, to command tanks and troops and call in air support, entrepreneurs have some powers that are similar to those of an army commander. They have, for example, command of a hierarchy of skilled personnel, equipment at their disposal, and a budget that permits needed expenditures. They also have within themselves and their organizations the analytic capabilities and capacity to coordinate groups of people. Beyond this, many entrepreneurs have powers not available to the NATO officers. Whereas the Army officers, being routinely rotated through specific commands on rather short assignments, had little prospect of seeing the fruits of the risks they took to nurture the Arizona Market, an entrepreneur might easily be in a position to command resources for projects that benefit a local community for a decade or perhaps two. The common starting point is recognition of the need for coordination to correct an imperfection in the framework of laws and institutions that shape a local context. In developing countries, such institutional gaps are the rule, not the exception. Public goods such as roads and schools are in short supply, as is law enforcement. Entrepreneurs can act to reduce or even close such gaps. A second advantage entrepreneurs enjoy over military commanders is that they can attempt to create coalitions with fellow entrepreneurs in similar or even different lines of business to help plan and finance improvements in local circumstances unconstrained by a chain of command. The Arizona Market is a suggestive model of how entrepreneurs can facilitate economic development in ways that impersonal markets cannot match.

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H&R Block's Refund Anticipation Loan: A Paradox of Profitability?

David Rose, AVP, Competitive Strategy, H&R Block
Daniel Schneider, Research Associate, Harvard Business School
Peter Tufano, Professor, Harvard Business School

PowerPoint Slides (PDF)

Some firms comprehend the enormous potential that exists for providing services to the growing low-income segment. But operating in the low-income market has numerous complications. Concrete business impediments include designing efficient distribution and servicing systems, offering simple and "easy to consume" products, and training a sales force. Vendors of products that target the poor often must enter into contentious, long-standing, and irresolvable debates over appropriate levels of profit and consumer protection. Whatever the merits of these debates, firms can find themselves bedeviled by complicated interactions with non-customers including consumer advocates, the press, courts, and regulators. The experiences of H&R Block, a $4.2 billion income tax preparation and financial services firm headquartered in Kansas City, Missouri, illustrate some of these costs. Block sells a highly profitable Refund Anticipation Loan (RAL) product to clients who opt to pay a fee to receive their tax refund in just one day. RAL consumers are typically from low-income households under considerable financial stress. Although RALs serve a specific need and are highly demanded (Block sold approximately five million in 2004), Block faces pressure from consumer advocates to lower the pricing of the product or to exit. This situation illustrates a number of hard questions with broad application. How much profit is "too much"? Who is the arbiter of such a decision? To the extent that consumer advocacy is costly, what are the implications for firm entry into and exit from the low-income market and for the prices of goods and services sold to the poor? What are the implications for consumers of advocacy activities that target large, visible, profitable firms? How should firms seeking to sell goods and services to the poor behave?

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When is Doing Business with the Poor Good — for the Poor? A Household and National Income Accounting Approach

Herman "Dutch" Leonard, Professor, Harvard Business School

Many businesses are discovering that it can be profitable to re-engineer their products, packaging, distribution and delivery systems, and (perhaps most conspicuously) cost structures in order to be able to "do business with" lower-income people than they have previously served. Expansion of formal commerce with this hitherto largely ignored demographic group can indeed provide businesses with significant possibilities for growth in revenues and profits. It can be good for the businesses that engage in it because it spurs development of new lower-cost products or versions that can also be sold profitably to higher-income markets, because it provides a larger volume of sales over which to amortize development and other fixed costs, or simply because it provides an opportunity to sell more of a product at a profitable price.

But under what circumstances is the conduct of business transactions with the poor good for the poor themselves? Certainly not all transactions with low-income people are equally valuable. Even accepting the standard economic principle that voluntary transactions should be assumed to provide positive value to both parties, it is clear that some products and services are much more beneficial to the poor, and contribute a great deal more to the alleviation of poverty, than do others. If doing business with the poor is profitable for the business, then by immediate implication some part of the value created is being captured by the owners of the firm (presumably, though not necessarily, outside the low-income community).

A simple national and household income accounting framework is used to inquire about the conditions under which transactions with a lower-income community will be especially beneficial to the lower-income people themselves, and especially powerful in reducing poverty. Viewing a low-income community as an open economy trading with other, wealthier communities re-labels consumption items sold to a low-income community as "imports" that drain net earnings from the community. This is not necessarily bad on balance; if these products provide a significant enhancement to the quality of life of their users, the related income effects may be of secondary importance. But products made in the lower-income community and sold to outsiders are "exports," with the associated stimulating income effects within the lower-income community. If the product or some part of it, or its distribution, or some other part of its cost structure could be designed so that it produced income within the community, its effects on poverty reduction would be much more powerful. The household and national income accounting framework is used to identify features of product manufacture, delivery, and value in consumption that are more likely to contribute to income growth and poverty reduction in lower-income communities.

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