We live in highly uncertain times, even more than the usual in recent weeks. The unprecedented turmoil in global financial markets is reverberating across the regions, affecting developed and developing markets alike. While the full impact has yet to unfold, many analysts are flagging signs of a significant global slowdown, with expectations that our emerging market growth stories will degrade further going forward.
This will undoubtedly exacerbate the daunting realities we all already face today as we operate within emerging market conditions. Economies, public institutions, businesses and their models of engagement with each other will be put to test. The roles each of these sectors play, particularly the private sector, in solving the interim challenges and the more systemic problems that exist, will, and must be, carefully re-examined.
It is clear, from my point of view in the private sector, that we cannot leave the many long-entrenched problems unattended. Those that threaten the sustainability of our environment, perpetuate the vicious cycle of poverty and inequity, and weaken governance in public and private institutions, will ultimately be a value-destroying proposition and only jeopardize long-run enterprise value creation and national development objectives.
It is for this reason that I believe businesses today are increasingly expected to take a broader and more encompassing role in society. The private sector is regarded, now more than ever, as having an implicit social contract to help address development and social issues, both as corporate citizens and as stewards of shareholder funds. Private enterprise cannot operate in a vacuum and it is in their practical and strategic interest to ensure the prosperity and development of the markets it serves. Building trust and relevance is the new imperative.
In a McKinsey survey of 391 UN Global Compact participant CEOs, 91% believed that society has placed far higher expectations for business today to take on public responsibilities than it was five years ago; and 1% believed this expectation will rise further in the next five years.
Corporate social responsibility (CSR) programs are the current response of private enterprise. However, while these programs are important, they have natural limitations; given funding, human resource, and infrastructure constraints, that impede these programs from reaching the scale and impact necessary to deliver more permanent and lasting solutions to the serious problems we have at hand. Making a significant and lasting change, I believe, requires resources well beyond what is available now from non-government institutions, international aid or charities.
In fact, I would argue, that businesses are the agents with real potential to have a positive, lasting impact on social development issues. But for businesses to engage “beyond CSR”, it is critical to have a more imaginative, viable model that takes off from a platform where social issues are integrated into and are made central, rather than adjacent, to business strategy. This is increasingly becoming an imperative proposition as the private sector seeks to build a larger measure of trust with the communities it serves.
The bottom of the pyramid: a market opportunity
There are several social development challenges where businesses can make a difference and one of these is in addressing the needs of the lower income communities in creative and value enhancing ways.
The World Resources Institute and the International Finance Corporation estimate that four billion people or 75% of the world’s population constitute the base of the global economic pyramid (i.e. those earning incomes below US$3,000 a year) and are mostly concentrated in Asia and Africa. While some 2.8 billion of these subsist on US$2 a day or less, they, in aggregate, actually constitute a $5-trillion global market.
The number of people living in poverty at the bottom of the wealth pyramid, versus the relative handful at the pyramid’s peak, represents an explosive socioeconomic challenge on one end of the spectrum but a potentially large market opportunity on the other end. There is, of course, a wealthier mid-market segment of some 1.4 billion people with per capita incomes between US$3,000 and US$20,000, representing a US$12.5 trillion market globally. However, this market is already well served and has benefited from the many positive externalities brought about by vigorous market forces in a competitive environment.
In the Philippines, the bottom 90% of all households earn less than US$600 per month on average, but represent 60% of the country’s purchasing power. Businesses, particularly those seeking sustained growth or engaging in large upfront capital expenditures must inevitably find ways to develop products and services for lower socio-economic brackets. However, they have to look beyond just selling products and also find ways to create social and economic value.
This has increasingly become a priority as businesses seek to attract new customers and professional talent. Both consumers and employees increasingly want to be associated with institutions which are creating value beyond their bottom line.
A powerful insight in doing business at the base of the pyramid is that first, people at the bottom of the wealth pyramid need access to the same products and services as the rest of the world; and second, they are necessary to sustain growth, especially for businesses operating within emerging market realities where anywhere from 40% to 90% of consumers belonging to low-income communities command anywhere from 25% to 50% of the purchasing power.
The bottom of the pyramid thus presents a potentially massive source of growth for firms that can “crack the code” or find the right business model to effectively serve and penetrate this market in an enlightened and productive way.
There is, however, a deeper insight. Better commercial solutions to meeting the needs of low-income customers also have the potential of creating social value and wealth for low-income households and their communities. It is not only the businesses that serve them that can realize value, but the low-income customers and communities themselves are given the opportunity to grow, become wealthier, and be better engaged with the normal economy.
This creates a positive spiral in raising the quality of lives and is a sustainable solution to addressing many social development problems.
Challenges to doing business in low-income markets
Admittedly, however, operating and bringing solutions to low-income communities present several unique challenges from a business perspective. This segment has inherent characteristics that tend to raise the costs of doing business and, while many of these are common to any business, they are more acute as the incomes of the target segments fall.
In our own experience in the Ayala group, for example, we evolved and have adjusted our own business models to be far more inclusive in meeting the needs of a much broader consumer segment. We have identified three key challenges to operating within this market segment.
First is the operational challenge. There are implications to affordability and access during the initial entry into low-income consumer markets. Lower disposable incomes limit the amount of a product that can be purchased at any one time so “parceling” of the product is critical. There are also collection challenges as there are logistical costs associated with collecting customer payments, especially if the product or service has already been delivered. We have seen these challenges in our telecom and water services business.
Second is the more fundamental cultural challenge and there are three distinct aspects to this.
First, corporate decision makers do not typically come from the low-income segment of the economic ladder which makes us one step removed from the realities of grassroots communities. Business executives come from a relatively homogenous background and tend to have limited interaction with base of the pyramid communities. Our assumed, and often unexamined, world view becomes the first obstacle that has to be overcome in understanding the base of the pyramid.
Also, the level of education, habits and preferences of low-income consumers are different on many fronts from the more traditional markets. Consumers from low-income groups may not appreciate the implications of certain consumption choices they make and sometimes end up using significantly higher priced products and services than those they can avail of from established businesses. There are also notable differences in the purchasing habits and buying preferences.
Finally, there is a very strong sense of community among lower-income groups, making it necessary for businesses that want to penetrate this group to consider the segment collectively. They have to find ways of “embedding” themselves more deeply within the community.
Lastly, there are general market inefficiencies in this sector. The lack of participation in a formal system alienates low-income segments from the formal market and businesses may find themselves having to deal with existing intermediaries that base their model on market inefficiencies.
Common success factors in engaging the bottom of the pyramid
While there are certainly differences in the way the business models of Globe and Manila Water evolved, there are common factors that were critical to their success and are important in effectively engaging the bottom of the pyramid:
Product offerings, price point, delivery, distribution and billing approaches were tailored to fit the unique and distinctive characteristics of low-income consumers.
Both developed an intimate understanding of subtle community dynamics and “embedded” their firms into the communities in a positive, reinforcing way. Protecting business assets in low-income communities needs the help of local communities at both the level of the government and at the level of the small residential communities. Successful operations in low-income areas are closely intertwined with local communities and are a key component to achieving business goals. They are in the best position to monitor developments on the ground and shape and influence neighbors’ and consumers’ behaviors.
Both invested in education and communication. It is important to make communities aware of the potential “value-at-stake” that would be put in jeopardy if key challenges of security, collections, etc., could not be resolved by the community. Globe and Manila Water used education and direct community outreach to make the economic and social value of sustained service provision clearer to communities.
Creation of an integrated package of benefits, extending the economic benefits beyond the direct impact of the core services. Globe offers medical supplies, food missions, training to entrepreneurs and engineers. MWC has extended water provision to public institutions (i.e. schools, hospitals, markets) and has provided economic opportunities by outsourcing some of the component materials to members of the community themselves, thus creating livelihood programs for the poor.
CSR Programs were integrated or linked more with the core strategy and operations of businesses. In both cases, CSR programs are moved from a “cause-oriented” mindset towards a more “strategy-oriented” model. CSR programs thus extend beyond an obligation to “do good” or “give back”, but actually have a more strategic motivation and impact to the business. In the low-income communities that it serves, both Manila Water and Globe are regarded not just as a service provider, but also as a livelihood partner as they engaged the communities by generating jobs, supplementing education and facilitating micro-finance services, as an example.
BOP businesses as development models
There is a powerful dynamic at work and a mutually beneficial ecosystem created by engaging these communities at the base of the economic pyramid. These enterprises create a positive signal that has powerful social development dimensions.
Bill Gates has talked about “creative capitalism” not as another type of capitalism, but simply a different application of old capitalism. He referred to “creative capitalism” as business devoted to accelerating the reduction of poverty and diseases or business that helps reduce inequity.
Private business organizations have always been about creating economic value; from producing goods and services valued by consumers, or generating satisfying employment, or by delivering attractive profits for shareholders. But there are growing examples of businesses and enterprises (aside from Globe Telecom and Manila Water) that have shown it is possible to likewise create social value– to produce outcomes that yield public benefits, reduce social harms and make communities and societies more livable and satisfying.
Around the world, there is a growing acceptance that the private sector is key to alleviating poverty. However, profitability remains fundamentally important. The low-income consumer segment presents firms with an exciting growth opportunity that is value enhancing at both the corporate and societal level. To overcome the many obstacles to serving low-income consumers, firms can adopt unique business models. To be successful at this, however, we need to work differently and work in the pursuit of goals beyond the traditional metrics of finance.
We can all re-imagine our businesses as social enterprises and as corporations operating within a social fabric. The private sector has always been successful in mobilizing resources, attracting investments, earning revenues above costs and generating returns above the cost of capital invested. We have built successful organizations essential to the dynamism of our businesses but we can also contribute to employment, quality of life and development by designing our business models in a way that balances profitability with a more holistic view of adding value to society beyond the traditional financial metrics.
These are excerpts from the speech of Jaime Augusto Zobel de Ayala delivered during the Management Association of the Philippines conference on October 7, 2008.