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Rethink or Reset? Building a Fortune with the Base of the Pyramid

12/15/2010 --

Authors seek fresh approach to co-creating mutual value with the world's poorest citizens.

ANN ARBOR, Mich.—A decade ago, the late Ross professor C.K. Prahalad and colleague Stuart Hart crystallized a new idea that reframed business' relationship to the world's poorest citizens: Companies could tap new markets, solve some social problems, and empower the estimated four billion people living on less than $2 per day. Their work, The Fortune at the Bottom of the Pyramid, set off a flurry of debate and activity.

Today, interest in the base of the economic pyramid (BoP) has never been higher. Growth in mature markets is slow at best and companies desperately need new sources of expansion and innovation. Many nonprofits and development-sector investors are seeking more market-based solutions to alleviate poverty. But the past 10 years has produced few home runs. Learning has been gradual and piecemeal.

Hart is a distinguished fellow at the University's William Davidson Institute (WDI) and a professor at Cornell. He and co-author Ted London, a Ross professor and senior research fellow at WDI, accumulated knowledge gained from practitioners and scholars in the area provide a playbook for future ventures in Next Generation Business Strategies for the Base of the Pyramid: New Approaches for Building Mutual Value. The book gathers research on BoP ventures to ensure that business is asking the right questions, truly co-creating value with customers, and learning new ways to accelerate progress.

In the following Q&A with Dividend magazine's Terry Kosdrosky, Hart and London note it's no longer viable for business to dismiss the world's poor. In fact, most of the world's population growth is occurring in BoP markets. Companies facing sluggish activity in established markets should rethink their business models and take a better look at this potential source of income, they say.

This idea of generating business at the base of the pyramid has been around for a decade but you say there's a need to evolve and re-frame the questions we're asking. What have we been asking and what should we be asking?

London: Ideas need to evolve, develop and improve over time. The case Stu and C.K. Prahalad originally developed presented the idea of the fortune at the base of the pyramid. It wasn't that simple but it became simplified to "there's a fortune at the base of the pyramid and all we have to do is figure out how to capture it." That started debates about exactly how big the fortune is, how much people spend, and how we take what we're already doing and extend it to that marketplace. To some degree there was also pushback about whether these ventures were good or bad for the poor. Those were initially good questions, but we need to be much more nuanced in our assessment and understanding of BoP venture development.

The big idea in our book is, instead of asking: How you can find a fortune at the base of the pyramid, how can you create a fortune with the base of the pyramid? Now you get much more interesting questions and debates. The right question isn't whether these ventures are good or bad. Business ventures serving the poor are here to stay. The more interesting question is how you make them better. If you go with that, you ask a whole different set of questions because you're not relying on selective anecdotes to defend one approach or criticize another. Instead you are trying to understand the entire value proposition and explore ways to enhance it. How do we engage across sectors to create more value for everyone? That's where the book comes in. It focuses on what we've learned in order to do this better.

Hart: I'm a big believer in the adage that any innovation solves problems and creates new ones. I think it was a significant innovation 10 years ago that you could even think about the base of the pyramid in business terms. People thought you couldn't do business there: No one had any money. So a lot of it was just shifting people's mindsets to even engage the idea that there's a commercial opportunity.

But, as Ted suggests, it's easy to fall into a trap that C.K. and I never intended: the idea of just going in to get the money there. That was never the intent. If you read the original material, it doesn't come through that way, but it's the easy conclusion. The book tries to build on that experience over the last several years and address the new problems. We have companies and development agencies saying enterprise-based opportunities do exist. But now it creates new challenges and problems that need to be resolved. One of them is how you actually go about this value creation. How do you collaborate and co-create rather than impose? And if we're successful in creating a lot of new economic opportunity with the base of the pyramid, how do we ensure that we don't melt the planet at the same time?

In terms of execution, what has been lacking in these ventures? You mentioned a lack of big home runs to emulate.

Hart: Most of the corporate initiatives have been very much a 1.0 approach: Let's figure out how big the market is, collect market data, find the household income, establish the right price points, design a product, and market it. And it just hasn't worked. The simple reality is that it's not an effective way to build a new market space on this socioeconomic level. There's a big difference between market creation and market entry. Most of the early attempts have worn the market-entry hat. Market creation involves a different approach and a different set of skills. It's more about co-creation and less about taking a product from outside and trying to push it in a community. That's what's limited the success of a lot of the corporate ventures so far. It's a different story with some local ventures and nonprofits, but for multinationals that's often been the case.

How do you create a market, especially in an unfamiliar territory? For some companies that might be uncharted territory.

London: There has been some mixed success. But the fundamental flaw with most approaches to date has been a failure to really understand value creation. It has to even go beyond co-creation. If we hear the voices of the poor when we start creating the business model, we may think that's sufficient. But it's not. There's not been a willingness to have an ongoing conversation with the customers. In the developed world you'd never run a business without a regular conversation with those you seek to serve. Yet when for ventures that are serving the poor, the response you often hear is, "It's too costly. We can't afford to understand the impacts we're having on the customers." To me, you can't afford not to.

You always hear this anecdotal story about how somebody visited this one person or place. But that's not the same as having a deep understanding of people and context. It doesn't work well for poverty alleviation and it doesn't work well for successful ventures. If you're not co-creating in the beginning and continuing that conversation throughout, you're not going to have success.

Furthermore, if you can understand the impacts on the ground and understand the poverty alleviation outcomes, then you can actively engage the development community. That community has billions of dollars to invest but reservations about investing in business. But if you truly understand what's happening on the ground and invest in continued improvements in your business model and associated ecosystem, you can tell the nonprofit and development communities that you can help them achieve their poverty alleviation goals and you can prove it. Companies don't always have the resources to do their own market and ecosystem creation on a scalable basis. The purpose of the book is to lay out the steps that enterprises and their partners need to think about in their execution.

Hart: It takes a leap of faith at some level. There's a tyranny of existing product categories. The development community suffers from that, too. It's human nature, i.e., "We have this product or process and we understand this category, so obviously this will work for poor people and we'll just have a dumbed-down or smaller version." I think that mentality is what's holding us back. That comes through in the book in Erik Simanis' chapter on market creation and Pat Whitney's piece on the importance of not imposing the pre-existing categories. One of the important benefits of mutual value creation is the co-generation of entirely new categories. You end up with businesses that neither side could have imagined on their own. But that means going in without all of this faux certainty that most corporations require: a business plan, product, projections for sales with the hockey stick graphs, etc. You might need that that to sell it inside the company, but it's all premised on a bunch of assumptions that don't hold up. The truth is that you should launch the venture without any of that because you just donít know. But it's really difficult for companies to suspend disbelief that way and enter into a new business experiment flying blind, even though that's exactly what you have to do.

That sounds like a big leap for some companies.

London: Not necessarily. It's typically a low-cost investment with a high upside. And that's the way to frame it. Not that they're going to get money and go off and not have to report back for six years. No one gets a free ride. But you might have different metrics to measure success. But those metrics have a longer-term nature and they may be more learning oriented. They can be metrics designed to give you a vision on whether you are making progress toward the bigger goal of creating a viable, sustainable scalable business model. And this isn't so unfamiliar to many enterprises. Companies, for example, make substantial technology investments that are often very long term and experimental in nature. They just need to transfer this thinking here.

Hart: It's a buying-options mentality as opposed to a bet-the-company mentality. The paradox here is that corporations are better, actually, at betting the company. They're more geared toward putting big bets on big things. But that's not what this is about. In some ways they struggle on how to allocate $1.5 million in a $50 billion corporation to a business experiment like this, which is like a rounding error for them. They can't figure out how to do that because you can't draw all the charts you want to draw like you can with a line extension. Yet the company is happy to throw $100 million into a line extension into a new geography that's really risky. But, hey, you can draw all those charts.

You said there have been some successes, so what are the characteristics they have?

London: In the first chapter in the book, I present a roadmap for BoP venture development. What do you need to think about when you're in the early design stage? How do you create pilots that can maximize the learning you're going to get? What are the competitive advantages and capabilities you need to scale? Within each of these stages, there are key principles that BoP venture leaders can use to enhance success. Companies have not, for example, really thought hard enough about the sources of competitive advantage that will allow them to sustain themselves in this market. They also need to think more about capabilities they need to develop so they can go to new markets with a different business model. They have to think about scaling in three dimensions, scaling up, scaling wide, and scaling deep.

In another chapter, Bob Kennedy and Jacqueline Novogratz focus on how to think about innovation in a BoP context and the role of patient capital in enterprise development. We talked earlier about Erik Simanis chapter on market creation. Madhu Viswanathan discusses what he learned at a micro-level from working in this space. Patrick Whitney addresses design principles that have been used effectively by companies in the developed world and how to apply some of those and modify others to create more than just a product. And we have Allen Hammond, one of the leaders in this field from the beginning, thinking about new models and hybrid approaches for scaling that allow you to be both local and global. The book is designed to focus on particular areas like market creation, design, piloting, scaling, poverty alleviation, and environment implication. We don't think we can cover everything in one book, but hopefully we have addressed many of the key issues and, more importantly, charted a new way forward.

Hart: The width of the value proposition is important. There's a tendency for top of the pyramid capitalists to look narrowly at products and think all of the value is embedded in this thing you are selling. One of the lessons learned from a decade studying the base of the pyramid is that the successful businesses have typically come from the base of the pyramid and not from Western capitalists. They also have much wider value propositions. They're not just product businesses. There's a community service aspect to it that is really important. Grameen Bank is one of the most iconic examples in the microfinance space. But it's much more than the loan. It really is a community intervention. There are all these other spinoffs that include access to better agricultural inputs, access to renewable energy, phone connectivity, and internet connectivity. It's a much bigger, wider value proposition than what the typical Western company offers.

Are we starting to emerge from the trial-and-error period in BoP ventures or are we still in it?

London: We think it's time for the next generation. Overall, it seems inevitable that the private sector will need to explore this market to a greater extent and the development community will need to accept a greater role for business in their approaches. We've learned enough now, however, that there's no need to repeat the mistakes. There's enough accumulated wisdom and experience to say we can increase the likelihood of success. We have enough ideas now to do it better. But of course there is no guarantee for success. Any time you enter a new space some companies will do well, some will not. Some development initiatives will have a substantial impact, others will not. Is this the end? No, I think the learning continues and that's how we close the book. We've begun to set the path forward for the future but there's much more to be done.

Ted London is a senior research fellow and director of the Base of the Pyramid Research Initiative at the William Davidson Institute. He's also an adjunct professor of business administration at Ross

Stuart Hart is the Samuel C. Johnson Professor of Sustainable Global Enterprise at Cornell's Johnson School of Management. He's also a distinguished fellow at WDI.

Terry Kosdrosky



For more information, contact:
Bernie DeGroat, (734) 647-18476, bernied@umich.edu