Recent Articles


Thinking out of the Dabba (India and Global Affairs)

 

He makes the case that that the large number of poor people that exist in the world actually represent an enormous and lucrative potential market, which businesses can profitably address, if they think innovatively about their business models and business economics. The message of "profit from the poor" has caused a storm of protest in certain development sector circles, leading to debates about whether the poor should be thought of as mere consumers or also as producers. The answer of course is that thinking of the poor as consumers does not preclude them from being thought of as producers.

Some micro finance institutions see themselves as operating on both sides of the "poor as producer, or poor as consumer" equation. Their financial and business assistance enables the poor to be economically productive. And as they get economically productive, they can afford to pay for other things that they need, provided they can get it at the right price - food, nutrients, education, healthcare etc. However, even without any further boosting of current levels of economic activity, there is already a lot of consumption expenditure that is being incurred by low income earners, and they are not getting their money's worth. For example many of them have opted out of the dysfunctional government health, education and transport services, and they collectively pay a lot of money to a rural medical practitioner who does not have an MBBS degree; or to a small hole in the wall private schools that are not regulated by anyone; or to an un safe, overloaded, uncomfortable private transporter.

Thankfully though, the school of thought that rejects the thinking laid out in "The Fortune at the Bottom of the Pyramid", because it is anti-poor, has not carried the day; the broader message has been generally accepted that we need to design businesses or public service systems that are win - win for the poor (enable them to participate in the market economy) and for the supplier (creates profit).

The broader message, to elaborate, is that (1) businesses often have over engineered, over priced products and services, produced and delivered in a manner which is high cost; or if they are priced affordably, they are of poor quality (2) businesses can, if they think differently, design cheaper, appropriate-performance products and services that the poor will want to buy and can afford. (3) Contrary to popular belief, they can make as much money doing this as they are making now from serving the rich - provided they figure out how to produce and deliver such products and services at a really low cost.

The message that the poor can be profitably integrated into the market economy if the supply side thinks differently, is an important message for a country which is in the process of setting up the rules of its consumption game; and at a time when the markedly visible difference in consumption and access to public goods between the rich and the poor, is causing concern over our social stability. Everyone in India who is providing products and services to Indians, be it social amenities or consumer goods and services, needs to take note of this. The structure of demand (or consumption) in India makes for difficult economics, and this structure is here to stay for a long time. India is a collectively rich economy made up of many poor individuals, and the consumption structure for all manner of goods and services is that there are lots of people spending a little bit each that collectively adds up to a lot. It is only through innovative business design that we can make acceptable quality, affordable priced goods, services and amenities accessible to the poor (whichever way you define them) and still have healthy bottom lines for the suppliers.

This message is not just relevant for the commercial "for profit" sector but also for the social "not for profit" sector, where there is a vibrant group of forward looking people who see themselves not as doing charitable or social workers but as being social entrepreneurs. Social entrepreneurs are increasingly clear that philanthropic funding is not sustainable, and as the poor are slowly getting less poor and aspiring more actively than ever before for a better quality of life, they can afford to pay a little bit for services that they need. Therefore, many of them are embracing the idea that the principles and practices of the market economy could possibly make their work more effective. If beneficiaries buy goods and services offered by social entrepreneur organizations at an affordable price, and if these are produced and delivered using an efficient, low cost business system, then the profit generated helps in making these organizations financially sustainable, and also provide the growth capital for expansion. Not only that, if consumers are paying for it, then they will reject services which are not relevant and of the right quality, and bring accountability to development organizations also.

Prof Mohammed Yunus labels such business ventures as "social business', and describes their guiding principle as being "no loss, no dividend". His concept is that social businesses should function like any other business: social organizations borrow and use financial capital to set up a business that is designed to offer affordably priced goods and services to the poor, produced at a cost that enables them to make a modest profit on it - or at least not make a loss on it. The profit generated is the growth capital for the business, and the financier does not get any dividend for his capital, but can take his capital back, once the business has generated enough reserves to replace it. His famous example is the micro nutrient enriched yoghurt business that his social organization and Dannone have jointly architected, and he adds that direct distribution had to be door to door and not via shop fronts, to ensure that the rich kids did not have access to this benefit of low margin, hence low priced yoghurt. The most experimented with model for social business is that the microfinance provider sees the self help groups that he serves as also being his "target market" for consumption goods and services as well; and the provider of microfinance is now also the seller of other goods and services. SKS micro finance is a prime example of this. They also go a step further and say that they don't see a problem with paying a dividend to their financiers either, as long as the poor are well served.

 Ironically, there now is actually is a fair degree of convergence between the thinking and the practice of the two historical adversaries - development sector organizations (NGOs) and big business. The former wants growth capital, the latter profit. The principles of 'for profit' businesses serving the BOP and social business serving the BOP are exactly the same, even though the business sector sees profit and future growth of this consumer base as the primary motivation, while the social sector sees the smile on the human face as the primary motivation. In either case, the design of the business model (i.e. what to give, at what price, made and delivered how, at what cost, such that a financial surplus is made) is the key. What's more, as the Grameen - Dannone example shows, each party needs the other. The consumer is 'owned' by the development sector organization, which enjoys consumer trust and credibility and has consumer knowledge of the kind that big business cannot develop overnight. The capital, the competence, the ability to scale and the human resources to actually run the production end of the business resides with big businesses, and cannot be developed overnight by development sector organizations.

Despite all this obvious complementarity, the two sides still do not work together easily. I went once to a conference which had both sides well represented, with people from the Government and the World Bank thrown in for good measure. The conference was called "profit at the bottom of the pyramid". An entire morning was spent on changing this. The development sector did not like the words profit or bottom, and finally settled for "progress at the beginning of the pyramid". Equally, the business folk felt that the NGOs were behaving like zamindars of the past, the only difference being that their clout came from the number of self help groups that they controlled, and not the size of their land holding.

In the world of business, where will the BOP business successes come from? For multinational corporations (MNCs) from the developed world, the BOP business paradigm being suggested, is an unfamiliar, revolutionary idea. Used as they are to high per capita income markets with a strongly entrenched consumerist culture (defined by 'want not need', 'more not less') and a demand structure of a few people spending a lot each, this is a totally different take on how to think about consumer markets. This idea has seized the imagination of big business around the world and entered the board rooms of most Fortune 500 companies. Several of them now have at the least a team thinking about a business, maybe an R and D budget allocated to experiment with business ideas around this, and a few actually have a business on the ground, up and running, though faltering quite often. The faltering is often caused by the immediate knee jerk reaction of delivering reducing price by decreasing functionality or decreasing styling . Today's poor consumers are not backward, connected as they are to the world in real time. They have their own ides of what is a "must have" functionality ina product or service and what is a dispensable frill.

Small Indian entrepreneurs are far more equipped to create BOP businesses than the MNCs. In his book "The Fortune at the Bottom of the Pyramid", CK Prahalad illustrates this approach with several examples of businesses from India that have been designed for the BOP examples ranging from micro finance businesses to Casa Bahiya, retail businesses in Brazil to the Jaipur foot and so on. But the original implementer of a bottom of the pyramid (BOP) business, way before CK actually wrote the book, was Karsanbhai Patel of Nirma. He created an appropriate-performance detergent powder, priced at one third that of the market definer and market leader - Surf from Hindustan Lever. He was able to offer it so cheap because he manufactured, marketed and distributed it using an ingenious and ingenuous business design that was far cheaper than Hindustan Lever's, or any MNC's. Thought the product was less "luxurious" than Hindustan Lever's in that it had a far higher level of soda ash, it was a quantum jump in wash quality and convenience compared to the laundry soap that most low income consumers were using, because detergent powders were so unaffordable. Because of the low price, and the large number of poor Indians unhappily watching their clothes yellow with laundry soap, he sold enormous volumes and, despite the low margin per unit, made good money in absolute terms - even by the stringent standards of profitability of any MNC.

Chik, a local shampoo was the first to sell shampoo in sachets at a low unit price and make it accessible to low income consumers. While large tractor companies struggle to find the right products for farm mechanization on the 1 to 5 acre farms that abound in India, the grass root entrepreneur has already innovated bicycle hoes and motorcycle ploughs and tilting bullock carts. Second hand motorcycle engines mounted on rickshas make for mobile "thelas" or kiosks and jeep headlights become floodlights in a no electricity area, and are made to run on a low cost mixture of kerosene and diesel. The dabba waala is a low cost, high efficiency logistics system. The Gujarat milk cooperative is another low cost high value business design.

Because we are a "jugaadu" society with scarce resources, we understand low cost innovation better than most others in the world. And because we have a great deal of innovative, low cost technology already available and in use in pockets of the country, we can design large scale low cost business systems easily. Low cost ATMs for the villages using bio metric identification devices, low cost diagnostic machines, cheaper computers with thin front ends that enable two to use for the price of one etc. are already market tested and ready for use, as are a lot of social sector organizations that have innovative internet based service offerings at low costs. Poor consumers embrace technology because it democratizes. As they will tell you, a machine doesn't discriminate against you because you don't speak English or you are a very low value customer, but people do. Illiterate people find it easier to deal with icons on a machine than with an impatient human being behind a desk. We are well poised to create an inclusive market economy that suppliers benefit handsomely from, financially speaking.

Therefore, the agenda for us going forward, as we build our own market economy, and our own social infrastructure, is to focus hard on creating BOP businesses, both social businesses and for profit businesses. This requires a move away from transplanting products and services and business models from the developed markets, in the name of modernity and evolution. It is time to firmly say no to consultants that suggest to us that it is time we shed our core competence of low cost innovation, because we need to get modern - and that that every market must evolve along the same trodden path that the United States of America or Malaysia, Singapore did. India is about creating the "next practice", and we must do it both in the social sphere and in the business sphere, by creating several large and vibrant BOP businesses. Tax and duty reductions for these businesses, similar to that offered for factory locations in backward areas would be a good incentive.

The entire government run education and health delivery systems should be transformed into social businesses designed for the BOP, except perhaps for the lowest decile of income, where it is free. This way, we will be able to serve the rising aspirations of the poor and create a better functioning social system for our next generation, from whom we hope to reap the benefits of the demographic dividend.