Rethinking Business Models To Fight Poverty

Bernard Garrette , Professor of Strategy and Business Policy - August 15th, 2011
Children in the streets ©Renaud Douci/ONG SOLIDARITÉS INTERNATIONAL

Bernard Garrette is interested in the business models of large multinationals trying to get a foothold at the “bottom of the pyramid” in emerging countries. His analysis, performed in collaboration with the University of Michigan’s Aneel Karnani, suggests that companies should rethink their whole approach when entering emerging markets, refocusing their efforts on business fundamentals like profits, market creation, and partnerships with actors who are familiar with local distribution networks.

Bernard Garrette ©HEC Paris

Bernard Garrette, who holds a doctorate from HEC Paris, is a professor of Strategy and Business Policy. He has been Associate Dean of the HEC MBA since January 2011. His research (...)

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Garrette’s interest in this topic started a few years ago when two of his students pointed out to him that “half of humanity is outside the scope of today’s educational research in strategy and marketing.” Indeed, despite the publication in 2004 of C.K. Prahalad’s book The Fortune at the Bottom of the Pyramid, business education programs continue to ignore the world’s poorest consumers. Instead, meeting the needs of poor populations is generally left to charity organizations. The problem: when left entirely in the hands of NGOs, research and development is necessarily limited, due to insufficient funding. This lack of interest is surprising, given the huge market potential of this market, which represents a full half of the world population — especially in consideration of the saturation of developed markets. Why, then, are companies still struggling to get a foothold at “the bottom of the pyramid”?

Rehabilitating Profitability

On the basis of their analysis, Garrette and Karnani conclude that the established range of actions in response to poor populations is too small, notably because the zone of contact with them is dominated by NGOs, who do not seek to turn a profit and thus have a limited capacity to act as dynamic forces for progress and change. The “social business” approach, inspired by Muhammad Yunus’s microfinance model, is not a solution either: that model seeks equilibrium (avoiding losses to ensure that the organization can continue functioning), but, like NGOs, does not yield returns on invested capital and thus ultimately suffers from under-financing. According to Garrette, the most “socially useful” actions for the poor are those that provide a return on invested capital. And, indeed, the way to grow quickly is to create value in order to be able to reinvest.

Forget Western-Style Marketing

Does this mean that private enterprise is inherently more suited than NGOs to conquer markets at the “bottom of the pyramid”? Not necessarily: all three of the multinationals that Garrette studied experienced great difficulties with their projects. But these companies clung to their former Western approach, attempting only to adapt, rather than recreate, their usual business model, which can be summarized as using marketing to create needs within existing markets. As it turns out, however, there are no established markets at the “bottom of the pyramid” (yet). There are clear and pressing needs, but no market, because individuals within this group do not have the means to satisfy their needs.  “You have to forget about marketing and come back to the basic reason for trade: creating a market where there is a need,” Garrette says. To do this, companies must observe people’s behavior and ask themselves: “how do the poorest people try to meet their needs? Why don’t they succeed? These questions make it possible to detect embryonic markets.” For example, when Essilor discovered a pseudo-market for the rental of eyeglasses in India (one rupee for 15 minutes), they understood that poor customers were prepared to pay a price, albeit a very small one, to be able to use glasses. It is important to take care, however, not to base plans on a poorly researched understanding of the market at hand. Essilor’s hiring of professionals to administer individual vision tests and sell glasses adapted to every visual defect proved too expensive; in hindsight, offering pre-built glasses (to correct patients’ vision imperfectly, but still usefully) would no doubt have been wiser. 

Creating Local Partnerships For Distribution

Finally, Garrette explains, it is difficult for multinationals to succeed alone in unfamiliar emerging markets. They need local partnerships with NGOs, the government, or some other actor with knowledge of the local terrain to help them create the necessary market conditions (distribution, infrastructure, education, etc.). Garrette says, “Today, Western corporations are broken up into pieces: they externalized their secondary activities (distribution, suppliers, etc.) years ago, and they no longer know how to manage a whole value chain. But these are exactly the skills needed to succeed in countries where market structures do not exist.” And he goes on to cite problems in the distribution of products encountered by companies such as Danone and Procter & Gamble as examples of this difficulty. Danone entrusted the local population with the distribution of its yogurt in remote villages in Bangladesh, but the low level of sales and the cost of equipment (to keep their products cool) blocked the development of the network. As for Procter & Gamble, the water purification powder that they offered for sale in small packages, notably in the Philippines and in Guatemala, was too expensive; not only in relation to local purchasing power, but because local inhabitants had limited interest in the product. “Distributing industrially purified water would have been much less expensive and more efficient,” explains Garrette. “In fact, in emerging countries, dedicating a distribution network to a single product cannot work, because the income that the distributor will derive from that is not enough to live on.” 

Based on an interview with Bernard Garrette and the articles “Challenges in Marketing Socially Useful Goods to the Poor”, by Bernard Garrette and Aneel Karnani, California Management Review , summer 2010, and “Better Vision for the Poor” by Aneel Karnani, Bernard Garrette, Jordan Kassalow and Moses Lee, Stanford Social Innovation Review , spring 2011.

APPLICATIONS FOR PRACTITIONERS
APPLICATIONS FOR PRACTITIONERS

Garrette’s work offers a number of ideas for leaders who are launching socio-commercial projects in developing countries:

• Start from scratch and build using local context instead of trying to adapt a previously existing company product or way of doing business.

• Use partnerships to help create the conditions necessary to a project’s success, notably reliable distribution partners.

Finally, his analysis advises non-governmental organizations against neglecting the issue of return on invested capital — capital is lacking in relation to the level of need, and the best way to find the necessary financing is to develop profitable business models.

Methodology
Methodology

The applied methodology consisted in the analysis of three socio-commercial projects launched by the multinationals Procter & Gamble, Essilor, and Danone in poor countries. Data were collected directly from the companies. Study of these projects, and their difficulties in comparison to other more successful projects, is useful to learning which models are effective, and which are not, when setting up “bottom of the pyramid” businesses in emerging countries.