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The Fortune at the Top of the Pyramid:Why the BoP should care about profiting from the ToP
Aishwarya Lakshmi Ratan, Microsoft Research India‘BoP in Practice’ workshop, IMTFI, June 1, 2009
Gucci embroidered handbag, $2905
Pantene shampoo sachet, $0.06
Overview
1. The classic BoP approach (and its detractors)2. Returning to the evidence: what enables ascent from
poverty?3. Inverting the classic BoP paradigm4. Pursuing BoP Producer ToP Consumer linkages5. Technology’s role in enabling ascent from poverty
(1) THE CLASSIC BOP APPROACH (AND ITS DETRACTORS)
TOP
1 Billion People (> $5)
MOP2 Billion People ($2-$5)
BOP3.5 Billion People (<$2)
Figure source: Edelweiss Research
Sell
ToP Producers BoP Consumers
• Huge collective purchasing power at the BoP – 5-13 trillion $ (PPP)
• Large and small companies can make significant profits by selling to the BoP
• Small margins, large volume business models
• Selling products & services to the poor can enable poverty exit through improved consumption
• ToP corporations’ development impact is in selling quality and needed products to the BoP
Prahalad 2004; Hammond 2007
But to what extent can lowering the cost of consumption at $2 a day incomes eradicate poverty?
Limitations
• Inaccurate measurement – much smaller mkt at $1.2 trillion (PPP). Even smaller at real fx rates.
• Cost of and constraints in serving BoP very high
• Cited examples either non-profit or serving MoP• Significant poverty exit can only occur through
increasing the real incomes of the poor• State must deliver key services to the poor and
protect from ‘bad’ consumption• ToP corporations’ development impact is in
employing the BoP
Karnani 2007, 2009 Photos: Indrani Medhi, Rikin Gandhi, Jonathan Donner, Aishwarya Ratan
Is the supply of labour and primary commodities the only way that the BoP can participate in markets?
(2) RETURNING TO THE EVIDENCE: WHAT ENABLES ASCENT FROM POVERTY?
Stages of Progress studies
Out of Poverty Into PovertyIndia (Rajasthan) Diversification of income sources
(importance of urban contacts), additional small businesses, land improvement (successful irrigation investment)
Ill health/high healthcare costs, high-interest private debt, social and customary expenses (funerals and weddings), failed irrigation investment
India (Gujarat) Diversification of income sources (informal sector employment and additional small businesses like dairying), obtaining a private sector or government job (importance of contacts), minor irrigation facilities
Ill health/health-related expenses, large customary expenses (marriage and death feasts), high-interest private consumption debt (debt and debt bondage)
India (Andhra Pradesh)
Diversification of income sources, land improvement
Ill health/high healthcare costs, social and customary expenses, high-interest private debt, drought
Krishna et al, 2003, 2004, 2005, 2006
Out of Poverty Into Poverty
Kenya Diversification of income by linking to urban economy (mostly private jobs, few govt jobs), establishing successful small businesses
Ill health/high healthcare costs, death of major earner, heavy funeral expenses (slaughter of family livestock),large family size, small land-holdings, uneconomical subdivision of land
Uganda Land improvement, Diversification of income sources, Gain from Business (mainly commercial crops), Jobs in private sector, education IF person finds job after education
Ill health, healthcare expenses, death of income earners, large family size, funeral/marriage expenses, land division, crop disease, land exhaustion
Peruvian Andes Diversification of income (livestock, diversified cropping strategies), Support of community organizations, Improvements in physical infrastructure
Ill health/high healthcare costs (including physical disability), social and customary expenses (mostly marriages, some funerals)
North Carolina Employment (finding a job), multiple jobs, longer hours, better budgeting
Ill health, healthcare ex penses, loss of job, lack of family support compounds effect
(1) Dominance of income-related improvements in ascending households
(2) Diversification of income sources critical
“Diversification of income sources was mentioned as a principal reason in the corroborated accounts recorded for 35 per cent of escaping households. Accounted for in equal part by irregular, informal sector employment and by ancillary activities, especially dairying, such diversification of income sources is a very significant reason for escaping poverty in these villages, and it is almost as important in more industrialised Vadodara district as in less industrialised Sabarkantha district” (Krishna, 2005:19)
(3) INVERTING THE CLASSIC BOP PARADIGM
Status quo
•Every participant in a market economic system is both a producer and a consumer•Those who produce primary goods and supply wage labour are numerous, the valuation of their offerings in the market is low, and they are only able to consume that which is cheap, i.e. primary goods and labour-intensive services. •Those who produce processed goods with value-added components and supply specialized services are few, the valuation of their offerings in the market is higher, and so they are able to consume higher-priced processed goods and services
A BoP Consumer Focus
•Encourage ToP producers to reach out to BoP consumers (Prahalad and Hart, 2000, 2006). •The size disparity between these two segments is vast, with the BoP constituting two-thirds of the world’s population. •ToP innovation in making and selling processed products and services to the BoP can lead to a new source of revenue for them through thin-margin, large-volume sales. •The poor would like to consume more. Why not sell them what they want to consume in affordable packets.
Inverting the paradigm:A BoP Producer Focus
•Encourage BoP producers to reach out to ToP consumers•BoP producers have a comparative advantage in their low costs of labour and production•Small scattered producers find efficient ways of aggregating what they produce, adding value in ways that will specifically please ToP consumers who can assure demand, and marketing/distributing these products and services to those at the top of the income distribution
(4) PURSUING BOP PRODUCER TOP CONSUMER LINKAGES
Why should the poor care about the rich?
BoP as Consumers• Income streams of the poor highly
unreliable• Poor consumer seeks standard
products that have the lowest ticket price
• Poor consumer may face welfare trade-offs between consuming in the present vs. the future
ToP as Consumers• Income streams of the rich steady and
well-insured against numerous shocks• Rich actively seek differentiation from
peers -drive consumption of luxury, custom-made goods
• Rich consumer has sufficient surplus to consume in the present and invest in the future
In India, the top 20% of the population is responsible for 45% of aggregate consumption.
BoP Producers ToP Consumers
Company Products Annual turnover (US $)
Producers
Masuta Silk Producer Company (Jharkand)
Largest producer of Tasar silk yarn in India
1.5M 2500
SEWA Trade Facilitation Centre (Kutch)
Traditional textile, embroidery, and craft products
0.5M 3500
Gujarat Cooperative Milk Marketing Federation (Gujarat)
Largest food products company in India (milk powder, baby food, milk drinks, etc.)
1.3B 2.6M
Calypso Foods (Tamil Nadu)
Specialty fruits and vegetables (gherkins)
6M 5000
(A) Institutions for Aggregation and Processing
CONTRACTUAL PRODUCTION• Third party assures producers of demand and sets price• Risk is borne by the external aggregating agency• Earnings gain is only through sales, and does not include any stake in
any further value addition or the final product• Producers still retain individual ownership of assets
(A) Institutions for Aggregation and Processing
PRODUCER COMPANIES• Aggregate the production of the poor in a manner that allows greater
bargaining power in the market around both sales as well as procurement of inputs
• Use the ‘Producer Company’ structure to allow member-ownership structure (one member-one vote)
• Hire management to target new markets• Allow thousands of producers to pool their output, and invest in some
amount of processing and value-addition • Producer-members have a stake in the final returns generated by the
company – Distributed dividends alone ~4% of annual household income (Masuta)
(B) Sustaining demand: Meeting the Aspirations of the Rich
•‘Hansiba’ production styles, designs, colour combinations and marketing incrementally enhanced to match the palate of external high-end customers•Brand ambassador at the recent opening of a third ‘Hansiba’ outlet in Mumbai was Leah Martin, an American singer and model
Sustaining demand: Meeting the Aspirations of the Rich
•The Amul Moppet was initially targeted at urban upper class homemakers•Sensibilities and tone of the campaign are mostly urban•The gimmicky one-liners used, called “topicals”, are in English and are drawn from national and international news
(C) Mobilising Capital• Providing finance for production becomes a
less risky proposition for most banks when the supply-side is streamlined, efficiency gains from aggregation and specialisation are realized, and a collective of producers shares the risk of production
• In a Producer Company, internal management of working capital is moulded to suit production timings, input purchase, and the consumption needs of the producers. Innovations in financial management allow convenient cash flows for the producers throughout the production cycle.
Photo: PRADAN, Masuta
(C) Mobilising Capital
Surviving shocks: • PRADAN’s poultry cooperatives grew by 50%
in 2005-2006• But the bird flu scare caused the market price
of chicken to plummet to half the cost of production
• Heavy losses of Rs. 5 to Rs. 20 lakhs per coop that year
• Yet, the size of the organisation allowed the producers to use reserve funds, collectively mobilise more working capital, wait out the downturn
• They subsequently rode the boom in 2006-07 to more than double their revenues the next year
Photo: PRADAN
(5) TECHNOLOGY’S ROLE IN ENABLING ASCENT FROM POVERTY
The role of technology
• “Technology, it is already apparent, can be as powerful a tool for addressing barriers and inefficiencies at the bottom of the pyramid as in more established markets.” (Prahalad and Hammond)
• Yet, the effects that investments in technologies have on enabling the poor to move out of poverty vary greatly, and in many cases are hard to establish.
• Technology primarily works as an amplification tool. The impact of technology in enabling poverty alleviation is then only as good as the task it seeks to enable.
Enabling Consumption of the Poor
• M-PESA: a mobile money transfer/payments service with outreach to ~6M in Kenya
• Used predominantly for small-denomination (<$80) domestic P2P remittance transfers between family members and friends
• Weakest case: Urban migrant paid $1 more per transaction using M-PESA once every 2-3 months
• Strongest case: Urban migrant saved ~8% of monthly income by using M-PESA
Photo: Indrani Medhi
Enabling Exchange with the Poor
• “ITC's empowerment plan for the farmer centres around providing Internet kiosks in villages”
• ITC’s e-choupal is primarily used to facilitate the distribution of coupons for procurement of crops like soybean by ITC - less for accessing information for negotiation or arbitrage by the farmers
• The disintermediation leads to an average net upgrade of ~6% of annual income per farmer
Photo: PC Quest
Enabling Production by the Poor
• The Masuta Producer Company coordinates and aggregates the production of Tasar silk yarn. The fabric produced goes on to be part of FabIndia textile products,
• A combination of TV, DVD players and videocameras (through Digital Green) enables training in productivity-enhancing opportunities and assists with the ongoing promotion and sharing of best practice
• The average producer’s income has involved an increment of 30-40% of household income
Photo: Rikin Gandhi
WRAP-UP
Summary
• Some market-based mechanisms to assist poor households to rise out of poverty are more effective than others
• The most powerful mechanisms have to do with substantially improving incomes of the poor
• Strong earnings gains have been realised by aggregating production of the poor, collective risk-sharing, specialization, value-addition through selective processing, and direct sales and marketing to rich clients
• Pursuing BoP Producer-ToP Consumer linkages through Producer Companies and enabling these with appropriate technologies can indeed make significant progress towards “eradicating poverty through profits”
Additional considerations
• Role of Government in Producer Companies must be limited to infrastructure provision and prudent industry regulation
• Social and psychological effects of technology adoption/consumption are critical to well-being as well, but often do not themselves drive ascent from poverty
• In an economic downturn, overall demand falls. Yet, the rich have greater buffers to sustain consumption than the poor.
Last word…Mumbai’s dabbawallas
•“The century-old supply chain of dabbawallahs is operated by 5,000 semi-literate men and women who pick and deliver 200,000 tiffin boxes to office goers per day.”•The average turnover of the dabbawallah industry is ~$8.5 million per annum.
•'The method we adopt is simple and easy. For us, customer satisfaction matters a lot and we are here to deliver services to them.’
Source: Rediff , Pawan Agrawal, Sanjay Sawant
