Saturday, March 24, 2012

Next Generation Business Strategies for the BoP

C.K. Prahalad and Stuart Hart changed the way we think about the poor and their participation in business and commerce with their “Base of the Pyramid” (BoP) paradigm. Though the BoP concept has been the subject of criticism for (i) being definitionally imprecise; (ii) for seeing the poor only as consumers (and, by implication, as the next target for greedy large corporations!); and (iii) for its lack of success on a scale that matches the potential identified by Prahalad and Hart, there is little doubt that it remains a subject of great interest for business managers and researchers.

There are important efforts on to take the BoP concept forward. Stuart Hart is today committed to taking it more aggressively to the field, and one of his new initiatives is the Indian Institute for Sustainable Enterprise (IISE) being set up right here in Bangalore. And, the combined learning and experience over the last decade is being used to refine the BoP concept itself.

Next Generation Business Strategies for the Base of the Pyramid is a recent book (FT Press/Pearson Education, 2011) crafted by Ted London & Stuart Hart that helps us understand the “State-of-the-art” of the BoP concept. Naturally, the book starts by paying tribute to CK Prahalad for, among other things, his “ability to amplify weak signals” and “demonstrate dimensionality and directionality” (p. xxiv).

London and Hart make an effort to dispel some of the criticism against the BoP concept, pointing out that production and consumption are linked – if you have more time freed up, you can devote your energies to more income generation; if you pay less, you have more income for other needs; therefore, the key is increasing disposable income (p. xix). The current paradigm of BoP is much more participative and more rooted in the communities for whom products and services are designed, so it’s becoming more difficult to criticize the BoP concept on the way it treats the poor.

In fact, the most insightful parts of this book are those that engage with understanding the poor and the under-served, and that create a conceptual basis for the greater “embeddedness that characterizes BoP 2.0.

Analyzing why BoP customers have not shown much interest in MNCs’ basic needs products – e.g. P&G’s PUR water treatment that was a big failure - Erik Simanis argues in Chapter 4 that the BoP does not constitute a market. According to him, a consumer market is a lifestyle built around a product. Consumers have an inherent sense of when value is valuable, i.e. what is the value of what they are purchasing. In a consumer market, members “embed” a product and its value proposition into their lives. Simanis concludes that for a BoP product to succeed, the company has first to create a new consumer market which is, essentially, a new lifestyle (a value proposition worth valuing + embeddedness in one’s life).

Simanis underlines the point that strategies that work in existing consumer markets are not the same as those needed to create new markets. In the latter, both customers and sellers lack reference points that allow them to compare and choose. The most attractive BoP markets involve addressing non-consumption, i.e., creating new markets. A consumer market is “a community of people for whom the idea and practice of paying money for a value proposition is second nature and who have embedded a product into the fabric of their lives.” (p. 112). “A consumer market is the end result of a successful collective sensemaking effort that has infused a product with personal meaning and significance.” (p. 112).

Simanis suggests that products and services addressed at the BoP start with a “value open proposition” so as to avoid getting boxed into a single category. Embedded innovation would help as “the most effective way to get someone to desire a value proposition and consumer offering and to then invest the time and effort to learn new routines and behaviors is to have him or her feel a sense of ownership for it.”( p. 117). Simanis proposes three phases of embedded innovation: seeding, base-building, growth and consolidation and emphasizes that doing this effectively might need a 5 – 7 year time frame.

Another insightful chapter is by Madhu Viswanathan (“A Microlevel Approach to understanding BoP Marketplaces”). He points out that activities that are routine and predictable for people with means can be quite unpredictable for the poor. The poor tend to resort to “concrete thinking” to cope with uncertainty – e.g., they focus on a single piece of information; or, they focus on the immediate; or they seek familiar context. They also tend to follow pictographic thinking or a matching logic. Viswanathan argues that low literacy can result in low self-esteem, and that for the poor the selfworth that is important for human existence comes from human relationships. Their lack of material resources tends to enhance reliance on families, traditions, and social surroundings. Transactions tend to be characterized by fluidity and customization. He concludes that “solutions succeed and fail based on the extent to which they are based on a deep understanding of life circumstances” (p. 153).

Patrick Whitney identifies the potential of design thinking to reframe BoP problems. Reframing “user insight enables the redefinition of the problem to one that is based upon the user’s activities instead of the company’s product.” (p. 178). Thus Godrej’s chotukool became more about improving people’s lives rather than just selling them a refrigerator.

In his chapter on “BoP Venture Formation for Scale,” Allen Hammond of Ashoka suggests three approaches to help BoP initiatives achieve scale: (i) Build both local and Global DNA (in financial structure, management capacity, etc.), (ii) Build an entire ecosystem to support scale (this often involves expanding the scope of venture creation) and (iii) consciously build hybrid organizations involving both NGOs and business, generating value for both.

In the final chapter, London draws attention to some of the unaddressed issues in BoP research. One of the issues he identifies, the internal organizational challenges of the BoP business in a large organization context, is from what I can see one of the main reasons why we are unlikely to see significant traction in the BoP space for quite some time to come. The logic of BoP is so different from the dominant logic of most large corporations and the time taken for results to appear so long that BoP business models are unlikely to become commonplace anytime soon.

Overall, this is a thought-provoking book with several useful examples. I particularly liked the one on Life Spring Hospitals, a Hyderabad-based network of low-cost maternity care hospitals that has applied the “Aravind Eye Care logic” to maternal healthcare. This is essential reading for anyone studying or applying BoP business concepts.

1 comment:

  1. Prof Krishnan thanks for the post. The BoP is a concept close to my heart; I am working on a paper on financial inclusion in India. I've added Hart and London's book to my reading list.

    Rishi Mallesh