Today, numerous scholars and articles as well as managers and corporate initiatives focus on the opportunities that C.K. Prahalad and Stuart L. Hart have shown in their seminal article about the “Fortune at the Bottom of the Pyramid” (strategy+business, 2002). However, it seems that even after a decade of intensive research and numerous pilot projects many scholars and managers of (mostly) Western organizations are far away from understanding the real challenges of low-income groups in India and similar countries.
Who benefits from the fortune at the bottom of the pyramid?
The possibility to reduce poverty and make profits at the same time is an idea (Prahalad & Hart, strategy+business, 2002) that has not only attracted the interests of academics but also numerous multinational companies. The initial activity focus of most activities has primarily been on the development of products or services that allow low-income groups to participate in more diversified consumer markets and access a number of durable or fast-moving consumer goods that they could not benefit from earlier. However, recent research reveals that only very few initiatives actually convince economically as well as socially (Garrette & Karnani, California Management Review, 2010).
“My biggest challenge to change our business models in emerging markets is neither technology adaptation nor missing infrastructure but the mindset of my managers” (Head of Corporate Development, European MNC)
In addition to the limited success of making profits with products and services for low-income groups so far there has also been growing criticism from different scholars and NGOs. They highlight an overemphasis on turning low-income groups primarily into consumers of multinational companies irrespective of the impact on the total income available and the sustainable livelihoods growth aspects in emerging markets such as India. Critics focus on the growing problems for individuals as well as communities through an increased access to non-vital consumer goods without an adequate growth of the total income of the affected low-income groups at the same time. For example, targeting the poor as consumers for relatively luxurious items including many fast-moving consumer goods can have a tremendous impact on their spending pattern. Up to 80% of their daily income has to be spent on basic items such as food, clothing and shelter let alone health care or education (Habib & Zurawicki, Journal of Business& Economics Research, 2010). In reality, new business models for low-income groups in many emerging and frontier markets are less economically and socially sustainable than what many corporate social responsibility (CSR) reports of Western and domestic companies might indicate.
Improving business infrastructure first, selling to consumer second
There is nothing wrong with providing low-income groups with access to new consumption opportunities as long as their income opportunities increase as well. However, in reality this is hardly ever the case. For example, many low-income groups in rural India do not only lack access to basic healthcare, water and education infrastructure but also live in areas where small-scale producers and farmers have only limited access to power, equipment or logistics infrastructure in order to grow beyond their village if their business is successful.
“Imagine that your country or district is only allowed to consume and to import but not to export anymore. What will be the consequences for your economy? – This is basically our situation here.”
(Field Officer, NGO operating in rural India)
There is no doubt that micro-finance institutions have improved at least the access to financial capital for low-income groups and numerous people have been able to start a business with their support. However, it is interesting that the whole world questions the legitimacy of the business model of Apple Inc. based on a number of suicides among the employees of its suppliers in China but only a few really reflect on the actual value of many micro-credit institutions after many more of their clients in India have committed suicide due to massive debt overloads.
In reality, successful local entrepreneurs in rural India hardly ever have the opportunity to grow beyond their village. Even with sufficient access to financing solutions, the further economic development of rural India and similar regions around the world is limited as long as additional (physical) business infrastructure such as affordable commercial transportation solutions, access to well-educated people (e.g. craftsmen) or uninterrupted power supply is not available. However, a coordinated approach to improve all the necessary infrastructure elements in a selected rural area in India or elsewhere often goes beyond the possibilities of a single company or government institutions. As a result, many initiatives have a relatively limited impact on the sustainable improvement of the local living conditions. For example, what is the impact on local job creation if a successful small-scale producer has access to re-financing possibilities but lacks the access to well-trained employees and local logistics infrastructure? While more coordination among different infrastructure improvement initiatives in the same region would be beneficial for the overall impact of each single initiative, companies but also NGOs hardly ever take over this role.
Bridging the pioneer gap
Without the coordination of various efforts and projects, investments into new business infrastructure solutions in rural areas are often not financially attractive for companies. As a result, there are only limited financial and human resources available to develop new concepts, test ideas, run pilots and scale up successful projects. This is what we call the “pioneer gap” (Monitor Group, From Blueprint to Scale, 2012). The major reasons for this situation are:
- Social impact investors normally require modest returns of investment but at a low risk level. These conditions are only given when business models are ready to be massively scaled-up.
- There is a lack of venture capital investors that have the necessary funds, long-term perspective and also the required field experience to identify promising investment opportunities in rural areas and finance their early stages of development.
- Local social entrepreneurs often understand how to technically design sustainable business infrastructure solutions but often lack the necessary skills to develop sound concepts, conduct market tests or run pilots in order to successfully implement them.
“What we need is more collaboration and joint efforts between different companies with suitable technologies, (non-)governmental institutions and financing partners – across continents – in order to develop solutions that suit local taste, integrate various technologies and allow for optimal financing solutions.” (Indian Field Officer, European Development Agency)
This is where universities might also be able to contribute. However, similar to companies and NGOs there is only limited value for a single university to get engaged. First, the insights of most students and faculty in industrialized markets about the real business infrastructure situation requirements in selected rural areas of India and similar regions are somewhat limited. Second, local business schools in India and similar countries have the necessary local understanding but could often benefit from the more direct access of their academic colleagues in industrialized countries to alternative technologies and funding sources.
An academic ecosystem
With initial support of Swissnex India, the India Competence Center of the University of St.Gallen has teamed up with local partners such as the Indian Institute of Management in Udaipur or the social enterprise “Project Dharma” to develop in the long-run an ecosystem that should allow student initiatives as well as other researchers to efficiently find the necessary support to contribute to the closure of the pioneer gap. However, such platforms only survive if there are enough student projects and research initiatives that meet with local demand, social entrepreneurs and especially enough institutions that are willing to support and coordinate the efforts of multiple partners to bridge the pioneer gap and align the improvement activities for the business infrastructure in selected areas of rural India.
In sum, the base-of-the-pyramid eventually represents an interesting new customer segment for many companies. However, it is the responsibility of companies as well as universities to ensure that they foster not only local demand but also the local business infrastructure to enable sustainable economic growth in rural India.
