Doing Business with the Poor for Prosperity

Doing Business with the Poor for Prosperity

When Bangladeshi banker Muhammad Yunus won the Nobel Peace Prize in 2006, it was in recognition of his successful work over decades to create a bank for the poor people of his country. But it was another type of acknowledgment as well. By giving the award to the CEO of a reportedly profitable bank, the Norwegian Parliament was also recognizing that profitable business can be a powerful force for good in the world.

With a repayment rate exceeding 99 percent, the Grameen Bank that Yunus established has loaned more than $6 billion, helped build 640,000 homes, sponsored more than 50,000 scholarships and student loans, and changed the lives of 80 percent of his country’s poor families. Building on this record of success, Grameen has recently expanded into communications, nutrition and health care.

In his Nobel acceptance speech, Yunus explained:

Big companies are finding a great many reasons to think like Yunus. Many of them involve self-interest, with the organizations trying to build more prosperous, more sustainable businesses.

The economic world is changing rapidly, and companies are trying to figure out how to change with it. The economies of the globe’s “emerging and developing” (which once meant “poor”) countries in 2005 accounted, for the first time, for more than half of the world’s combined gross domestic production (GDP), The Economist reported in a 2006 September survey titled “The New Titans.”

© iStockphoto.com/peeterv© iStockphoto.com/peeterv

This shift in economic balance “is likely to be the biggest stimulus in history,” The Economist said. “As these newcomers become more integrated into the global economy and their incomes catch up with the rich countries, they will provide the biggest boost to the world economy since the Industrial Revolution, which fully involved only one-third of the world’s population. By contrast, this new revolution covers most of the globe so the economic gains – as well as the adjustment pains – will be far bigger.”

Much growth in what used to be called the “Third World” has been accounted for by the real new titans such as Brazil, Russia, India, China and South Africa, the so-called BRICS countries. But many countries in Africa are growing more quickly than, say, the United States; and the commodities boom caused by the BRICS’ needs for minerals and fibers should spur that boom for some time to come.

So the big multinational companies of the world must plan to do less business in the North, where population growth is stagnating in many areas, and to do more business in the developing world, where much of the economic action is today and where, by 2050, 85 percent of the larger planetary population will reside. But how should companies operate in parts of the world where, despite economic growth, the majority of the populations remain poor? In fact, some 4 billion people, out of a world population of more than 6 billion, are “poor” by most definitions.

In 2006 a number of CEOs who are members of the World Business Council for Sustainable Development (WBCSD) put their signatures on a Statement of Intent on Doing Business with the World, which said in part that, “in striving to align profitable and self-sustaining business ventures with the needs of society, we have set the following objectives:

  • To develop a deeper understanding of how global issues such as poverty, the environment, demographic change and globalization affect our individual companies and sectors;
  • To use our understanding of these issues to search for more inclusive business solutions that help to address them on both a local and global scale;
  • To align our core business strategies with the solutions that we have identified;
  • To incorporate long-term measures into our definition of “success,” by targeting profitability that is sustainable and supported by a responsible record in managing social, environmental and employment matters.”

 

Signers included top executives of such companies as General Electric, Anglo American, BP, Unilever and Toyota. The Council is a collection of 200 of the world’s biggest companies (about $7 trillion in combined annual turnover), which believe that helping society tackle major challenges such as globalization and environmental degradation is good business (www.wbcsd.org).

Yet before 1999, the WBCSD members rarely talked about poverty, because they did not want to be associated either with its existence or its cure. Then in that year, thousands of young people demonstrated on the streets of Seattle at a meeting of the World Trade Organization. It appeared to the CEOs that the young people of the wealthy countries – essentially their own sons and daughters – were demonstrating not only against trade and globalization but against business itself.

This event led the Council to organize around the issue of base-of-the-economic-pyramid, or pro-poor, or inclusive, business – doing business with the poor in ways that are real business, and thus potentially growable without limit, but also that help people create their own “sustainable livelihoods.” It seemed to many members a good time to get involved in such business projects because:

  1. Many developing nations are improving governance, legal structures and investment infrastructure to make it easier for companies large and small to do business there. The World Bank documents these improvements in its regular Doing Business reports.
  2. Lower communications and transportation costs allow more geographically dispersed production and sales.
  3. Public expectations of corporations are changing as communities and civil society increasingly expect companies to get involved with social problems.
  4. New, and better, partners are available to companies. In the recent past, many not-for-profits, non-governmental organizations (NGOs), foundations, citizens’ groups and multilateral organizations made poor partners for business, as they were suspicious of business and its motives. Today many of these groups have the business savvy to help companies operate in poor countries and poor neighborhoods. They also understand how companies can assist in realizing their own goals, such as improved sanitation, water supply, healthcare, housing and business opportunities in the developing world.

 

This base of the pyramid business work led the Council to create a Development Focus Area. The members of this group are not only developing affordable products and services that improve overall quality of life but also developing suppliers from low-income communities in the countries in which they operate, thereby building capacity, generating employment and bringing small businesses into the formal economy. The companies are also providing basic services such as water, sanitation, energy, housing, healthcare and communications services.

The Council now has dozens of examples of such inclusive business, and in none of those examples are the poor getting products or services of lower quality than those sold to more affluent customers. But often the way that the product is sold changes.

© iStockphoto.com/micheldenijs© iStockphoto.com/micheldenijs

The seed company Pioneer Hybrid, now a part of DuPont, sells seeds, fertilizer and pesticides in Kenya. But these were traditionally sold in 50-kilo bags and bigger – an investment of several weeks’ income for most farmers and impossible to carry home on one’s back. A local NGO worked with Pioneer and farmers in the Siaya district to repackage the goods in affordable mini-packs. Farmers can now buy a chewing-gum sized sachet of 250 seeds of a local vegetable for five shillings (6 cents), and for another 10 shillings (12 cents) they can get a pack of fertilizer for 150 planting holes. A good farmer can earn anything from between 2,000 to 4,000 shillings ($25-50) by using these packs. Pioneer’s sales have increased as a result of this new selling mechanism.

The South African utility Eskom supplies approximately 95 percent of the country’s electricity; however, before 1994 only 12 percent of the rural population had access to electricity. Eskom pledged to connect 1.75 million homes between 1994 and 2000. Problems with meeting this goal included high cost per connection, a lack of community understanding of the program and non-payment by recipients under the initial scheme.

The company developed better community interaction programs, pre-payment meters and the tokens to feed them. Local shops sold the tokens, and local people were trained to install the systems and to do maintenance. Thus Eskom created jobs in the communities while lowering their own connection and maintenance costs. In most countries, cement companies sell to wholesalers and retailers to sell on to builders. But in developing countries, the builders are mostly people constructing their own homes. Apasco, a Mexican subsidiary of the global cement company Holcim, realized that selling cement in bulk through a chain of middlemen dramatically raised prices. By opening new distribution centers in remote areas where cement could be purchased bag by bag and by providing technical and safety advice to builders, Apasco was able to sell responsibly to the poor. Lessons learned in Mexico are being studied at headquarters to see if this model can be replicated elsewhere.

Much has been written about the sort of micro-finance pioneered by Yunus: making small, short-term loans to poorer people so that they can invest in their businesses or their homes or their children’s education. One problem with this is transaction costs; if you are loaning someone tens of dollars and paying the person making the loans hundreds of dollars in salary, then you soon go out of business.

The phone company Vodafone is lowering transaction costs by helping customers use their cell phones to manage money. Following a successful pilot program in Kenya, the company has been rolling out a service that allows customers to access cash via their mobile phones. Called M-PESA, the service allows customers to borrow, transfer and make payments by using a mobile phone; this is transforming financial services by making transactions cheaper, faster and more secure.

Vodafone CEO Arun Sarin said his company sees significant growth potential in emerging markets like Kenya partly because research shows that mobile technology can revolutionize social and economic growth in these countries. “This is not for altruistic purposes,” he said. “We have no desire to undertake the role of governments or NGOs or embrace an exclusively philanthropic approach to ‘do good.’ Rather, we recognize that around 20 percent of the world’s mobile phone users are from low-to middle-income countries and can see that the next billion mobile phone users are likely to live in markets that have very different needs from those we are used to.”

Through the pilot, existing microfinance clients received a cell phone with which they could make electronic payments on their loans. Each phone is equipped with a special subscriber identity module (SIM) card that allows the transactions to take place. Besides loan payments, users are also able to deposit or to withdraw cash from authorized M-PESA agents, typically a small storeowner that has enough ready cash on hand to complete the transactions. Clients are also able to make person-to-person money transfers, to purchase airtime for re-sale or personal use and to receive account statements.

According to Vodafone, the pilot project confirmed several important benefits to users. Clients found M-PESA safe and convenient to use as it meant that they did not have to carry large amounts of cash with them and they could also enjoy longer “banking hours,” which had the benefit of leading to a reduction in default rates.

© iStockphoto.com/PeteWill© iStockphoto.com/PeteWill

Doing business with the poor is not just about selling to; it is also about buying from. Over the past 50 years, U.S.-based consumer products manufacturer SC Johnson has become one of the biggest users of natural pyrethrins in its household insect control products. A daisy known as pyrethrum is the source for a naturally occurring insecticide that degrades quickly in the environment. The pyrethrum flower is grown and supplied to SC Johnson by small-hold farmers in the highlands of Kenya.

When SC Johnson launched Raid® in 1950 as the world’s first commercial aerosol insecticide, the family-owned and managed company chose to use environmentally benign natural pyrethrum as the active ingredient. The company became important to the highland community by providing livelihoods for more than 200,000 Kenyan farmers and their families. When lower-cost synthetic alternatives emerged, SC Johnson chose to maintain natural pyrethrins in their product mix because they valued the long relationship it had built with the Pyrethrum Board of Kenya (PBK) and with the highland farmers. Instead, SC Johnson focused efforts on assisting PBK to become a more efficient producer of natural pyrethrins.

Oil companies and mining companies often find themselves operating out in remote rural areas and surrounded by poor farmers. Having no products to sell the local people, their inclusive business strategies focus on making local companies part of their supply chains.

BP is managing an investment of around $20 billion to develop oilfields and pipelines in the South Caspian region, which contains 10 billion oil-equivalent barrels of proven oil reserves, but where more than 60 percent of households cannot afford the standard “food basket.” With its partners, BP has designed a mechanism that brings local small and medium enterprises (SMEs) more effectively into the oil industry supply chain. Thus the SMEs’ development of skills and reliability becomes a crucial part of BP’s business interests.

© iStockphoto.com/Veni© iStockphoto.com/Veni

BP and the Norwegian oil company Statoil, with their business partners and development partners, have been supporting in Azerbaijan a fund to stimulate capability among contractors in the oil industry; the plan would both improve BP’s business and create jobs in the community. BP, Statoil and Unocal run a $600,000 program with German Technical Co-operation (GTZ) and the International Finance Corporation (IFC), the private sector arm of the World Bank Group, to establish the Supply Chain Technical Assistance organization. This partnership will help equip Azerbaijan’s local businesses to participate more actively in business opportunities related to major oil and gas field development projects.

The program will engage at least 30 local companies in sectors identified as providing long-term opportunities in the oil and gas industry. Assistance is tailored to their needs by addressing issues such as business planning, access to capital, management training and the attainment of standards required by the international business community based in Baku.

This article on doing business with the poor began with the vision of one Nobel Laureate and ends with that of another. Nobel economics laureate Amartya Sen, an Indian now teaching at Harvard, does not have much to say about business, but he has a view of development that is very important to companies, especially those concerned with being strong forces for human rights. Sen has written a book called Development as Freedom, in which he argues that freeing people helps them to develop their own livelihoods, including the economic aspects of those livelihoods. He also argues – and this is the important message for business – that development itself sets people free.

Of course, business is already an important force for economic development: providing jobs and business opportunities, paying taxes and improving technologies. But the logic of Sen’s argument is that by playing a more thoughtful, strategic role in development, companies are helping set people free and helping them realize one of the greatest of human rights.

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