Industry Updates

New Market Opportunities In Servicing South Africa's Poor:

05 Jun 2011

Co-creating Business's New Social Compact
One can no longer ignore that market liberalisation is forcing executives and social activists to work together to develop new business models that will transform organisations and the lives of poor people everywhere. CK Prahalad's latest work (see February 2007 edition of Harvard Business Review) suggests that many corporations have started to pay attention to customers at the bottom of the economic pyramid, and furthermore, companies and NGO's are trying to learn from and work with each other.

By working together and subsequently developing convergence between the corporate sector and civil society new innovative business models are helping to grow new markets at the bottom of the pyramid and niche segments in mature markets.

Shouldn't you be considering the low income market for profit and social development?
Today's low-income markets in Africa present a massive profit making opportunity and one only has to note the success of various telecoms companies' present strategies across the continent. There are approximately 18 Million South Africans living on less than R10 a day, who previously neglected to participate meaningfully in the economy and required the intervention of the State or the non-profit sector to alleviate their plight. Now these millions can actually provide your organisation with a groundbreaking economic opportunity, provided a long-term strategy is implemented correctly.

So how can the poor and profit walk hand in hand?
Great defining moments of the past in economics, politics, medicine or sports have always required people to change their mind set. And today, more often than not things just don't work as they used to. High on the list is the fight against poverty: a campaign that requires a complete paradigm shift -and a battle that, if correctly approached, can result in a win-win for business and the poor. One of the world's most respected champion of this cause is Professor CK Prahalad, who believes business and the poor can develop a mutually beneficial relationship if we stop thinking of the poor as "victims or a burden and start recognising them as resilient and creative entrepreneurs and value-conscious consumers".

His recent book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, calls on big business to place the poor at the centre of their profit-making strategies. And ever since 1997, Prahalad has developed his ideas about how corporations should focus on the bottom of the pyramid (BOP) and advocates viewing the poor as people who can be part of the poverty-eradication solution. To eliminate poverty, BOP markets must "become integral to the success of the firm to command senior management attention and sustained resource allocation".

The BOP opportunity in South Africa
Surprisingly very few companies have applied their minds to targeting this market in South Africa, as it requires a new view, so business as usual has led many organisations to disregard this segment. You can exclude the BOP as long as your organisation has stable traditional sources of revenue, says Prahalad. But if you are striving to grow above the industry average, and increase volumes through excess capacity, or if you need to augment volume and revenue during an economic downturn, the market at the bottom of the pyramid is important.

Prahalad says leading businesses are not questioning whether money can be made, but rather how to serve the BOP on a big enough scale, and how to transfer what works from one part of the world to another. He envisions major potential profits in this market (in 2004 this amounted to about $13-trillion a year, globally). Even more importantly perhaps, he says the poor will be empowered by choice and be freed from the "poverty penalty" where they pay a premium on many items from rice to credit. In fact, driving down these premiums can make serving the BOP more profitable than serving the top, he says.

How to participate?
Organisations need to re-engineer products to reflect the economics inherent in the BOP. The poor earn differently (daily or weekly), save differently, spend differently (price-points shift) and consume differently. So companies targeting this market must think small unit packages, low margin per unit and high volume, says Prahalad. This thought process rests on an entrepreneurial mind set, as BOP markets need to be built, not entered. If customer segmentation is the first step in building a BOP market, organisations need to define and measure "poor". SA does not have a national poverty survey, so there is much argument about who and how many are poor. Illana Melzer, of consulting firm Eighty20, says "Companies need to look beyond their conventional bottom parameters - they may be surprised by who their customers are, in addition, many people who would be regarded as poor according to established categorisations (a generally accepted definition of poor is someone earning less than R600 a month) are driving significant growth in spending in SA. With mechanisms such as child support grants and state old age pensions, more money is going into the market, and spending has increased, especially in food and clothing."

IN A 2006 McKinsey Quarterly report, Christopher Beshouri proposes that by tapping into local networks, companies can serve low-income markets profitably, delivering value to shareholders while creating the infrastructure for economic development in the neediest communities. When companies determine how to serve low-income consumers in developing countries profitably, everyone benefits: the disadvantaged gain access to products and services that the private sector is best positioned to deliver, while companies tap into vast new markets, the report states. In addition, when fundamental sectors of the economy, including banking, electricity, telecommunications, and water thrive, they change consumers into producers and foster economic development.

"Marketing to the bottom of the pyramid requires organisations to redesign their business model and revisit cost structures," says Goldman. "But it is not about providing less for less. While price points must be relevant to the consumer, this must not affect quality. Organisations must rethink their packaging, distribution network and communication channels. And they must engage the community, because people in the community can be a powerful human face for the brand."

Successful BOP Initiatives:
In the Philippines, Manila Water uses collective billing to ensure timely payment, employs small-scale entrepreneurs as couriers and pipeline contractors, supports microlending, and brings affordable water to schools and hospitals. Cellphone companies Globe Telecom and Smart Communications use initiatives, ranging from educational programmes to food and medical assistance, that benefit the community to encourage local leaders to safeguard cell towers and protect company employees.

In India, Hindustan Lever has developed the Shakti programme that trains rural women to operate as entrepreneurial distributors of consumer products in villages of fewer than 1000 people. This programme results in annual sales of about $250m in villages that would otherwise be uneconomic to serve.

Some of the industries in which BOP strategies can work:

  • Telecommunications enable farmers to access market information and offer an alternative to poor postal services
  • Home ownership increases families' net worth, provides security and positively affects self-esteem

The concept of social issues being central to strategy is applicable beyond low-income markets. Community-based initiatives can be more than corporate social responsibility -- they can actually render a business sustainable. Instant gratification is rare, but the approach will make a greater difference to the long-term economic prospects of larger numbers of poor people. This opportunity, championed by CK PRahalad, today's most influential business strategist, can undeniably be a profitable one. But perhaps more importantly it can be one that develops people, not philanthropically, but sustainably, truly changing their lives for the better.