Strong partnership key to success in bottom of the pyramid innovation
For those at the ‘bottom of the
pyramid’ (BoP), the four billion people or so living on less than two dollars a
day, life is hard. Although collectively they have considerable combined
purchasing power, they have up to now been traditionally overlooked by
businesses. However, major multinational corporations (MNCs) are now seeing
opportunities in developing products for the BoP markets, while making a
difference to the lives of the poor people.
“For this concept to work, there
needs to be strong collaboration between firms, governments, NGOs (non-governmental
organisations) and social entrepreneurs,” Francois Perrot, BoP project
manager of the Lafarge group, told INSEAD Knowledge on the sidelines of a Net
Impact conference held recently in Geneva.
Perrot had been moderating a panel
discussion on innovation at the bottom of the pyramid at the conference, which
examined the opportunities and challenges faced by MNCs in launching and
developing pilot projects, as well as their impact on poverty alleviation.
The
disconnect between multinationals and those at the bottom of the pyramid
The operations of firms – especially
the MNCs – have become rather disconnected or disembedded from local economies,
panellists agreed. Their experience is that NGOs tend to know more about the
characteristics of local poverty and what is best for the poor people in a
specific area, whereas large companies generally have a limited understanding
of the situation on the ground.
“Without insights from NGOs and governments,
the products that the MNCs develop or the programmes they launch, would be less
than efficient or effective,” says Perrot, whose work within the Lafarge Group
Strategy Department consists of identifying business models and executing them
with the aim of enabling poor people to have easy access to cement and low-cost
houses.
If BoP products – that is, products
specifically developed to address the needs of the low-income segments – do not
take into account the local specificities of poverty, they may be useless for
the people in a certain district or the project may even have a negative impact
on their lives, he explains.
Perrot gives as an example of good
practice: how EDF, the French electricity supplier, implements rural power
projects in remote areas of Mali. Electricité de France first seeks to
understand the consumption habits of these people, in terms of what they do
with energy and how they can use it, to ensure that the project they implement
is the best technical solution for them - whether it is diesel, solar or energy
mix. “It would be a terrible thing to implement a technical solution that would
cost more to the poor people, or that would not be appropriate for their use,
and in the end, not contribute anything towards helping them achieve a better
living.”
Challenges
multinationals face in BoP projects
Mainstreaming low-income projects
and bringing them to a larger scale is one of the main challenges facing
companies today.
Panellists at the Net Impact
conference considered Unilever’s ‘shakti’ project as the leading example on
BoP. Unilever, through its Indian subsidiary HLL, developed a range of products
for low-income households in remote areas of India. It then packaged common
household products like shampoo and soap in sachets and sold them door-to-door,
helped by so-called ‘shakti ladies’ who make a living from this activity. The
‘shakti’ range now constitutes a significant part of HLL's revenues –
reportedly nearly 15 per cent.
Bringing such projects to scale is a
challenge for several reasons. First, firms lack the internal capabilities to
develop these projects as they require both strong entrepreneurial skills, as
well as the ability to understand and address social issues such as access to
water, energy, and housing.
Often the firm's expectations for
immediate profit goes against the development of successful BoP projects, the
core of which aim to create mutual value for both the firm and the poor. It
requires a substantial amount of effort to transform a small pilot project into
a large, mainstream activity. Among their portfolio of business development
projects, companies may then opt for more profitable projects that can deliver
in the short term.
As BoP projects have strong local
links, firms may face difficulties in trying to replicate a successful business
model in another geographical area of the same country or to export it to a
different country. “These projects should be local answers to local problems,”
argues Perrot. But a company’s profitability, especially that of a
multinational, relies on economies of scale that BoP projects may fail to
deliver.
The other main challenge is for
low-income projects to demonstrate the ability to have a significant impact on
the lives of the poor. Does it really improve their living conditions? Are the
poor getting a fair deal, while their bargaining power in their dealings with
firms is rather limited? These are some of the questions that still need to be
addressed by companies in the development of BoP projects, Perrot says.
By Grace Segran | http://knowledge.insead.edu/innovation/success-in-bottom-of-the-pyramid-innovation-2079
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