Virtual Learning Resource Centre

Make poverty business: Increase profits and reduce risks by engaging with the poor

by Craig Wilson and Peter Wilson, Greenleaf Publishing, 2006.

Abstract

Poor people in developing countries could make excellent suppliers, employees and customers but are often ignored by major businesses. This omission leads to increased risks, higher costs and lower sales. This book puts forward a “rigorous profit-making” argument for multinational corporations to do more business with the poor. Adopting a poverty perspective can provoke profitable innovation, not only to create new products and services, but also to find new sources of competitive advantage in the supply chain and to develop more sustainable, lower-cost business models in developing countries.

(Reviewed by Kevin Barham in April 2007)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

Adopting a poverty perspective to build competitive advantage

Poor people in developing countries could make excellent suppliers, employees and customers but are often ignored by major businesses. This omission leads to increased risks, higher costs and lower sales. Governments and poverty activists ask businesses to do more for economic development but they rarely base their exhortations on a proper business case. This book aims to bridge the gap by putting forward a “rigorous profit-making” argument for multinational corporations (MNCs) to do more business with the poor. Full of original insights and much well-considered advice, it should be read, say the authors, by international business managers seeking to increase profits and reduce risk in developing countries, and by development advocates who seek to harness the profit motive to reduce poverty. It deserves an even wider readership as it poses some fundamental questions about the role of business in global society.

Peter Wilson and Craig Wilson (they are not related) have both worked as government officials, development advisers, business consultants and entrepreneurs. Between them, they have worked for the World Bank, the International Finance Corporation, McKinsey and the Australian and British diplomatic services, and have lived or worked in many of the world’s developing countries. They aim to take economic development out of the “corporate social responsibility ghetto” and place it firmly among the core business interests of the firm.

They examine the successes and failures of global companies when dealing with the poor and with development advocates in the media, non-governmental organisations (NGOs), governments and international organisations. Adopting a poverty perspective, they argue, can provoke profitable innovation, not only to create new products and services but also to find new sources of competitive advantage in the supply chain and to develop more sustainable, lower-cost business models in developing countries.

As noted below, they also suggest that to see the poor merely as consumers at the bottom of the pyramid (the “BOP”) misses half the story. They prefer instead to take a strategic view of all the ways in which a MNC can interact with and influence the lives of the poor. The poor face poverty traps when dealing with an MNC but the authors suggest there are low-cost ways in which they can overcome the traps and gain access to a larger and cheaper pool of employees and suppliers.

The other side of the coin is that the poor can also become a threat to a firm’s reputation and security if relationships are badly managed. The authors believe that country risk should be actively reduced through economic development rather than “passively managed with lawyers and guards”. Doing business with the poor can be profitably integrated into the core operations of all MNCs, not just consumer manufacturers looking for marketing opportunities or those firms who feel under PR pressure to do some “cosmetic” corporate social responsibility.

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The real challenge

The authors note CK Prahalad’s book The fortune at the bottom of the pyramid which suggests that the world’s four billion poor people who make up the BOP have immense entrepreneurial capabilities and vast untapped buying power which represent enormous potential for companies who can learn how to serve this market by providing the poor with what they need. Prahalad, say the authors, provides “the motivation, the ambition and the shining city on the hill”, whereas they are more interested in “replacing a few light bulbs down here in the valley”.

They also point out that Prahalad’s BOP proposition is essentially a marketing approach that aims to target the mass markets of the poor and sell them better and cheaper products. There is nothing wrong with that and actually marketing to the poor is not new. Coca-Cola has been doing very well at it for a long time. The real challenge, however, is to help the poor get a sustainable job and create access to savings, credit, insurance and the other features of a developed economy while linking this to the mainstream profit-making operations of business.

The authors submit that most companies face no shortage of profitable opportunities for innovation. The challenge, with limited management resources, is to choose between them. The authors say they are not calling for major initiatives but for managers to read and think more broadly around the ideas and to talk to a wider range of people so the ideas about making business poverty start to become a standard part of a manager’s toolkit.

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A wider view of poverty

The authors call for a wider view of poverty. Reducing poverty is not simply about giving people more money. Most of the problems of the poor don’t concern what they can or cannot buy in the market, but the lack of control they have over their lives and their need for more security and autonomy. Poverty is more complex than just wages and prices and involves such problems as the lack of information the poor have about the job market, their trouble proving collateral to gain access to credit, or their vulnerability to environmental change or political instability.

If firms see poverty as a question of only wages and prices then there is a conflict as they want lower wages and higher prices and the poor want precisely the opposite. Taking a wider view, however, allows the firm to look for opportunities to give people information or help them gain access to credit and other resources. There is emerging evidence that the benefit to an economy of a foreign investor depends crucially on the number of ties it has with local companies and employees. Foreign firms can also offer autonomy, self-respect and security to the poor.

The problem that many MNCs have when operating in developing or former Communist countries is that their early advantages of quality, glamour and reliability gradually wane as foreign firms come to be seen as exploiters. Also, local firms, without the costs of expatriate managers and expensive infrastructures, start to become more competitive. As local economies mature, MNCs need strategies for cost-cutting, outsourcing and localisation. The poverty perspective is one tool that can help them identify and solve the problems. If they better understood the positive effect they are having on economic development, they could use that as the basis for a credible communications campaign which would help to gain the support of governments, development agencies and local people.

The authors dislike the term “corporate social responsibility” (CSR) and the way it has developed as a separate discipline from business management. CSR, they argue, can stifle innovation and can create a distraction from the real business of creating value. CSR may actually discourage companies from investing in countries where it is difficult to monitor or maintain standards.

The authors say they are interested in running the core business more profitably and in doing so helping to alleviate poverty. This is not about “glossy PR campaigns or random acts of philanthropy”, but innovating to find ways of dealing with the poor so as to create new sources of competitive advantage. We need to be more rigorous about the business case and not be ashamed to talk about business and profits as the real sources of value to society.

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What business can and can’t do for the poor

Despite what the advocates of CSR might say, business can’t do everything for the poor. Firms cannot and should not try to become responsible for all aspects of development. Profit, rather than any other measure of corporate activity, is the best first estimate of how much value a business creates for society and we should encourage businesses to make profit rather than distract them with other tasks. (Moral Capitalism, also reviewed on the VLRC, makes a similar point. While urging firms to be responsible in their dealings with society, it emphasises that the first requirement of business success is sustainable profits.)

The authors point out that firms’ efforts in engaging with the poor will inevitably be selective and focused in the areas most relevant to their business, leaving gaps which need to be filled by something other than the profit motive in the short term. It is their core business (which, for example, generates tax revenue for the local government) rather than any peripheral development activity that has the real impact.

There are three ways in which companies can help alleviate poverty:

Through poor people as customers (the “distribution” channel)
Through poor people as employees and suppliers (the “enterprise” channel)
Through developing country governments as recipients of tax (the “government revenue” channel).

The authors acknowledge that aid donors and NGOs are important in providing services that cannot be justified on a business case. But, ultimately they should aim to work themselves out of a job. The ultimate aim must be to alleviate poverty by handing over to a thriving private sector, strong local communities and a local government providing public services that are sustainably funded by local taxes. The key to achieving this is economic growth; and the only sustainable way of achieving this is to do more with the capital and labour you already have, by increasing productivity.

MNCs generate economic growth through technology transfer, increased productivity and better micro-management:

Technological change – not just machines and electronics, but also ways of working, management systems and organisational structures – is the essential ingredient of economic growth. Developing countries can’t just copy Western technology; much of it involves “tacit” knowledge embedded in the mix of culture, rules of thumb and organisational structures of the organisation that produces it. If we want to bring the advantages of technology to developing countries, we can supply products, people and organisations which “embody” the knowledge. The sale of a computer or mobile phone which brings years of technological and managerial experience to consumers and local entrepreneurs allows them to create further value that benefits the country as a whole, even if the device was not sold to a poor person in the first place. So the “distribution channel” can in fact have a huge effect on growth because products embody new technology.
Likewise, the “enterprise” or “employment” channel makes an important contribution by transferring a complex body of knowledge to employees and suppliers, not just through formal training but in the daily sharing of experience of how to provide products and services.
Business can also support economic growth by contributing to the economic infrastructure of regulation, laws and economic policy-making – the knowledge of how to govern a free-market economy and which benefits exiting businesses (both local and foreign) in the country and stimulates further internal and foreign investment. Paying taxes is important but so is knowledge transfer.

But what if the benefits are stripped by the MNCs themselves or the local rich? The authors point to World Bank research which suggests that – on average across a range of developing countries – the poor gain proportionately as much as everyone else from economic growth. As the research is based on average figures, this means that in some countries the growth achieved is largely in favour of the poor, while in others it is much less so. The challenge is therefore to identify growth policies that benefit the poor the most. Company profits contribute to growth, regardless of how they are achieved. So, it is not just a question of telling firms to achieve their profits by seeking to improve economic growth. Seeking specifically “pro-poor growth” will provide the clues to overcoming the inefficiencies of operating in a developing country, strengthening the firm’s long-term strategic position, and protecting its reputation.

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Don’t follow the pack

The authors suggest that the real gap in development is in those countries where international business is not yet willing to go. Companies tend to be drawn to places where other businesses are already operating and there is an infrastructure of suppliers, services, intermediaries and customers. Once a location becomes a “business cluster” it is hard for others nearby to catch up. This is why globalisation does not spread the benefits of business evenly. Expecting business to be active in the poorest countries may not always be realistic in the medium term.

This does, however, make the division of labour between business and development much clearer. Companies will achieve rapid poverty reduction in the countries that are lucky enough to form new business clusters in the global economic system. This allows development professionals to focus on the “leftover” unfortunate countries caught in the “global poverty trap” who can’t attract business because they haven’t already done so. The aim for companies in these leftover countries is to find ways to attract some initial business and alleviate some of the symptoms of poverty through philanthropy.

On the other hand, as the authors suggest, companies could benefit from lower costs and welcoming governments if they don’t follow “the pack” to India or China and invest somewhere that desperately needs some initial investors in order to enter the global system. The problem is that the advantages for business in doing something about poverty are not always obvious and often require short-term cost and risk in return for long-term, sometimes intangible, benefit.

The authors admit that there are no incentives or a single formalised mechanism that would encourage MNCs to reduce poverty in developing countries through direct investment (although they note the idea proposed by Harvard professor George Lodge for using development funds to “incentivise” major companies to carry out infrastructure development projects through a “World Development Corporation”. Lodge’s book, A Corporate Solution to Global Poverty, co-authored with Craig Wilson, will be reviewed shortly on the VLRC.)

Despite the problems, a constant theme reiterated by the authors is the need to think widely about what your firm might be able to do with and for the poor. If you think engaging the poor is a nice idea but it won’t work in your company, they urge you to think about what the obstacles are and what you would need to tip the balance. Let donors such as the United Nations Development Programme know – the door is wide open, they suggest, for companies to influence development policy in their own interest and in the interests of the poor.

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Measuring poverty

There is a lot of controversy about how to define poverty and about how many of the world’s population are poor. As the authors say, the standard definition of extreme poverty is people who live on the equivalent of less than $1 a day. This measures how many people can consume the same as a person who earns $1 per day in the USA (not many such people exist in the USA). It is estimated that the number of people living on the equivalent of less than $1 a day is 1.1 billion, compared with a total population in developing countries of 5 billion and a global population of 6 billion. About 300 million of these people are in Africa, 400 million in South Asia, and the rest live mainly in East Asia and the Pacific.

Despite the “bleak” figures, the authors point to the huge progress that is being made. One of the United Nation’s Millennium Development Goals was to halve the number of people who live on less than $1 a day. Although immensely ambitious, the signs are that this is likely to be more than achieved by 2015, mostly thanks to progress in China. India is beginning to contribute to the reduction too. The exception is Africa where the figures are frightening – the number of very poor people is expected to rise from 227 million in 1990 to 340 million by 2015. Africa’s share of the world’s poor will increase from 11% in 1981 to 57% in 2015.

The authors note conflicting opinions among academics and others as to whether the $1 a day measure is an appropriate benchmark for poverty levels. There is a suspicion that it has been chosen because it is catchy and “media-friendly”. It captures only those who are poor by the standards of poor countries and extremely poor by Western standards. It sets the bar much lower than what would be considered a reasonable poverty line in the West so it might actually underestimate global poverty. An increase to $2 a day still means you are living on only $700 a year – imagine, say the authors, trying to live on that in the US.

Despite the disagreement about the $1 a day measure, the authors feel it is satisfactory for our purposes. It gives an idea of trends over time and enables rough comparisons between countries. Most importantly, it allows firms to present poverty reduction figures in a way that is meaningful to governments and development agencies.

Estimating how much a given investment by a company in a developing country will reduce poverty is very difficult, especially as development economists don’t agree on the nature of the relationships between growth, investment and poverty reduction. The authors recommend a “bottom-up” approach that simply counts the number of people working for the firm and for direct suppliers who have been lifted out of poverty by doing business with it. Even the biggest MNCs don’t do this at the moment. But, given that poverty reduction is the predominant global political objective of the times, partly because of poverty’s role in producing terrorism and instability, there is a strong case for a company to ground more firmly what it does in terms of the effects on poverty.

The authors call for a wider definition of poverty that sees the purpose of development as more than just increasing economic indicators. They cite Amartya Sen’s argument, as put forward in his book Development as freedom, that measuring only someone’s level of income or consumption gives a very poor estimate of their well-being. Sen says that what matters to people most is not income or consumption but the freedom to achieve what they value. The freedom to make your own choices without constraints from (for example) governments, soldiers, or oppressive communities and the freedom to work and trade with whomever you choose are important aspects of liberty.

From this perspective, the presence of a business in a country can contribute to “development as freedom” in far more profound ways than simply increasing incomes or providing consumer goods. It does this by extending the range of choice and increasing the range of alternatives open to people. The authors emphasise the importance for a firm of consulting widely with the community and the local people. It is only through consultation that we can be sure the results of development are genuinely things that people value.

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Poverty and inefficiency traps

The authors build a strong case for doing business with the poor. So what stops companies from engaging with the poor? They focus on “inefficiency traps” that prevent companies from doing business efficiently with the poor, the “subtle” systems that stop people making mutually beneficial agreements. The solution to these often depends simply on increasing one’s ability to form trusting relationships and commit to agreements.

One of the problems for developing countries of opening up to free markets and foreign investment is that it tends to reinforce the status quo and the position of the established elites. This is dangerous for international companies as they can find themselves discredited by the sometimes disappointing results of capitalism. It’s bad for reputation and it’s bad for profits as it restricts the number of people a firm can deal with as customers or suppliers. Poverty and inefficiency traps explain much of this and a firm that understands them can increase its bargaining power and improve its reputation locally.

The authors recall the enlightened self-interest of successful business people in 19th century England such as the Rowntree and Cadbury families who provided their employees with good wages, nutrition, housing and health facilities. Although partly philanthropic in motivation, this also ensured their employees were healthy and productive. The authors suggest that businesses today can apply the same thinking in overcoming the barriers that the poor face when seeking to do business with MNCs. The bigger your potential pool of potential suppliers, employees and customers, the stronger your bargaining power. It also allows you to feed into the growing interest of governments and development agencies in “pro-poor” growth.

The authors describe a number of inefficiency traps and suggest some solutions:

Self-fulfilling discrimination – this happens where firms give the impression they are not interested in dealing with or employing certain ethnic groups or nationalities or other groups, thereby discouraging them from applying for jobs or offering goods and services. By committing to a diversity programme and promising to give serious consideration to applications from certain groups, a firm can access a new pool of under-utilised, low-cost talent.
Lack of trust between foreigners and locals – this leads firms to deal with only a narrow range of suppliers and concentrates the benefits of development in the hands of a small group of people. BP’s Enterprise Centre in Azerbaijan is a visible commitment by the firm to local supply and encourages locals to trust BP to take them seriously. They therefore invest time and money in making proposals for business. It enables BP to identify local suppliers with relevant skills and strengthens the company’s negotiating position with expensive foreign suppliers or existing local suppliers.
The “hold-up” problem – which happens when a supplier invests a significant amount to supply a single customer which then uses its negotiating power to bargain the supplier down to marginal cost. An MNC should try to reassure potential suppliers it will not exploit the relationship – a public commitment to local sourcing will make it harder to renege on a deal later on.
Imperfect information about potential local suppliers – this can be addressed by using networks. For example, an MNC could ask a local university or development body to start linking it to local suppliers. Or, it could club together with other MNCs to form an enterprise centre similar to BP’s.
Lack of credit – people in developing countries who want to become your suppliers or customers may lack the assets, and therefore the collateral, that would enable them to borrow money. MNCs might cooperate with micro-credit organisations by identifying local suppliers or distributors they feel are trustworthy and competent and help them to secure credit (by, for example, giving them a guaranteed purchase contract which they can use as collateral). As an example, Unilever in Bangladesh (where the Grameen Bank set up the world’s first micro-finance operation to lend to the poor) has partnered with local banks to help its distributors gain access to working capital.
Uninsured risk – while developed countries partly deal with business risk through savings and insurance, developing countries lack effective savings and insurance mechanisms. If poor people are unable to save or insure against risk, they will stick with low-risk, low-return activities which create little value. MNCs seeking to develop local suppliers, distributors or customers will need to be more tolerant of their risk concerns than they would be in the developed world. Giving long-term contracts that shift some business risk from the poor person to the MNC is one solution.

Security and the poor

Poor people suffer disproportionately from insecurity in the form of violence, crime, violations by local police, terrorism, etc. In addition to its role in supporting economic development, ensuring security is increasingly seen as an end in itself. Poor people worry just as much about crime and abuse by the authorities as they do about low incomes.

MNCs have legal, operational and strategic reasons to be interested in security – to secure the safety of staff and premises, to stabilise conditions in the local community, because it is in their interest to operate in a stable, peaceful environment, and because positively influencing the security situation in a region will enhance its reputation with governments and aid agencies. Firms should ensure their security operations involve and don’t alienate the local community. If local communities feel they benefit from the presence of an MNC, they will have less incentive to attack you and more incentive to protect you from extremists or criminals. It’s about winning “hearts and minds”.

A case study shows how a global oil company in the Niger Delta applies military strategic thinking to help create a secure business environment based on a twin track of security (e.g. isolating criminal elements from local communities) and development (including setting up community development partnerships).

MNCs can also contribute to national stability and post-conflict reconstruction. This brings the authors back to their central theme that what matters is not only economic growth and a thriving business sector, but the precise nature of the activity. The opening up of economic opportunity can be counter-productive if it creates competition between groups over who gets the benefits. A firm must consider whether its activities exacerbate or reduce the struggle between different groups for money and power.

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Partnering to reduce poverty

The authors point to the dangers of companies trying to implement projects in developing countries when they don’t have the competencies or the incentives to do so. One way to overcome this problem is to partner or cooperate with local organisations that can supplement their business skills with experience in development issues and local knowledge and connections.

As the book indicates, much of the research in this field has focused on implementing development projects, perhaps for corporate social responsibility and reputational motives unconnected to the firm’s core business. The authors are more interested in the situation when firms want to extend their business to areas or people that may not be currently profitable and need the help of an NGO to achieve it. This may occur because a firm needs the NGO’s help with its main business and needs to demonstrate that part of its proposal has development benefit. The authors describe an example of a partnership that is a classic example of a win-win approach:

The Norwegian telecoms company Telenor was asked by Grameen Bank to supply mobile phones to the poor in Bangladesh. To meet the different parties’ objectives, they formed two vehicles: (1) Grameen Phone, a joint venture which provided the mobile infrastructure and served the urban market, and (2) Grameen Telecom, a separate company which purchased mobile services from Grameen Phone at half price and aimed only to cover its costs by serving the vast rural market through a network of “village phone ladies”. The idea was that the latter each bought a handset using a Grameen Bank micro-credit loan and earned income by renting the phone to other villagers.
This played to both sides’ strengths and objectives. Telenor could meet its needs for profit and certainty by serving the premium urban market and providing infrastructure and service for wealthy urban customers, but had no local knowledge or influence. Grameen could fill these gaps and help Telenor thrive in the urban market on condition its development objectives were met by serving the rural poor. The lessons of this example are that both sides need to be explicit about their objectives, to be clear about each side’s strengths and weaknesses, and to be willing to take the other‘s advice. Partnerships must be created for a specific purpose rather than as ends in themselves.

The authors review the advice that companies can obtain from their local embassies and, in the case of British companies operating overseas, the Department for International Development. They warn that it is essential to understand the development arguments when seeking support from DFID as, although it is a British government department, it is allowed only to pursue policies in the interest of the host government and may not take British national or commercial interests into account.

They also look at the help that MNCs can obtain from international development agencies. They note that large-scale efforts to link companies to international development agencies and major NGOs rarely come to pass because of opposition from anti-business NGOs. It may, however, be possible to obtain practical, small-scale help from members of international donor organisations who understand your business and development case.

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Innovation for poverty reduction

In much of the emerging literature on business and the poor, it is suggested that innovation is the key. The authors look at what innovation means in the context of poverty reduction and call for a “conservative innovation” approach. As they describe it, “common wisdom” about innovation says that aspiring corporate innovators should:

Insulate themselves from all the accumulated history and wisdom of their company
Try to emulate freelance entrepreneurs
Work everything out from scratch.

All this does is replace the low-risk, low-return corporate model with a high-risk, high-return entrepreneurial model. Entrepreneurs are not necessarily better at innovation than big companies; most entrepreneurs fail. While big companies have to be more risk-averse and their returns may be less lucrative than successful small firms pursuing a high-risk strategy, they are much less likely to fail. And far from being constrained by their history and structure and having to build everything from scratch, big companies’ experience, resources and reputation allow them to try out new things and garner support for new ideas.

The authors distinguish between evolution and design. Entrepreneurs are concerned with designing something completely new, whereas large corporations specialise in evolution. Large companies grow slowly but surely and small companies either fail or grow rapidly. The “Holy Grail” is to combine the benefits of the large corporation with the benefits of being an entrepreneur (low-risk, high growth). To have any chance of doing this, corporate innovators must know when they are evolving and when they are designing. They need to ask what characteristics of a proposed innovation will benefit from the company’s history and network, and allow them to make faster, better choices than an entrepreneur ever could? What needs to be insulated from the company and be done by design, not evolution?

We have to know whether our current structures are a help or a hindrance. When making decisions about a new product or service, we have to switch between evolution and design, depending on the particular aspect in question. If a new product is based on our existing technology but will serve new customers through different marketing channels, our discussions about technology will be evolutionary and include all the relevant company technology experts. The marketing process will involve designing from scratch, should probably exclude the marketing department and bring in some new expertise and perspectives. The converse is true for selling new technology to existing customers.

Where innovation for the poor is specifically concerned, the authors make the following observations:

Designing products and services for poor people. This is where most attention has focused in the emerging literature. The problem with evolutionary innovation in rich countries is that it tends to add complexity and features and make products more expensive rather than less expensive over time. Once you’ve created complex products and a high-cost business model, it’s difficult to take costs and complexity out of the system. Just making a product simpler to sell it to poor people without changing the underlying business model and inherent costs is not the answer.
Therefore, where products for the poor are concerned, it makes sense to adopt a design approach, ignore what the company already knows from the developed world, and give the job to local people (who are also cheaper than expensive expatriates). But the market will be full of entrepreneurs all trying different solutions, so the local innovators must draw on support from the parent company. The strengths of large companies are typically the ability to scale up, to create structure and rules, and to operate efficiently. Such business system skills can be added to local innovators to combine locally relevant products with world-class implementation skills.
Widening the scope of innovation. The most interesting areas in innovation for poverty reduction are not the product itself but the processes by which customers acquire, use and dispose of it. The classic example is Cemex, the Mexican cement company which went to lengths to understand the housing needs and constraints of the poor and, as a result, set up community saving schemes to help the poor buy its products. This case demonstrates that much of the useful innovation in poverty reduction concerns identifying what elements are missing from the physical, economic, and legal infrastructure of a developing country.
The business model itself and relationships with distributors, suppliers and retailers may also be open to innovation. The authors give the example of a fast-moving consumer goods firm which couldn’t deliver the low-cost, localised products that poor but numerous potential consumers needed because the country concerned did not have an efficient distribution network that could reach every village. It invented a licensing system in which farmers could supply direct to customers and local shops using small-scale company technology under a “quality assured” brand. This combined the best elements of the farmer entrepreneur (local knowledge and proximity to market) and the company (technology, quality control and a trusted brand).
How to provoke innovation for the poor? The aim is not necessarily to make your employees more “entrepreneurial” or “creative” but to provoke practical ideas by giving them new information. One approach is that of Cemex which asked its employees to spend time in the poor districts of Mexico with potential customers learning about their needs. You might also talk to development economists about local needs or help your corporate innovators understand more about the company and its strengths and weaknesses at innovation. More analysis and strategic thinking are needed to identify the essential factors that the existing business relies on and which are missing in a new location. Including local entrepreneurs, partners and suppliers in your discussions will enable you to draw on their knowledge of the host society.
Completing the circle. And, one of the benefits of innovating for a poor market is that it will force the company to find simple, low-cost solutions that can be scaled up to be introduced back into the bottom of the rich market. In this way, the multinational firm becomes a “meta-national”. In the MNC, all the communication is one-way, from HQ to poor countries, because it wants their markets or cheap manufacturing capability. The meta-national learns from all its operations in different environments and the role of the HQ is to organise the transfer of knowledge and successful ideas between all the satellites around the world.

Readers interested in product innovation for serving the poor will want to supplement this section of the book with the ideas to be found in CK Prahalad’s Fortune at the Bottom of the Pyramid. They will also be interested in a recent article by Henry Chesbrough and colleagues in California Management Review. This gives examples of how simple devices, invaluable to the BOP, need to be supported by a carefully devised business model for selling, distributing and training, and which requires close cooperation with the NGOs and the local people. It shows that a crucial factor that firms need to take account of is the longer time that such products need to reach profitability. (Business Models for Technology in the Developing World: The Role of Non-Governmental Organizations, California Management Review, Spring 2006).

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Making the changes

When it comes to deciding how firms will make the necessary changes if they are to engage the poor, the book takes a slightly curious turn. According to the authors, much of the book is about the need for expatriate managers to be more clever about the way they engage with their host country. Companies should therefore be better, they suggest, at selecting, training and managing their expatriates. Apart from avoiding the costs of premature repatriation, underperformance in the job and high staff turnover, it would lead to a new breed of expatriate managers who are sensitive to the needs of their host country and who are better able to implement recommendations for reducing poverty.

The types of action that the authors want companies to take on poverty alleviation are the precisely the sort of innovations that are difficult for companies to implement. The benefits are often long-term and intangible, where as the costs and risks are immediate and clear. The people expected to implement the changes are not necessarily equipped to deal with the ambiguities of doing business in a foreign culture and might be scared to emerge from their “corporate ghetto”. Their incentives and targets may be short-term and they may adhere to them rigidly because they don’t receive “nuanced guidance” from their bosses.

The authors also suggest that people working for development organisations should try to understand the constraints and incentives that business expatriates work under. They should help the expatriate understand the local environment and should look for ways to “de-risk” initiatives such as local procurement by helping expatriates meet the right locals.

This chapter provokes as many questions as it answers. Just how do you change the outlook of a large company to make it more receptive to working with the poor? Surely, if we are talking about building poverty alleviation into the strategy and core business of the firm, it is not just down to better training and management of expatriates, though that will help. How, for example, are the CEO and top management to be persuaded of the benefits and what role should they then play in encouraging the rest of the organisation – both at home and in the overseas operations – to consider engaging with the poor? How will top management persuade shareholders and investors about such a switch in strategy? How do reward and recognition systems need to be modified? The whole question of how to change the managerial mindset so that consideration of poverty alleviation becomes integrated into the firm’s core business needs a lot more consideration and research.

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Reputation and country risk

The authors look finally at some of the risks that companies face in developing countries, including confiscation of assets or cancellation of contracts. They give some valuable warnings. For instance, the more you try to minimise risks by getting close to the current political regime, the more a new regime will want to undermine you when it comes to power. If you try to compensate for risk by negotiating higher returns or fixing the returns in hard currency, you will be seen as exploitative when the political climate changes. Your attempts to decrease your short-term risk will end up increasing it in the long term.

If, on the other hand, you are embedded in the local economy and seen to create value for a wide range of people, the chances are higher that you will be supported in times of trouble and that a new regime will hesitate to unravel your operations. Your aim should be to use your core business to create a unique source of value to the local economy which cannot be easily copied or replaced. The authors recommend you create a “Development Value Proposition” to promote your firm’s reputation with such audiences as the local government, public and business people. This should not focus on CSR-type or philanthropic activities but should “celebrate” your profits.

The authors suggest that you start by looking at the biggest items on your income statement to identify priority areas. One approach is to identify sources of high profits that you might be embarrassed and worried about. These might include local monopoly positions or other sources of artificial market power which are liable to attract criticism and which create your greatest sources of reputational and country risk. As a country manager, you should seek to replace these short-term tactics with some long-term strategic advantages. When you have stripped out the artificial advantages, you are left with the profits that accurately represent your benefit to society. These are the areas you should be expanding and publicising, perhaps commissioning a local think-tank to research your economic impact. Make sure all of your employees know the story and communicate it. The authors suggest that many companies miss the opportunity to make a case on the basis of their economic impact.

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Creating value after the project

As another example of the many original insights to be found in the book, the authors suggest that companies should be concerned with creating value, not just when starting or expanding investment in a developed country, but also when winding up a project so as to avoid causing economic shock through loss of employment, tax revenue, supply contracts, etc. This is a particularly important but often neglected issue; companies need to plan for the poverty effects that might take place at the end of a project. One way to do it (among several described) is to use a trust fund that saves funds for later reinvestment to meet the needs of future generations. Another is to create a network of connected businesses that will gradually reduce their dependence on the original core business.

To illustrate some of the lessons about a company’s contribution to economic development and the impact on its reputation, the authors present a case study of US retailer Wal-Mart. The authors say they chose Wal-Mart as it is a company that does some things well and some badly, rather than as “a boring and uninstructive example of best practice”.

The authors also tackle the subject of corruption. Companies should not, they say, passively accept corruption as “just the way business is done here”. It commits shareholders to unnecessary costs and increased risk; it is a business cost that can be cut. The problem, of course, is that if you don’t pay bribes and your competitors do, you may lose advantage.

Companies are beginning, however, to use consortia, such as the Extractive Industries Transparency Initiative in oil and mining, to combat corruption. The public commitment to transparency made by a member company when it joins such a consortium helps it resist a demand for a bribe. Joining with other companies, rather than unilaterally making transparency a policy, ensures your competitors are subject to the same pressures and potential punishments as you, and means you can put more trust in each other. It gives credibility and mutual protection in dealing with local governments. And it cuts costs and strengthens the company’s reputation.

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Forget the stereotypes

The authors say they are not talking about a business revolution. It is simply about using poverty to develop profitable business opportunities. By actively seeking to be benevolent, we can sometimes identify new routes to satisfy our self-interest. You will be a better international manager if you understand the dynamics of income, opportunity and wealth within your host country.

Make Poverty Business is a rewarding book for any manager who wants to think more broadly about new business directions and about the role of business in society. It is essential reading for managers interested in exploring the so-called “BOP hypothesis” that the world’s poor represent vast business potential for firms. It should be read in conjunction with the other two “foundation” books on the subject: The Fortune at the Bottom of the Pyramid by CK Prahalad and Capitalism at the Crossroads by Stuart Hart. The major contribution of Make Poverty Business is to give us a much wider view of the way in which business can contribute to poverty alleviation. It also urges managers to think beyond the all too obvious problems in dealing with the poor and to think imaginatively about possible approaches. Each chapter, for example, ends with follow-up questions asking the reader to think about how the ideas relate specifically to his or her organisation.

Among their concluding advice, the authors urge managers and companies interested in making poverty business to find new sources of information and widen the number of people they deal with in host countries, development agencies, embassies, think-tanks and NGOs. Encourage your staff to spend time with poor people learning about their needs and aspirations. And forget the stereotypes – not all development activists are “self-righteous” and not all poor people are helpless victims.

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