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Social business, Strategy

Doing business with the poor

An interesting topic I came across a few weeks ago is doing business with ‘the poor’. Back then I read a recent publication by Kay and Lewenstein and decided to write an essay for one of my modules on this topic. More specifically, I critically analyzed ‘Serving the World’s Poor, Profitably’ written by Prahalad and Hammond, published in the Harvard Business Review in September 2002, because Kay and Lewenstein challenge the core concept of this older publication. Since I grew up in Western Europe, thus under relatively affluent circumstances, the topic gave me some food for thought.

Prahalad and Hammond argue that ‘the poor’ are willing to spend a large portion of their income for non-essential goods. Since available products and services are not as cheap as assumed, these markets offer lucrative business opportunities for multi-national enterprises (MNEs). Furthermore, their thesis is based on scientific research which suggests that ‘the poor’ are willing to pay a so-called ‘poverty premium’ on everyday goods like loans, phone calls and nutrition. ‘The poor’ in this context are those people that have an annual income of less than US$ 2,000, often referred to as the ‘bottom-of-the-pyramid’ (BoP). That is nearly four billion potential consumers or two-third of the world population. Other scholars like Karnani argue that ‘BoP activities are either profitable but not socially beneficial, or socially virtuous but not profitable’. I summarized the discussion of leading scholars including Yunus, Simanis and Stiglitz by focusing on the following key questions:

  • Are there other dimensions of poverty apart from income poverty? (Yes)
  • Does globalization reduce global poverty? (Yes)
  • Does the private sector play an important role in the eradication of poverty? (Yes)
  • Should companies be allowed to make profit when doing business with the poor? (Yes)
  • Is there other research supporting/disapproving the thesis of a ‘poverty premium’? (Yes/Yes)

I think profits for MNEs are important, and this should also hold true when doing business with the BoP, particularly in developing markets, because otherwise this business activity won’t be sustainable.

Also, I would be interested in your opinion on this exciting, controversial and extremely important discussion.

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Discussion

4 thoughts on “Doing business with the poor

  1. Hi Ben, I also came across the concept of Prahald in my Social Entrepreneurship class! It is definitely a very interesting concept and I like the idea of making people from the BoP not only to consumers, but also to partners. This is one of my favorite case studies in this matter, because it is so simple and yet so effective: http://de.slideshare.net/CanalEndesa/ecoelce-project-affordable-energy-from-recycling

    Posted by lisalotti | November 17, 2013, 7:53 pm
  2. Hey Ben, very interesting post! As Lisa already mentioned – we both are quite familiar with this topic. 😉
    One thing which very touched me by talking about the poor was our time we spent at the Bill and Melinda Gates foundation – they have very convincing goals and you should have a closer look into their database if you want to do more research.
    I also just read some posts by Bill Gates (www.thegatesnotes.com). Maybe this one is also interesting as Bill explains his 36 hours journey in Berlin 😉 I found it quite interesting.
    Have a good day!

    http://www.thegatesnotes.com/Personal/36-Hours-in-Berlin

    Posted by electrohh | November 18, 2013, 5:32 am
  3. Hey, thanks to both of you for these very useful hints. It is amazing to see how much effort Bill and Melinda Gates put into their philanthropic work. It would be interesting to learn more about Microsoft’s strategy in those markets though.

    Posted by Ben | November 18, 2013, 12:26 pm

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  1. Pingback: Publication on ‘Doing business with the poor’ | Elbenomics.com - March 4, 2014

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