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.