In Conversation with Ted London
Ted London speaks with Amit Kapoor about a vast array of issues relating to the Base of the Pyramid and business models which serve this constituency the best.
“If companies make money they will stick around. To create value for the base of the pyramid, companies need a sustainable, scalable model.”
“I was always happy with the term ‘Base of the Pyramid enterprise’ because that’s simply about an enterprise that’s serving a particular segment.”
You believe that the business enterprise needs to play a bigger role in serving the base of the pyramid. How do you foresee this playing out? Do you foresee different models emerging or them taking stronger leadership positions?
We are not changing the fundamental tenets of capitalism in a sense of trying to empower enterprises to work in a free market arena, but the models that these firms use, the strategies that they employ, the partnerships that they build have to be different than what’s gone before. It means three things. One is that as companies think about what drives success, it is not that they don’t need a competitive advantage, or they don’t need to pilot effectively, or they don’t need to partner, it just needs to happen in a different form. So it can’t be that it all starts with one person to the power of one, but it then has to become inclusive both regarding who is being served and how the model comes together.
The second is that we have to think a lot more about different kinds of collaborations and partnerships and a lot of that involves building productive, sustainable, scalable relationships across sectors and having the various partners understand the value propositions of their cross-sector partners. And the last is how do we think, although in some sense, business is always going to succeed if it generates value even if some of it, it can’t capture. The question we have to think about is what is the value that we are creating for low-income markets and how much. This involves a deep understanding of the value proposition from the perspective of the base of the pyramid. If companies make money they will stick around and to create value for the base of the pyramid they have to have a sustainable, scalable model.
What kind of models are you foreseeing?
I don’t know if there is going to be a business model that will work, but it is one of the things where I have done a lot of work. I am also coming up with my new book “The BoP Promise”, which is looking across at our experience over the past 25 years and trying to understand better what it takes to build a successful enterprise. The models can be different but what is more important is to understand how to set yourself up for success. What your resources need to look like? How do you go about solving problems? How do you think about the right structure? What is the matrix that you need to employ in this space to be successful? When one moves towards the thinking from design to pilot, to scale we need to consider the unique principles in the market environment. With that in place, one can begin to develop more robust business models. I don’t think we can talk a lot about different business models that have had varying levels of success but what we are trying to do is understand the core principles of those models that led them to be successful or what went wrong for the models that have failed. We need to be more rigorous about understanding what has worked and what has not worked and how can we develop principles, ideas, models, frameworks that can make it easier for the next generation to be successful or ensure that it avoids some classic mistakes.
There is always a huge issue that pharmaceutical enterprises could be fairly exploitative. Could it be that they are not thinking about the poor?
It is fair to say that pharmaceutical companies have not focused on the base of the pyramid as a market because they don’t see the economic returns to doing that. They don’t invest in diseases that mainly inflict the poor because they don’t see a return on the Research & Development. We have to create incentives for pharmaceutical companies to invest in these drugs. It is more challenging when companies have drugs that work for both top of the pyramid and base of the pyramid – AIDS, TB are some examples. Pharmaceutical companies claim that it cost them hundreds of millions of dollars to develop these drugs. They invest in drugs if they think they can get a return. The actual cost of making the drugs; once the design is done and rules are made, is a fraction of the cost to develop these drugs. So the question is how do you balance the need for these companies to make a sufficient return on invest combined with the fact that there is a huge population that can not afford the kind of prices they claim to need to get the return on their investment.
There are multiple ways of thinking about that. One is that developing countries get together, guarantee a market and negotiate a lower price for these drugs. Sometimes we see companies selling them under different brand names or allow generic manufacturers to make them. Also, we cannot expect the pharmaceutical company to lower the price of a drug and sell it in a developing country. So it’s not an easy nut to crack but we have to do it and what we probably need to do is bring everyone in a room and figure out how are we going to make this happen in a way that makes sense. Badgering companies to lower the price will only have limited impact. Other stakeholders have to get involved and figure out how to make this happen; otherwise, companies are going to resist investing in the drugs if they feel they can’t make a profit.
The emerging social enterprises have not been able to crack the code for scale. So, how do you look at the scalability or replicability of models which is seemingly the biggest challenge?
This is where this whole idea of inclusive business or base of the pyramid business will make it or not make it. Small is beautiful, but it is not sufficient. Given the magnitude of the challenge, we need solutions that are scalable. Scalable means that either you have to subsidize continually, or the enterprise has to work in a way that it can generate efficient returns to continue to move forward.
For enterprises, it fundamentally comes down to three things. Firstly, enterprises have to recognize that it is not a completely uncharted area anymore, and there is a bit of learning about what works and what doesn’t work. So, they have to understand and think in advance before getting started. Secondly, they have to overcome the resistance to partnering. Most businesses and entrepreneurs like to do things themselves and control as much as possible. In my view, this model does not translate well into a market environment that is limited in certain ways. The enterprises have to figure out on how to overcome some of the challenges of the base of the pyramid market. Thirdly, they have to have a deep understanding of their value proposition from the perspective of the base of the pyramid and an extractive model. The extractive model is pretty unlikely to be sufficiently scalable. For the models that are going to scale in any market, they have to understand the value proposition of those they seek to serve and to continue to make it better. It means not only embracing the economic returns but understanding the impact across the multiple dimensions of poverty and how you are changing people’s lives or improving their well-being. Many companies fail at it. Companies haven’t embraced the idea of building an ecosystem of partners, and they often fall short of understanding their value proposition perspective of the base of the pyramid. Until we do that, we are not likely to have a lot of sustainable, scalable enterprises. There are a lot of sub-pieces that go into that – things like creating an enabling environment, view from the lens of the enterprise but they are not likely to be able to influence government policy.
What are the principles that an enterprise should look at to understand the value proposition for the people?
Businesses should have regular conversations with their customers and understand how those customers or producers or entrepreneurs or partners are viewing the value proposition they are proposing. For, e.g., we are creating value by alleviating poverty. So, it helps to translate the social idea of poverty alleviation into a business idea of value creation. Poverty is multidimensional, and there are three important pockets of well-being. One is economic well-being, i.e., people will benefit from greater income hence economic security. We also need to understand what are the full implications on economic well-being, which is more than just the income. Second is capability. I worked with a lot of entrepreneurs in Malawi 25 years ago. The entrepreneurs were economically successful and were also capable. Even when business didn’t work, they had capabilities to build another more successful business in the future, to understand how enterprises and their ideas could be made more viable. So building capability becomes crucial. Third is about relationship well-being. People face a lot of barriers in isolation. It can be physical isolation, cultural, gender or caste isolation. So, it is important to think about isolation and its impacts. When we empower women, it is a great outcome, but it often changes the dynamics in a family and can create tension. Enterprises have focused on empowering women but failed to recognize that this also created some negative relationships in the family structure. The more successful the women got, the more uncomfortable the husbands became. Either the husbands told them to stop or the husbands felt it was a good business and they could do it and took it over.
It happens when the whole perspective of value is not incorporated into the model. To be successful we have to understand the value proposition on three levels – the well-being of the buyers, the sellers, and the community. The micro-lending example has several negative impacts. Firstly, the local enterprises become out of business. So there were other lenders who were making money and serving the community. The micro-lenders were never liked as they were very extractive and were wiped out even though it was the local business. Second, people were given money but this also gave them debts which is a negative and some people became over-indebted. Third, it does change the dynamics in a family. So the challenge and the value proposition is in understanding how does one enhance the positive impact.
How do the various stakeholders like the policy maker, the development community, and others create a coherent whole which has a positive impact?
The idea is if we provide the appropriate type of capital that solves most of the problems for these enterprises, then it is about the constraint to access to capital, the return that is reasonable for the investor. Providing money is simply not enough in this space and the development community needs to understand what is the full portfolio of support that an enterprise might need and how do we make sure that in aggregate we are offering that. The development community has to be comfortable with the idea that a key measure of their success is profitability and scalability of the enterprises they support. So they have to accept the idea that their resources are going to help companies make money and if that doesn’t happen then these efforts to support enterprises will not succeed. One sees a fair number of development people saying that they are okay with working for companies as long as they don’t make a profit. So the development community needs to be thoughtful about what perspective they enter with when they engage the private sector, and they need to think more clearly about the full portfolio of support that the private sector needs.
Finally, there are so many buzz words we hear today that it creates great confusion – ranging from responsible capitalism to conscious capitalism to fixed capitalism and so on. How do you make people understand how to sort through this clutter?
I think that there is a good side and a bad side. The good side is that more buzz words mean there is a greater set of people engaging in this space and confusion also means that people are interested enough to try and understand. So in some sense to have some dissent or disagreement is a good thing. The challenge is to have people understand that they are all centered on the same basic idea. They can call it what they want, but it’s the same idea that can be used to address social issues in a sustainable, scalable manner. So it takes it further from just social responsibility or short term investment to create something that has a long-term, lasting impact over time. I was always happy with the term ‘Base of the Pyramid enterprise’ because that’s simply about an enterprise that’s serving a particular segment. People have used terms like pro-poor business and inclusive business or creative capitalism- all of these have problems like pro-poor could mean other business is anti-poor. Similarly, creative capitalism could mean that other types of capitalism aren’t creative. Base of the pyramid in some sense is a relatively simple term because it just highlights an enterprise segment. People want to force value proposition into terminology but value proposition comes from how you execute not how things are talked about. About ten years ago base of the pyramid was thought to be an aspirational idea. But now we have moved well beyond that stage, and the next stage of the community is to together find commonalities rather than finding differences in our work, because everyone’s broad aspirations are the same.