Foolish Book Review: Corporate Responsibility

How big business can profitably serve the world's poor.

Jeremy MacNealy
Jeremy MacNealy
Oct 31, 2006 at 12:00AM

In the past few years, an avalanche of literature has hit bookstores, libraries, and business schools, revolving around what I believe may be the most important question we face following the turn of the millennium: "How can we better address major global concerns such as extreme poverty, the environment, resource conservation, and education?"

In the United States and many other Western nations, government programs, nonprofits, and philanthropy efforts by the extremely wealthy have mostly assumed this mantle of responsibility. But whether it's the Department of Housing and Urban Development's efforts to create wealth for the poor through affordable home ownership, or Bill Gates using the fortune he amassed through Microsoft (NASDAQ:MSFT) to fund socially responsible projects, the problem of poverty isn't lessening -- in fact, evidence suggests the situation is worsening in many regions of the world.

Is there another way to attack the problem of poverty? I believe so, and many others agree, particularly in the world of business. Some are attempting to persuade big business that seeking competitive advantage and promoting charitable efforts can be complementary objectives, not competing ones. Among the people speaking out on this topic: world-renowned business strategists C.K. Prahalad and Allen Hammond, whose essay "Serving the World's Poor, Profitably," appears in the Harvard Business Review on Corporate Responsibility.

A vast market
Every business must have a market for its goods and services, or it won't be in business for very long. Prahalad and Hammond's essay contends that there is a vast market among the world's poor, waiting to be tapped.

They use a graph to show where most corporations target their efforts, at the so-called top of the pyramid -- the 100 million or so people who make at least $20,000 a year. At the bottom of the pyramid (referred to as BOP markets) are the 4 billion-plus who make less than $2,000 a year.

One of the misconceptions of this market, however, is that the goods already sold there are "incredibly cheap and hence, there's no room for a new competitor to come in and turn a profit." But the statistics say otherwise: BOP markets pay four to 100 times as much "for drinking water as middle- and upper families," and 20% to 30% more for food. Do you think there may be some market potential there for a wholesaler like Costco (NASDAQ:COST)?

Furthermore, in a comparison of annual interest rates between two communities in Mumbai, India, the shantytown Dharavi saw moneylenders charging between 600% and 1,000% in annual rates, on average. In a wealthy suburb of Mumbai called Warden Road, annual interest rates were only 12% to 18%. The authors pose the question, "If a large financial company such as Citigroup (NYSE:C) were to use its scale to offer micro loans at 20%, is that exploiting or helping the poor?"

They add: "The issue is not just cost but also quality -- quality in the range and fairness of financial services, quality of food, quality of water. We argue that when MNCs (multi-national corporations) provide basic goods and services that reduce costs to the poor and help improve their standard of living -- while generating an acceptable return on investment -- the results benefit everyone."

It makes good business sense
The authors argue that businesses gain three advantages by serving the BOP market: a new source of revenue growth, greater efficiency, and access to innovation.

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The growth argument is a familiar one. Harley-Davidson (NYSE:HOG) is willing to put up with restrictive Chinese policies on motorcycle usage in the short term, because in the long term, China represents a massive market for its products. Nike (NYSE:NKE) management noted that the shoe company's recent success in China will likely be a blueprint for other developing markets such as Russia, India, and Brazil.

Prahalad and Hammond write: "Growth is an important challenge for every company, but today it is especially critical for very large companies, many of which appear to have nearly saturated their existing markets. That's why BOP markets represent such an opportunity for MNCs: They are fundamentally new sources of growth."

In addition to top-line growth, MNCs also gain efficiencies through "cost-saving opportunities." Access to cheaper labor pools is one obvious advantage of BOP markets; another is less visible, but just as important. The essay contends: "The competitive necessity of maintaining a low cost structure in these areas can push companies to discover creative ways to configure their products, finances, and supply chains to enhance productivity. ... These discoveries can often be incorporated back into their existing operations in developed markets."

Finally, BOP markets are a hotbed for innovation. The authors point out that one of the challenges facing BOP communities is connectivity. In response, corporations must devise creative ways to adapt to this environment. In my recent look at Yahoo! (NASDAQ:YHOO), CEO Terry Semel echoed this phenomenon, suggesting that Internet usage will be shaped by the emerging market, where an estimated 85% come to the Internet for the first time, not by a PC, but rather through a mobile device.

Rethinking business
BOP markets represent an enormous opportunity for both businesses and poor communities to profit. To make this a reality, however, big business must rethink "the traditional focus on high gross margins."

The authors point out that in order to succeed in this market, corporations must "reduce capital investments by extensively outsourcing manufacturing," streamline supply chains, "actively manage receivables," make "focused distribution and technology investments," and ultimately supply "very large volumes" of low-margin products. Does this sound like a business model employed by any company you know? Sam Walton built his Wal-Mart (NYSE:WMT) retailing empire by employing a very similar strategy.

Just as it took a Wal-Mart to reshape retailing in the United States, it will take other innovators to reshape global business. Doing so will not only prove to be enormously profitable for those companies, but also serve as another agent in the fight against poverty.

Other articles with social responsibility messages:

Wal-Mart and Microsoft are Motley Fool Inside Value selections, while Costco and Yahoo! are Motley Fool Stock Advisor picks.

Fool contributor Jeremy MacNealy is writing a law and ethics paper on corporate social responsibility as part of a graduate-level course at Duke University. He has a player rating of 99.21 and is ranked 95th out of 11,834 participants at Motley Fool CAPS; his profile is listed under jmacn22. He has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.