MHCi MONTHLY FEATURE:
From Responsibility to Opportunity: CSR and the Future of Corporate Contributions to World Development
Last month, in the wake of an outpouring of philanthropy, Michael Hopkins called on corporations and CSR practitioners to look more closely at how they contribute to international development over the longer term, rather than in times of crisis (see http://www.mhcinternational.com'Monthly Feature'). The recent January 2005 discussions at the World Economic Forum illustrated that addressing global poverty is now on the agenda of the world's top CEOs. The contribution of corporations to disaster relief was highlighted at the Forum, but there was also debate about how companies can eradicate poverty and promote the Millennium Development Goals (MDGs) through their normal course of business. These discussions built on the work of their Global Governance Initiative, part of which has looked at the business benefits from promoting international development.
Whereas the Indian Ocean Tsunami has focused recent attention on philanthropy, there has been a quieter change of tide in the opinion of key business leaders so many now see poorer regions of the world as places they can do business with while helping the local populations. A particular area of interest has been the idea that rather than being a cause for philanthropy, serving the needs of the world's poor is actually a vast untapped market for big business.
2. Fortune at the Bottom of the Pyramid (BoP)
Just before Christmas 2004, the US NGO World Resources Institute held a conference in San Francisco, titled "Eradicating Poverty Through Profit: Making Business Work for the Poor." Over 800 people from the private, voluntary and government sectors attended, to hear the latest on the opportunities for corporations to source from or sell to disadvantaged people in ways that improve their quality of life while generating profit. The opening plenary saw strategy guru C.K. Prahalad present his thesis that there is an undeveloped and untapped market waiting at the bottom of the world economic pyramid - a market of four billion people who live on less than $2 a day.
Prahalad cites case studies of rural electrification in Nicaragua, small scale construction in Mexico, and salt iodization in India, to show how companies can make money from selling to people who have low incomes, while improving their quality of life. He points to transnational companies such as Unilever, Philips, Hewlett Packard, Dupont and Johnson & Johnson that have developed new business models and strategies aimed at low income markets. To achieve this requires rethinking basic approaches, such as the approach to pricing. Traditional pricing sums the costs of a production and distribution system and then adds on a profit margin, whereby selling to low income markets requires determining what people are able to pay, deducting a profit margin, and then working out how to delivery the product within that budget. Prahalad emphasizes that these markets need to be built not simply entered.
He suggests that the biggest barrier to success has been the mentality of managers, with these markets being invisible to most large companies. In his book he writes "if we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up."
Central to the argument is that companies are not the only ones that can profit from this new approach to business. The cover of his book contends that if we "create the capacity to consume" we are "delivering dignity, empowerment, and choice - not just products" and thereby promoting "an inclusive new capitalism". Some of the case studies in the areas of information technology and banking appear to support this view. The experience of microfinance, in particular, is worth some attention. The problem it addresses is the poor's lack of access to even the smallest loans to support their entrepreneurship. A key target beneficiary of this has been women, organized into small groups that share the loan and the commitment to repay it.
Microfinance institutions have often achieved average repayment rates greater than 95 percent, which is higher than rates for many more financially powerful debtors. Commercial banks are beginning to enter the sector profitably and governments are beginning to back it, from Jordan to India.
3. Corporate Social Opportunity
The development potential arising from new corporate strategies to serve low income markets makes this an area of interest for the CSR community. Both the Sustainable Livelihoods Project of the World Business Council on Sustainable Development (WBCSD) and the UN's 'Growing Sustainable Business (GSB) for Poverty Reduction' initiative focus on this. But the growing importance of this corporate social opportunity, not just corporate social responsibility, was reflected by Prahalad when he gave the plenary speech at the second academic conference of the Global Compact's Learning Forum in Philadelphia.
Suggesting that big business is key to solving the problems of poverty, not a reason for them, has excited the business press and business-led organisations, and major donors are now engaging in this, looking to use their funds as leverage for involving corporations in development projects. But before jumping on the poverty-profit band wagon, we should critically examine some of the claims being made, and what the real business and society benefits may be.
4. But not all that easy going
First, we have to query whether the evidence of profitable business with low income markets is really evidence of engaging those in poverty. There is a great diversity of incomes within the group of 4 billion people that are often referred to. Some of the most profitable examples are from the high technology sectors, with reports of booming cell phone sales across Africa and laptop sales across Asia. Yet what does this say about poverty eradication? Cell phones and IT may have multiplier effects on an economy, by facilitating more electronic payments and access to financial instruments for some people, but it is not clear how this benefits the malnourished and those without clean water. The argument that wealth will 'trickle down' does not correspond with the experience of many countries, where economic development has led to wealth gushing up to the rich few. Issues of power in supply chains and patterns of ownership are crucial in determining where incomes accrue.
Second, we should question the type of 'development' that is being promoted. One often quoted example of a successful bottom of the pyramid product is the work of Unilever's subsidiary in India, Hindustan Lever, in selling shampoo. The company had been focusing on the richer consumers and not looking at how to sell to poorer consumers, who were not able to afford a whole bottle of shampoo. They started producing and marketing single serving shampoo sachets, which were cheap enough for people, particularly young women, to afford. These examples are presented not only as a way of making money, but as a form of empowerment for these women. "When the poor are converted into consumers, they get more than access to products and services. They acquire the dignity of attention and choices from the private sector that were previously reserved for the middle-class and rich" says Prahalad.
However, is this shampoo story really one of empowerment and dignity? Commenting on the uptake of brand-name shampoos sold in single serving sachets in Thailand, Nicola Bullard, of the NGO Focus on the Global South in Bangkok, pointed towards the marketing machine that creates the demand. "Thai TV advertising is an endless parade of beautiful young women with long glossy hair swirling without a care - obviously commercial and chemical shampoos are not only better than traditional or local products, but they also make you more beautiful, richer and more modern. Who can blame the village girls for buying the brightly packaged foaming chemicals when they are subjected to such relentless hair-swirling!" Claims about empowering people by providing means for them to consume certain products can not be taken on face value.
It is disingenuous to use positive language about the autonomy and potential of the poor, while at the same time re-affirming their identity as the poor that by definition need to change, with outside help, and to change to become more like that outside 'developed' world. It is equally disingenuous to recognise that social development is more than consumption, but then address issues such as self-esteem in terms of consumption choices.
The third area where we need to question the current enthusiasm concerns the environment. The shampoo sachet example automatically raises questions about the increased amount of packaging and transportation, and the comparative environmental impact in comparison to using locally produced cleaning materials, such as soaps, herbs, lemon and vinegar. It may seem a small issue in comparison to acute environmental problems and global challenges such as climate change, but some analyses of sustainable development suggest that all socio-economic relations are important and local production and consumption is crucial: billions of used sachets across India doesn't seem all that environmental. The BoP thesis assumes a different perspective on sustainable development, where environmental problems can be solved through technical and financial advancement. Stuart Hart, professor at the Johnson School of Management at Cornell University, who was the first academic to conceptualize the BoP, argues that environmental concern is effete to the poor, and "sustainability requires massive reductions in poverty and that means bringing billions of people into the market economy." Contrary to this, the rural poor are depending on their immediate environment for survival in ways that richer urban dwellers do not, and often express their own environmentalism which is integrated into normal practice.
A fourth area where we need more consideration is on the issue of ownership. Should a more inclusive capitalism mean that there are more capitalists, more owners of production? A problem often identified with foreign companies is that they can dislocate indigenous business and so the profits arising out of local economies are repatriated as profits outside of the community. It is unclear whether growth of BoP market business models from TNCs will promote or undermine local capital ownership. In the meantime, any facilitation of TNC trading with BoP markets by development agencies might even compound current problems with North-South supply chains, tax avoidance, and anti-competitive practices that are fairly typical of TNCs.
5. Concluding Remarks
As work on the BoP grows, and corporate contributions to the MDGs more generally, these questions will become more important. There is certainly potential, but more work is required on the BoP concept and its application. Questions such as how large corporations might bring their financial, technical and management resources to help local entrepreneurs improve and scale their businesses, and avoid exploitative local middlemen, are important to address. The potential for large corporations to adapt technology to provide clean fuels, safer and more nutritious foods, medicines, and communications to people living in poverty could also be looked at. As current modes of development assistance have had limited impact in providing a hand up rather than a hand out, it is this potential for the private sector to make a positive contribution which interests me.
However, the potential negative implications must also be explored, by drawing upon a range of expertise, with people trained in sociology and anthropology for example, in order to determine the ways business can work toward development outcomes, and weed out inappropriate activities. This makes the interfacing of experts in business and in international development an important activity to help inform appropriate policy and practice. As more development agencies become involved in this area, so it is essential to improve knowledge and even consider guidelines for the implementation and assessment of projects involving corporations in development work.
There is some movement. Within the management academia, IESE in Barcelona is developing a BoP Learning Laboratory. Interdisciplinarity will be key here, but also an approach which is not merely instrumentalist, and doesn't merely focus on what is in this for certain types of business. There is still a need for a centre of international development research expertise to make a contribution in this area.
Without such critical, yet constructive, input, the fortune at the bottom of the pyramid may prove as elusive as the one at the end of the rainbow, for both business and society.
[Dr. Jem Bendell is an Adjunct Professor at Auckland University of Technology, a Visiting Fellow at ICCSR Nottingham University, and the Founder of Lifeworth.com, the progressive careers and recruitment service. Jem is on the web at www.jembendell.com ]