Getting to Scale: How to Bring Development Solutions to Millions of Poor People

8. Meeting the Demand of the Poor: Two Cases of Business-Led Scaling Up at the Base of the Pyramid

220 8 Meeting the Demand of the Poor: Two Cases of Business-Led Scaling Up at the Base of the Pyramid hiroshi kato and akio hosono The base-of-the-pyramid (BoP) perspective has been gaining influence in business and international development circles since C. K. Prahalad and S. L. Hart and other proponents articulated it.1 Underlying this trend is the belief that firms can identify innovative, commercially viable solutions to respond to the needs of the poor. Numerous studies and research have sought to identify effective strategies and business models with which private firms can break into these markets.2 This chapter is an attempt to contribute to the existing literature by examining two cases of BoP businesses that have achieved scale. In this chapter, BoP business is loosely defined as interventions that involve either the private sector only or a commercial partnership between the private and public sectors, and that provide the poor with goods and services to which they otherwise do not have access, such as education, health, finance, and energy. The poor refers broadly to people in the poorer segments of society rather than to a particular income threshold. The first case is the scaling up of long-lasting insecticide-treated mosquito nets (LLINs) through the development and propagation of the Olyset net The authors would like to thank Tatsuo Mizuno and Atsuko Hirooka of Sumitomo Chemical Co. Ltd. and Atsumasa Tochisako of Micromanos for providing valuable information. The authors are responsible for all the errors that may remain. 1. Prahalad and Hart (2002). 2. See, for example, Prahalad (2010). Meeting the Demand of the Poor 221 developed by Sumitomo Chemical. With the remarkable effects that have been demonstrated in malaria control, the introduction and mainstreaming of LLINs is one of the most outstanding recent achievements in global health. It is therefore of considerable interest to look at this case from a scaling-up perspective. Second, we look at the international remittance and microfinance business Microfinance International Corporation (MFIC). As a business with a wide range of enthusiastic customers, it is attracting the attention and support of many mainstream financial institutions and socially minded corporations. This case also provides us with useful insights into what constitutes a scalable business model. Analytical Perspective Our analysis is based on the understanding that scale is not merely a desirable target for BoP businesses but that it constitutes an essential condition for their success. This is because BoP businesses are different from normal commercial businesses for a variety of reasons: —BoP businesses are inherently challenging. Even a successful scaling up cannot ensure profits due to the limited purchasing power of low-income customers and the cost of doing business in low-income environments. In other circumstances, private firms protect their innovative products and business models with patents, thus guaranteeing them a certain market share. But in BoP markets, firms cannot use patents to set higher prices, as these will not be acceptable to customers. Furthermore, by limiting competition, patents may slow the process of scaling up and thus limit development impact. —BoP businesses require particularly high levels of up-front investments, because in many cases products are new and businesses are unfamiliar with the low-income market. Investments can help BoP businesses develop their products and understand the low-income market. Scale can only be achieved when these fixed costs can be financed and when low variable-cost models have been identified and tested. —BoP businesses often involve presenting poor customers with goods and services that they have not previously purchased or used. Building these markets requires the development of trust between the buyer and seller, a process that entails educational efforts by the BoP business and also acceptance by the users (for instance, when the product is contraception). An individual company is often unwilling to take on this burden, given the costs and the potential for other companies to free ride. Of the above points, the first presents the most fundamental challenge: How can BoP businesses be profitable and pro-poor at the same time? If an innovative product or business model is to be pro-poor, it should be made available to the poor at low prices or at no charge—and as rapidly as possible. In other words, it should be provided as a public good or good that everyone can afford. 222 Hiroshi Kato and Akio Hosono But the private sector will only...