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366 views17 pagesChapter 10 IBT
International Business and Trade Chapter 10 Handout
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Jackleen Rose JubeleaCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
@
Poverty
Introduction
‘This heat map represents the world's population. Darker areas of red represent large amounts
of people. As you can see from the map, countries like China, India and Indonesia have some
of the most densely populated areas. At the same time, most of the world's economic activity
still resides in North America, Europe and the Far East. Yet, tte economic activity exists and
poverty may be widespread in significant population centers ofthe world.
Although living standards differ around the world, in essence people are poor when they
lack the ability to purchase products and services. Low-income societles represent more than
Population density
People por People par
‘square km square
\ Mere than 1956 0 than 500
BEBE CBS
Tess sata
3a
Les hah # Stee han 1
‘Souea hp vtheslane cam pas/éocsmogefise200510}wortesphy pt
169 370 CHAPTER 10 Poverty
poverty ageneral scarcity or
lack of material possessions or
‘money for consumption; a perss-
tentlack of income that deprives,
anindividualof the ability to
‘obtain appropriate levels of food,
water clothing, shelter, health
care, and/or education
4 billion potential consumers who are largely unreached by International companies, For
example, although Vietnam has a population of 80 million people, Ford may struggle there
because few can afford to buy a car,
For this reason, most multinational companies target thelr products and services to the
wealthier segments of society. But consider an analogy: would you rather pick up a thousand
$100 bills ($100,000) or a billion pennies (510,000,000) in the same time frame? Most Western
companies are organized to pick up the $100 bills, but companies willing and able to pick up
the pennies may have huge opportunities.
Countries with a low average income and untapped human capital also present oppor-
for companies to cut labor costs, For example, hiring a machine shop worker in
‘Switzeriand will cost over $38 per hour, whereas hiring a similarly qualified laborer in the Phi
Ippines costs under $2 per hour.' And not least, the opportunity to alleviate poverty by hiring,
and training low-income workers and improving conditions in their communities provides a
secondary benefit to companies that have made a commitment to demonstrate corporate
social responsibility in their business pra:
LEARNING OBJECTIVES
‘After exploring thls chapter you will be able to:
1. Identify the causes and consequences of global poverty as they apply to
international business
2. Discuss traditional approaches to alleviating global poverty
3. Compare traditional approaches and business solutions to poverty
4, Describe ways that businesses can make money while also doing good
4
Causes and Consequences
of Global Poverty
LEARNING OBJECTIVE
Identify the causes and consequences of global poverty as they apply to international
business.
Defined as a social factor, poverty is a general scarcity or lack of material possessions or money
for consumption, a persistent lack of income that deprives an individual ofthe ability to obtain
appropriate levels of food, water, clothing, shelter, health care, and/or education.” However,
poverty Is not just a lack of money. It Is also the inability to effectively participate in society. It
means not having enough resources to feed and clothe a family, not having access to schools.
or clinics, not having land on which to grow food or a job through which to earn a living. It
means insecurity, powerlessness, and exclusion fr individuals, households, and communities.
Itmeans susceptibility to violence, and It often forces people to live In marginal or fragile env-
‘ronments, frequently without access to clean water or sanitation (see Figure 10.1)?
Because ofits impact on millions of lives, playwright George Bernard Shaw called poverty
“the greatest of evils and the worst of crimes.” The tragedy of poverty Is that it wastes so
‘much potential, Lives are battered, happiness Is stunted, creativity is wasted, and freedoms
are eroded by the misfortunes of poverty
Why does poverty exist? Countless books have been written about the causes of poverty,
but no clear consensus has been reached. What we do know Is that poverty is usually the con-
vergence of multiple social factors beyond the reach of individuals, and of multiple individual
@ causes and Consequences of Global Poverty 171
(Chip Somodevile/Getty mages
TERUG Poverty the poorin south Arica stele ton clean wate.
factors beyond the reach of governments. In the developing world, many social factors can
contribute to poverty, including limited access to credit and capital markets, extreme environ-
‘mental degradation, lack of public health care, poor infrastructure, and war
The Poverty Trap
‘What is most notable, however, is that the poor generally also have a much lower level of
individual capabilty—for health, education, nutrition, and hope. Increased personal bility can
be a way out of poverty; without i, the poor are often considered tobe “trapped!” in poverty
or in a poverty trap. As Nobel Prize-winning economist Amartya Sen palnts out, poverty
deprives individuals of key capabilites imiting their abilty to achieve and earn, thus keep-
ing them poor and limiting their opportunities to increase thelr capably. For the very poor,
the rate of return from investing in food, education, or a business is so low that, given thelr
resources, they cannot improve ther circumstances. Asa result they get poorer and poorer
‘and remain trapped in poverty. Poverty often leaves people without the opportunity, educa-
tlon, or resources necessary to progress out of poverty. Raised beyond a certain threshold,
however, their investments can become productive enough so that thelr Income can increase
‘overtime. This poverty trap is explained in the whiteboard video “The Poverty rap”
From a business perspective, poverty is about a person’ lack of ability to purchase the
things they need. Businesses may be interested in alleviating poverty because doing so may
increase the base of potential consumers, employees, and citizens The goal isto Improve the
capabiltiesnecessary to participate effectively in society, consume mare productsand services,
and become steady and reliable employees. In addition, international businesses are Increas-
ingly aware ofthe opportunities to provide goods and services tothe poor, understanding that
collectively they makeup a significant market.
Risks of Poverty
‘Before they can consider taking advantage of the economic and social responsibility opportu-
nities found in poor markets, companies first need to consider the risks in targeting the poor as,
consumers or employees, These risks are three-fold,
poverty trap an economic
condition In which tis ificultfor
anindividual to obtain enough
capital andjor reditto escape
poverty it causes poverty to per
sistandis also called the “cycle
of poverty’
‘WileyPLUS
‘See Whiteboard Videor The
Poverty Trap M12 CHAPTER 10 Poverty
1, Low to No Consumption The poor have many unmet needs. Ifa business could
satisfy those needs and make a profit in the bargain, it would have a painless, profitable way
to solve the problem of poverty. Unfortunately, profitably meeting the needs of the poor is
ro easy task. The consulting firm Monitor Group concluded, after an extensive survey, that
few examples exist of profitable businesses marketing truly beneficial goods in low-income
‘markets and operating ona large scale, The problem is that the market for selling to the poor is
very small, and the poor have very litte individual purchasing power, which means the market
isn't often atractve for companies.”
ln fact, the truly impoverished do not really represent an actual market at all. To have
‘ consumer market, businesses need to bulld a lifestyle around a product or service. For in-
stance, in the 1970s bottled water was a foreign idea in the United States, where paying for
water was not partofthe consumer lifestyle. Ittook decades of marketing before large numbers
cof consumers changed ther lives to accept paying for water. Now, bottled water's a large and
profitable U.S. business. Likewise, many poor consumers balk at the idea of paying for clean
water or sanitation, Many International companies make the mistake of assuming that a base
of customers willing to pay fora product already exists.
Consider the Tata Nano, the “world's cheapest car” After examining the local environment
in india, Ratan Tata ofthe Tata Group had the idea to develop a family car ata price of about
'$2,500—less than half what it cost to buy the next-cheapest car at that time. He followed this
vision, and after five years of hard work, his group of engineers developed the Nano tomeet the
‘needs ofthe poor, who had always wanted a car they could afford.
But were they really successful? While the carwas the world’s cheapest by a large margin,
the Nano (shown in Figure 10.2) was not an instant success and even suffered from early prob-
lems with quality. Even today itis only slowly building a market. One reason is that for the poor
In India acaris a status symbol, not ust a convenience. To get from place to place, they already
Use public transportation or other cheaper means, such as motorcycles. Their lifestyle does not
require a car, and If they were going to buy a car asa status symbol, they might not be inter-
ested in owning the “world’s cheapest status symbol.”
2. Low to No Cost Savings offshoring jobs to poor counties Is often seen as an
‘opportunity to reduce production costs in a globally Integrated world, However, as more
‘companies take advantage of these pockets of low-cost labor, the price of that labor goes
Pye
rs
‘Vavelb enronmert/Alamy Stock Photo
TIEUITEOEN tote nano thisveniciewas developed tobe the “world's cheapest cr? Causes and Consequences of Global Poverty 173
Up. This causes companies to move to the next poor market in order to reduce labor costs
‘once again. The cycle can be good for the countries in which such companies are competing,
because attracting firms requires bullding infrastructure and developing labor skils; however,
this “country hopping” also presents certain risks for the companies themselves.
For instance, offshoring jobs to poor countries ends up being much more expensive
than most companies predict. In fact, nearly 50 percent of all outsourced projects fail
The problem is that companies often fail to assess the operational and structural risks
of offshoring jobs. Operational risk comes from a firm's inabllity to document the work
remote employees do, to describe the different situations they might face, and to direct
what their responses should be in each scenario. For example, companies like Deloitte and
18M have had to spend millions of dollars managing and interacting with remote vendors
in poor countries to ensure that the quality of their work can be effectively measured and
tracked. Structural risk is the risk that arises as firms realize that their vendors may have
different incentives than the client. Often these relationships do not work as expected. For
‘example, a vendor may promise to hire workers with a certain skill set but fail to do so, or
they may alter the terms of @ contract as they operate.’ Apple has had to work more closely
with its vendors in China to ensure they are treating employees appropriately and not using
exploitive management practices.
Moreover, because the poor have limited access to health care, education, and any kind
of insurance, they are subject to higher turnover and absenteeism, and they often need more
training than their wealthier counterparts. Setting up a call center in a poor, rural village In
India may seem attractive from a cost perspective—wages are just a fraction of those pald
in wealthier markets—but international businesses will often end up paying for employees’
training, retraining, healthcare, and recovery from natural disasters.
3. Low to No Respect Most multinationals operating in developing markets might a
some point mutter the phrase, “I get no respect." Thats, when they mess up, they are exposed
in their home markets for exploiting the poor abroad. Typically, company reputations suffer
and firms ind themselves targeted by consumer boycotts, social media campaigns, and liability
lawsuits. While they can be damaging to the company, these responses are actually necessary
to ensure proper accountability.”
For example, the collapse of the Rana Plaza textile factory in Bangladesh In 2013 killed
1,129 garment workers, and an explosion at the packaging factory of Tampaco Foils in Bangla-
desh in 2016 killed 34 people and critically injured many more (see Figure 10.3).
Momunr asid/Alamy Stock Photo
‘operational risk a firm's
inability to document the work
remote employees do, describe
thedlifferent situations they might
face, and direct their responses in
‘each scenario
structural risk a firm's difculty
‘when relationships with vendors
donotworkarexpected
EXEIISTEEN the nana pura
Collapse Tis collapse ofa cath
ingfactoy was Bangloges's rg
estindustil accident Overs
ofthe Rana Plaza bung urged
employees to return towerkeven
afteranengheer had inspected
the buléing the dy before the
collapse and deemed tunsafe 174 CHAPTER 10 Poverty
foreignald money and programs
provided by governments, NGOs,
‘or corporations to hep allevi-
ate poverty
Italso created a backlash from media and advocacy groupsinthe industrialized world, such
as the Clean Clothes Campaign and Labour Behind the Label. These groups placed the blame
an companies such as Primark, Walmart, and Benetton that used the Bangladeshi vendor to (~
‘manufacture thelr clothes. The groups pointed out that workersin developingcountrieslackthe
tights, legal protections, and union representation enjoyed by thelr counterparts in developed
countrles. Because they lack bargaining power, those workers do net benefit from an Increase
in the demand for labor and thir wages do not go up. They may have no choice but to work in
sweatshops, suffering unhealthy or dangerous conditions, excessive hours, and physical abuse.
All these negative attributes are then linked back tothe firms that use the labor for profit.
[22] Traditional Responses to Poverty
LEARNING OBJECTIVE
Discuss traditional approaches to alleviating global poverty.
Many organizations have as their express mission ending or alleviating poverty. For instance,
the first United Nations Millennium Development Goal is to “eradicate extreme poverty and
hunger” Using different approaches, various organizations, governments, and businesses
provide direct assistance to and develop resources within impoverished areas. Meanwhile
researchers have begun seeking ways to scientifically measure the effects of these inter-
ventions and better design future efforts. While poverty is still a huge world problem, there are
some bright spots in efforts to reduce it.
Poverty Programs C
Two major schools of thought drive the discussion about how to alleviate poverty. The fist
says the world's poor are poor simply because they are unable to break out of the “poverty
trap.” Economist Jeffrey Sachs says the solution i simple. Like a car with a dead battery, poor
countries require a “jump start"—an infusion of foreign ad to lift poverty-stricken counties out,
ofthe poverty trap and onto the path to growth, Foreign aid consists of money and programs,
such as education and healthcare, directly provided by governments, nongovernmental
organizations, or even corporations to help alleviate poverty. According to Sachs, $195 billion a
year, invested by rich countries over the course of 20 years, would be enough to jump-start all
the poor countries of the world.
However, others, such as economist Dambisa Moyo, make up a second school of thought
and call foreign aid a waste of resources. In her book Dead Aid, Moyo notes that transfers of
food, money, and other resources do little to help poor countries and may actually be detri-
‘mental to their progress. Her reasoning is that ald suffers from three problems. First, it may
Undermine innovation in those countries that receive it, Second, it frequently goes to corrupt
leaders who bulld personal wealth rather than the Infrastructure thelr countries need, Third,
aid creates an unnatural reliance on foreign donors. Some countries even use it to enhance
thelr efforts to get more aid rather than to make economic or social progress."
These schools of thought represent different views of forelgn ad The ists based on the
Idea that markets by themselves may generate more general wealth but often unfairly neglect
the poor. The second Is based on the idea that providing aid undermines the incentives bullt
into market economies. people are given ai, then a false incentive system develops, thereby
motivating themto search for handouts from others rather than create the benefits themselves.
Below we discuss how the diferent types of foreign ad organizations are nteractingwith mar-—(_
kets so you can better understand what these "poverty programs" look lik.
While the debate is stil unfolding, most developed countries have set up governmental
ald agencles: the Australlan Agency for International Development, the Kuwalt Fund for
Arab Economic Development, Irish Ald, and the Agencia Brasileira de Cooperacao (Brazilian Traditional Responses to Poverty 175
Cooperation Agency). These agencies have been created by thelr respective governments to
help end poverty, cultivate economic resilience, and advance global security and prosperity.
© Governments fund them because they believe thelr own countries are safer and stronger when
fewer people around the world face destitution, thelr trading partners are dolng well, and basic
human rights are protected—including by other soverelgn nations.
The US Agency for International Development (USAID) reported that in 2015 the United
States provided foreign countries with $18 billion in total economic assistance ([Link],
gov). The biggest recipient was Afghanistan, followed by Israel, Egypt, and the West Bank/
Gaza, Figure 10.4 presents a historical chart of the aid the U.S. government has provided, in
the form of both economic and military assistance, from 1946 to 2015, Worldwide, the United
States contributed much more than the United Kingdom, the next-highest donor. However, as
‘much as the United States gives, the amount of U.S. foreign aid is still ess than 0.2 percent of
the gross national income each year, as depicted in Figure 20.5.
Believing that poverty is a primary cause of war and financial crises, many nations decided
to team up and provide foreign aid collectively, Collectively owned aid agencies are known
$7.6b
ola Obligations
1 US. Aorey fonts Oropmant
5 Depart Ste
mw coreme funsng YB) vou or agrevton
easy ferey Deptant en
ester Onone
1 Depurtnnt of Carer
e Fi a
"TvtetadiviacativnsFono ovveoO OsoeoeaOaTOTTA TOT aT Oot twa ON CDOT VOSS TOT ETE
EXTITETEN vs. toreign ald worldwide, 1946-2015 seurcesusno Foreign ald explore tsa
tpsfesporersad gold vend ml Accessed une 12,2017, 376 CHAPTER 10 Poverty
Fricunese.s ee
tiven as development asi
tance, by country, 2035 sewn
crptenerecvo co speen
tnd ewleomert pment
teeperseepor notte
eves sae Detopmen
cos eons apron
mots sary rae coe
Centos racton Ot Peton
tere tome 298
sinclar 250
‘multilateral aid agencies
collectively owned aid agencies
Compare > [Unies States ¥) wit [Franao 7
ODA as per cent of GNI (2015) ODA - USD billion (2015)
Poand ‘coun
Slovak Ropubie
(Gzoeh Republic
Slovenia
‘% 20 — i960 NN
austia
Filand
Spain
Belgum
oe
‘Aust erm
2 Austral
fone ‘Switzetand
Belgium aly
Germany Norway
ssmtzerand Canada
Fine Netherlands
United kingaor Sweden
‘Netherlands Frarce
‘Denmark span
Luxembourg emany
‘Noway United Kingdom
Sweden “J Unites States
° 1 2 ° 20 0
‘as multilateral aid agencies; they include the World Bank and the International Monetary
Fund, which were introduced in the discussion of multilateral organizations in Chapter 1. These
entities differ from government aid agencies in various ways:
+ Because multilateral ald agencies represent the interests of multiple countries, they tend
tobe less tied to the political sol-interests of specific donor countries.
+ They efficiently pool financial resources.
+ They foster a sense of cooperation among nations that further reduces conflict.
+ Because they are large, multilateral aid agencies can simultaneously develop and utilize
deep local knowledge of needs in any given global region.
Other Types of Organizations That Fight Poverty
Inaddition to governments and multilateral aid agencies, many individuals are directly trying to
eliminate poverty, often through special types of private organizations known as nonprofitorga-
nizations, Nonprofits, such as the Human Rights Watch and the Red Cross, usually have a social
mmission that is not about making money but rather about offering service the for-profit sector
doesnot provide. Ina nonprofit organization, all profits made (i any) must be put back into the
organization to further ts charitable goals. By contrast, for-profit organizations may te thessales
of a product to actions to alleviate poverty. For instance, a small plzza franchise in Utah called
Malawi's Pizza donates a “nutritious meal toa child in Malawi, ica” for each meal purchased.
‘Another type of organization often focused on poverty elimination Is @ foundatlon, Foun-
dations are nonprofit organizations that channel a wealthy donors resources toward his or
her aims. For instance, one of the primary alms ofthe Bill and Melinda Gates Foundation is
to reduce extreme poverty, This organization pays salaries to its employees and has other
‘operating costs, but the bulk of Its funds are used to help reduce poverty It has an endowment
‘of over $38 billion from contributions by Microsoft cofounder Bill Gates (about $28 billion) and
mega-Investor Warren Buffet (about $10 billion) The Gates Foundation contributes to fighting
diseases that primarily afflict the poor, such as pollo, malarla, tuberculosis, and HIV/AIDS. In
‘addition, ithas funded multiple microfinance institutions such asthe Grameen Foundation and
@ ‘Business Response to Poverty 177
Pro Mujer, with the alm of gling would-be entrepreneurs In poor countrles the capital they
need to start or grow thelr businesses.
Other organizations try to alleviate poverty by supporting the payment ofa far wage to
laborers abroad, For instance, Fair Trade USA helps to certify products such as tea, coffee, and
sugar that come from developing countries as Fair Trade products This certification indicates
that the farmers or workers producing the goods have been paid a fair wage, often above the
global market price. The guaranteed minimum sale price ensures that the farmer receives
enough money to invest In high-quality production or other Infrastructure. For Instance, cer-
tied Fair Trade coffee growers receive a minimum of $1.40 per pound for thelr coffee beans,
regardless ofthe price in the world market
With the additional money they receive, the farmers collectively invest In Improving
farming techniques, improving distribution and product quality, and bullding schools and
health care clinics in their communities. Companies like Starbucks that purchase this coffee
are able to formally brand it as “Far Trade.” Fair Trade products usually sll for higher prices,
butconsumers are willing to pay a premium forthe perceived higher quality and the realization
that they are doing some good
Poverty Science
In addition to governments, nonprofits, foundations, and Falr Trade organizations, many
‘educational Institutions have become engaged in the study of poverty. One approach in
research relies on randomized experiments to explore the effects of Interventions on reducing
Poverty, This research has generated a new field of poverty science, a movement by econ-
‘mists, policy researchers, and even business researchers, in cooperation with ald agencles,
to use randomized controlled experiments in order to understand what types of activities
and interventions might more effectively alleviate poverty. These researchers aim to bring
Increased rigor to poverty alleviation so businesses, governments, and nonprofits can make
the most effective use ofthe resources they have dedicated to this cause.
For instance, Abhijit Banerjee and Ester Duflo have summarized a host of experiments in
theirbook, Poor Economics:A Radical Rethinking of the Way to Fight Global Poverty. They explore
topics such as, "How much more food will a person living on 99 cents a day buy when glven
more money?” The answer is that an individual will spend on food about 67 percent of the
money above the 99 cents he or she earns, but much of it will go to upgrading the person's,
‘existing diet to Include more meat and more expensive grains rather than simply increasing
the number of calories. As a result ofthis research, we can steer organizations to not just fight
hunger. Making sure people have enough money to get sufficient calories on which to live Is
Important, but making sure they have enough money forthe right kinds of calories seven more
portant. When people increase the protein and the quality of grains in their diets, itincreases
their vitality and, in children, promotes proper growth and brain development. These factors,
‘make a big difference in helping people inthe workforce improve ther skills and ables,
With knowledge such as this, poverty science is changing the way organizatlons are
addressing poverty by providing scientific evidence for and against different poverty-reduction
Initiatives. Though the field is stil young, its discoveries seem likely to help us more efficiently
‘design and fund efforts aimed at reducing poverty.
A Business Response to Poverty
LEARNING OBJECTIVE
‘Compare traditional approaches and business solutions to poverty.
Operating in both poor and rich countries presents opportunities and constraints for multl-
national companies. In many developing countries, governments are skeptical of foreign
Fale Trade a trade movement
which pays a guaranteed price
to farmersin exchange for
commodities
poverty science a movement
by economists, policy research-
ts, and business researchers to
understand what types of activi-
ties andinterventions might more
effectively alleviate poverty 178 CHAPTER 10 Poverty
rate social responsibility
(€8R) a form of corporate sel-
regulation used to further some
‘social good beyond the require
ments of law
companies’ intentions. Forelgn companies often have (and sometimes deserve) a reputation
for entering anew market simply to extract resources and profits then sending the money back
to their home-country headquarters.
The Poor as a Social Responsibility
‘To alleviate some of this concern and to proactively do good in the world, many companies
have developed a corporate social responsibility (CSR) approach to doing business. CSR isa
form of corporate self-regulation used to further some social good beyond the requirements of
law. Such policies are created for many reasons, but if used strategically, they can have benefi-
cial effects on both poverty alleviation and the firm's performance.
While trade-offs may exist between social goals and short-term profitability, long-term
gains generally occur when companies re socially responsible. Infact, research has shown that
‘managers can choose the right level of CSR to maximize long-term profitability; to do so they
need to conduct a cost-benefit analysis in the same way they would for any other investment.
For example, avoldable tragedies like the Rana Plaza textile building collapse in Bangladesh
hhave caused companies to think more about Improving the lives and working conditions of
their suppliers’ employees, This is responsible, and it also makes sense strategically, Gone are
the days when companies could be concerned only about their shareholders and employees.
Drug companies, for instance, are increasingly pricing life-saving drugs lower in devel-
‘oping countries. Traditionally, these firms developed drugs in a few research locations and
then sold them throughout the world at the same price. They want to be paid for their time
and Investment, which can run to $1 billion and 15 years of research and development effort
However, many developing-country governments have pushed back against the high prices
charged for drugs and vaccines—often the very ones most needed in thelr markets. Asa result,
companies like GlaxoSmithKline are offering to poorer countries tiered pricing for vaccines.
Tiered pricing sets the price in proportion to the income levels in the countries where the drug
{ssold. For example, a typical consumer in the United States might pay $200 for a polio vaccine,
whereas that same vaccine Is priced at $20 or even $2 in a developing country.
The Poor as Profitable Clients
IF you ask around, you wil find few people inthe United States who will pick up a penny from
the street. Increase the amount to a nickel, and a few more will say yes. At a quarter, nearly
half will bend down. When you get to a $5 bill, most people will gladly pick it up, even from
a dirty snowbank. The same is true for most U.S. companies: They are unwilling and some-
times unable to cost-effectively pick up “small change" and instead cover the globe looking for
figurative $5 bils (or higher)
Still, some companies are realizing they could make huge profits by picking up pennies.
For instance, Bhart Airtel, which primarily does business in India, is one of the world's largest
telecommunications companies, but it was nearly bankrupt in 200. Alrt!'s business model
from 1999 to 2001, like that of most ofits competitors, had been focused on increasing the
average revenue per user. This means the company looked for clients who were likely to spend
more than the average of $50 per month on telecom services, and then it recruited them as
‘customers. However, because al of Artel’s competitors were also focused on these same cus-
tomers, competition was intense, and the costs of providing service were also high,
{In 2001, nearly bankrupt because of high costs and low revenue, Airtel realized it was
fighting too hard for too small a market and developed a new strategy focused on its total
revenue. In this way the company could add any customer it could profitably serve—and
it wanted to serve them all—which meant it had to significantly lower costs. To do that,
Airtel outsourced most of Its support functions, including technology, sales, and service,
and switched focus to acquiring any customer it could. The results have been dramatic.
@ @
‘ABusiness Response to Poverty 179
‘The company now has an average revenue per user of ust $6 per month (far shy ofthe $50 It
used totarget, butithas been making largeprofitsand expandingto other markets, particularly
in Africa, that companies have historically avoided—"walking past pennies," so to speak.
Airtel provides just one example of how companies can effectively work with poor cl-
ents and do so profitably, The transition required reorganization, a shift in strategic focus, and
the development of new employees! skills, but the results speak for themselves. Some ofthe
world's fastest-growing companies have figured this out. The key requirement i to recognize
the pennies that others are walking past and igure out how to gather them profitably
Base of the Pyramid Strategies
We can conceptually vide the world population nto segments based on the amount ofincome
received each day. As you can see in Figure 10.6, roughly 1 billion people—the very poor=live
on less than §2 a day. Businesses have difficulty operating at tis level because most activity
in this segment is humanitarian, The next segment, which lives on $2-10 a day, accounts for
about 3 billion people, who collectively make up a $5 tilion market. These two groups are
‘often called “the base ofthe pyramid.” Two other segments, those who make between $10 and
60 a day and those who make more, constitute a $12.5 tilion market that is well served by
many companies’ products and services. However litle competition occurs at the base of the
pyramid; these markets are difficult to access, dificult to serve, and dificult to develop profit
able products and services fo.
Picking up pennies efficiently and profitably requires innovations and efficiencies that
tenable a company to deliberately target the base of the pyramid (BOP) (Figure 10.5). The
B0P (represented in yellow inthe figure) is the largest but poorest socloeconomic group in
the global economy and consists of billion people who survive on less than $10 a day” They
‘often tive in rural areas largely unserved by companies. This means there is little competition
for these potential clients. By focusing on the poor as clients—rather than as victims in need of,
hhandouts—proft seeking companies can play a larger roe in alleviating poverty and can make
significant profits in the process. However, serving the BOP market often requlres a major shift
inthe way acompany thinks about business. For example, itneeds to focus on overall revenues
(pennies) rather than on revenues per unit sold (dollars).
‘Another and very obvious shift isto acquire a much deeper understanding of the poor and
their living and working conditions: How do they make purchases? What are their preferences?
Tounderstand the poor and meet theirneeds as clients, companies must view them as partners
with capabilites and insight that can be capitalized on. This means ensuring personal contact
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Market opportunites based onthe Income pyramid Mos products and serces are
targetesto tie blue section at the very tp ofthe ncome pyramid Companies have lo started focutng
anit ection al, However, the major ofthe word's population represents over lon of
Consumption potential. seuc:Adsed tom Mod onmiFnm 04 Sts psa cniphts
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base of the pyramid (BOP) the
largestbut poorest socio-eco-
nomic groupin the global
‘economy 180 CHAPTER 10 Poverty
between the community and company representatives, which in turn calls for highly decen-
tralized decision making and incentives for employees who collaborate with local community,
government, and social enterprises.
For example, when Unilever sought to bulld successful operations In BOP markets in rural
India, the company took a team of top leaders and dropped them into a rural Indian village
for over a month, Their goal was to learn what the environment is like, to understand what It
‘means to live in an environment without infrastructure and what it i to have litle money and
even fewer products to buy. The team learned a great deal and bullt—from the ground up—a
new distribution approach that centered on the women ofthe village. The results have been
exceptional
In addition to a deep, personal understanding of how the poor ive and work, companies
often need to increase their ability to quickly access and combine ideas already in place else-
where within thelr organizations. Ironically, providing valuable services to the poor requires,
combining local knowledge of the problem with knowledge from technologies, designs, and
systems outside the local context, Consulting others within the organization but outside the
local context helps local representatives understand valuable principles behind company
products, services, or systems that may produce an innovative solution to a problem the local
market has not been able to solve. As a result, when company representatives expand thelr
reach to include others in geographically distant locations, they increase their chances of find-
Ing relevant and valid information that can Improve their own solutions,
For example, while working on a projectin Serbia with the International Finance Corpora
ton of the World Bank, one ofthe authors ofthis text turned to some colleagues In China and
Ukraine to help develop a better product for the client. Research has found that subsidiary
‘operations in a particular country are better able to meet the needs of the poor, particularly
In emerging markets, when they turn to other teams outside that country for advice, While the
local contexts difer across countries, many elements ofthe problems the poor face are consis-
tent across borders.*
Global knowledge often provides novel and better solutions to local problems than can
bbe implemented within a local context, For example, we interviewed a project leader from 3
company focused on emerging markets. Her team has effectively accessed knowledge from
foreign units in diferent countries: “Here in India we took lessons from Chad and from Azer-
baljan, We directly turned to people who were involved in earlier projects to be involved inthis
new project. So from India we pulled in (particular project members] from the [giver] project
so they could help usin our talks to the client and help brainstorm on what is @ good approach
Inthis environment based on their experience.”
However, a attractive ast sounds to lift the poor out of poverty while making money, few
companies have been successful in doing so, Part of the problem is developing a decentral-
ized organization with strong local expertise, and then pairing that organization with a highly
efficient way to come up with innovative solutions that can be marketed to populations large
enough to generate overall profit.
For instance, DuPont ran into profitability problems with a venture it piloted from 2006 to
2008. DuPont's subsidiary Solae, a manufacturer of soy protein, operated in Andhra Pradesh,
India, The goal of the project was to alleviate malnutrition and open a new market for the
company by getting mothers in rural areas and urban slums to cook with soy protein as part
of their daly routine. The product set consisted of small packets of protein Isolate (which
provided about half a woman's average dally proteln needs) and a range of packaged, soy-
fortified snack foods—all priced below 30 U.S. cents, The Isolate's profit margins were on a
level with those of Solae's core business-to-business products (which were good), but sales
proved inconsistent. Sales were stronger for the snack foods but the margins were signifi-
cantly lower—so low, Infact, that the company couldn't reach effective economles of scale
Inthe limited avallable markets, Unable to see a path to profitability, Solae ultimately closed
the pilot Such experiences prove the need to take specific precautions and ensure that your
business model avoids traps related to BOP markets; Figure 10.7 provides alist of these traps.
For example, o sel to the poor requires diferent distribution channels than those used for
top-of-the-pyramid markets, ‘ABusiness Response to Poverty 161
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beneficial products tothe poor. Trying to serve multiple soclal
‘objectives usually leads to allure,
TEEEIIEEE A business modeltoslltothe poor when designing business model forbase-
of the-pyramid markets, businessee mut take int account certain consideration (aps that donot
necesaiy apply tothe top ofthe pyramid. Sov: Ae Kaman ligt te Poo’ Word ean ee,
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Reverse Innovation
Product life-cycle theory suggests that international trade across countries follows a product's
life cycle. New products are invented and exported to developed markets; then, as the prod-
uct matures, production shits overseas, andthe export nation evenualy becomes the mpet
nation. Developed when Innovation came almost ently from developed markets, product
life-cycle theory sees emerging markets as imitators, full of poor people who understandably
want therich persons product ut why woulda rich person want a poo etsor's product?
\When companies take innovations developed in emerging markets and repackage them
for developed markets, the processisknownas reverse innovation Reverse innovation begins reverselnnovation the process
when a company focuses on the need to develop low-cost products and services for low- _of taking innovations devel-
income populations in emerging markets. Once the goods have been developed, they are sold Ped inemerging, Pees
elsehere—even to developed markets—often at sgicany lower pies tan Inthe coun- _{S8eknEthem or dee
tes where they were exginally developed Seling at low prices helps create new markets and
capture market share, which can help fund additional innovations.**
Normal innevation fr emerging markets typically starts as companies try to adapt thelr
(@ _eszstsned products nd sercesby emoving more expense premium atures incre
reduce the product's price. However, this approach snot a source of sutalnable advantage
forthe company. n fat, “deteaturing” products usualy makes them les valuable without
sufilnty reducing the price to bring them within reach ofthe poor. In other words, tis 182 CHAPTER 10 Poverty
microfinance a source of fina:
ial services for entrepreneurs
and small businesees lacking
access to banking and entrepre-
rreurial training
approach targets only the most affluent segments within an emerging market, if anyone.
Reverse innovation, on the other hand, creates new products from the ground up to meet the
specific needs of the poor. These products are unique because they have been developed,
tested, and marketed in emerging markets first and then upgraded for sale and deliveryin the
developed world.”
Jeffrey Immelt, CEO of General Electric (GE), noted that in countries ike India, only 10 per-
cent of the population could afford medical devices that had been developed in the United
States and sold elsewhere, That led GE to increase its understanding ofthe local context—with
transformational results. The company soon developed a portable, battery-operated electro-
cardiograph that sold for $500—that's $19,500 less than the bulky machine made for the U.S.
market. Given the dramatically diferent price but similar functionality, it made litle sense for
GE to continue selling its $20,000 machine. So the company made some adaptations, added
some premium features, and started selling the new portable, battery-operated machine in the
U.S. and other developed markets
“Local companies in these markets are really smart,” said innovation expert Vijay Govinda-
rajan."Ifyoudon’tdoit, they [Link] doit, notonly doyou ose themarketin hinaor
India, but they can bring those productshere’ To avoid being one-upped by emerging-market
challengers, many multinationals have established research and development centers in BOP
‘markets like India and China, withthe aim of producing innovative products and services not
‘only for these markets but for the whole worid.
The Poor as Entrepreneurial Producers
In addition to iting people out of poverty by making them better consumers, some businesses
see opportunities to make money and move people out of poverty by making them better
producers. Resource-constrained environments often make the poor entrepreneurial. Visiting
Mumbai, India, you may be surprised to see children gathering sand from the beach and taking,
into the road tobe dried by the heat from the wheels of passing cars. The children then return
tothe slums to package the dry sand into packets made from discarded newspapers. They sell
these sand packs to local women, who use them to scrub their dishes. This form of ingenuity
comes from the necessity to create something out f almost nothing,
However, turning such entrepreneurial spirit into a country-changing force requires
business training and financing for the would-be entrepreneurs. Microfinance is a source of
financial services for entrepreneurs and small businesses lacking access to banking and entre-
preneurial training. Global organizations such as Grameen Bank and Kiva Microfinance are tak-
ing banking to the poor. Traditionally, the poor have been considered “unbankable" because
they have itle to no collateral that a bank could take in the event ofa loan default. However,
leaders such as Nobel Prize winner Muhammad Yunus have worked to develop innovative
business models that provide loans tothe poor ina way that is both profitable and helpful, with
minimal risk to the lender. One such model consists of giving loans to lending groups, rather
than to individuals. This makes the entire group responsible, so members must help each other
pay the loan back i someone cannot make a payment, Because people lack physical resources
such as homes and cars, microfinanclers use social resources such as lending groups and peer
pressure to ensure the loans are repaid.
Connecting financial capital with entrepreneurship leads o increased business opportunities
forthe poor, Research indicates that by taking a chance on an entrepreneur, microfinanciers give
hope and ambition to those who before saw no way to improve their circumstances.” Moreover,
lending groups act both as collateral for the microfinance company and as social networks for
the entrepreneurs, giving them people to talk to for business advice, marketing, and partnering.”
Still microfinance Is not without Its problems. Just giving a loan to someone does not
‘always help that person get out of poverty. Because most businesses run by the truly poor
barely make a profit, more working capital does not necessarily Improve the results, Nor doesit
turn a mediocre business model into a great one, This explains why glving loans to poor entre-
preneurs generally does not lead to a radical transformation in their lives. While still beneficial,
microfinance does not provide a foolproof solution to poverty. Rather, it s one more piece In
the puzzle of the potential solutions to poverty. 104] Doing Well and Doing Good
LEARNING OBJECTIVE
Describe ways that businesses can make money while also doing good.
While microfinance has led to a host of new businesses in emerging markets, an equally
limpressive—and possibly more powerful~change has been happening n developed markets,
This change is in the core value proposition of many companies. Since the end of World War
11, most companies have focused on maximizing shareholder value—carning profits and then
delivering those profits back to shareholders of the company through stock dividends or stock
price increases, This goal has been reinforced by laws that see leaders of public companies as,
"agents" responsible for Increasing shareholders’ wealth. One result is an organizational hyper-
focus on taking actions that are most likely to increase shareholder value most quickly.
However, new legislation in many countries permits companies to have a dual focus of
doing well-by making money and increasing shareholder value—and doing good, by engaging
in activities that promote a positive social outcome such as alleviating poverty or reducing
‘energy consumption and waste. One critical step in bringing about this change wastihe passage
‘of laws in 32 countries (including the United States) that enable public companies to create
‘new type of legal entity called a benefit corporation (B-Corp). More than 950 B-Corps in
60 industries ae “working together toward one unifying goal: to redefine success in business."
8-corps differ from normal corporations in that they are explicitly organized with an additional
focus beyond making money. B-Corps are required to report both their profits and thelr social
goals, Login to WileyPLUS to view a video that introduces the concept of B-Corps.
For instance, JustNeem is a body-care products company that uses the neem tree in all
its products, JustNeem Is "committed to sharing the benefits of Neem with West Arica, They
purchase al oftheir Neem raw materia from Mauritania, West fica using existing Neem trees
and paying a fair market price for labor and goods. This helps create jobs and generates income
{or families living with few resources. Their goal isto keep your skin healthy while at the same
time improve the lives of people in West Africa." Log into WileyPLUS to access a video about
JustNeem, an example ofa B-Corp thathas a social and profit mission.
Patagonia is another B-corp, with a dual focus of making money and preserving wild
and beautiful places. The company donates time, services, and at least 1 percent of sales
to hundreds of grassroots environmental groups ll over the world that are working to help
make the planet healthier. The company's specific focus Is to “build the best product, cause
‘no unnecessary harm, [and] use business to inspire and implement solutions to the environ-
mental criss At least 75 percent of materials used in Patagonia’s products are “environmen-
tally preferred (organic, recycled, etc) and 30 percent of suppliers meet bluesign® standards for
environmentally advanced apparel manufacturing.”™
Finally, hale! a Tu CasalisaMexico-based B-Corp focused on soclal housing production, ts
g0alis to “deliver affordable homesto communitiesthrough the implementation ofinnovations in
construction, technology and finance” Echale's madel focuses on helping individuals build thelr
‘own homes, The company estimates a total housing deficit worldwide of more than 400 milion
homes. Many of the world’s poor build their own homes, but the process is dificult because of
high costs and limited financing. Echale's objective isto stop the "vicious cycle by correcting the
flaws inherent to the selt-bulld process, thus allowing it to deliver returns on economic, social,
and environmental levels.” To do so the company helps familes bull their own homes and in
the process secks to strengthen communities and enable familiesto create wealth.
In addition to the B-Corp, other new institutional forms are emerging that highlight and
‘even reward the good that companies are doing, encouraging more tofollow sult. For instance,
Standard and Poor's and the International Finance Corporation of the World Bank provide a
Breen index of businesses in emerging markets that allows investors to track the companies’
carbon use, The goal Isto increase the transparency of corporate environmental policies and
drive more than $1 billionin investments to those that are more carbon-effilent, Other "green"
Indexes enable Investors to find and invest in companies that are more efficient or produce
Doing Welland DolngGood 183
benefit corporation (8-Corp) 3
legal entity explicitly organized
with an adeitional focus beyond
making money
‘Breen Indox an index that allows
investors to track a company’s
carbonuse 184 CHAPTER 10 Poverty
cleaner energy, bulld more efficlent transportation, reduce water use, utlize greener building
technologles, or engage in sustalnable farming and forestry.
Individual companies are also creating indexes oftheir own. For instance, Timberland, the
‘outdoor shoe and apparel maker, has created a grecn index to measure all ts products on a
scale of 0 to 10 with 10 being the most resource-greedy). The scale is based on the product's
Impact on the climate, the chemicals used during manufacturing, and the resources used in
production. Timberland's objective Is not only to make the impact of its apparel manufacture
transparent but also to encourage others to join in.
This trend among global companies is increasing as they seek to reduce poverty and win
‘customers, Individuals can have a significant impact on global companies by rewarding those
who are actively engaged in efforts that seek to eliminate poverty. As companies, governments,
and individuals come together, Innovate, and create new opportunities, many people can move
‘out of poverty, giving some hope that poverty can be eliminated. The United Nations reports
that more than 1 billion people have moved out of extreme poverty, and the portion of under-
nourished people in developing countries has been cut in halfsince 19902*
Summary and Case
LEARNING OBJECTIVE 10.1 Identify the causes and
consequences of global poverty as they apply to interna-
tional business.
Poverty is the general scarcity or lack of material possessions or
‘money for consumption. Ifthe poor are boosted beyond a certain
‘threshold, they are able to become more productive and goin wealth,
Focusing on poor markets can provide unique opportunities for
‘companies to increase profitability and competitiveness, but there
are risks
LEARNING OBJECTIVE 10.2 Discuss traditional approaches
to alleviating global poverty.
‘The traditional response to poverty Is the distribution of forelgn
ald by government aid agencles, multlateral ald agencies, and
nonprofit organizations. Educational Institutions have recently
begun studying ald distribution and effectiveness. Foreign ald can
alleviate poverty, but, if not carefully implemented, it can also stile
Innovation, encourage corruption atthe government level, and cause
dependence,
LEARNING OBJECTIVE 10.3 Compare traditional
approaches and business solutions to poverty.
Businesses have traditionally played arolein alleviating poverty through
corporate socal responsibly (CSR) intiatves. But some companies
have gone further and see the poor as clients or employees rather than
tims. Ths strategy represents a base-of-the-pyramid (BOP) approach
to doing business, which relies on scaling up low-cost strategies and
leaning new ways to tackle old problems. This knowledge can not
‘only help in poor markets but also bring improved products back to
“developed marketsin a process known as reverse innovation.
LEARNING OBJECTIVE 10.4 Describe ways that bi
nesses can make money while also doing good.
8-Corporations present an alternative business madel that promotes 2
«val focus on profitability and social good. investors want not only to
fearna return on investment but also to make a difference Inthe world
Because the 8-Corp standards provide a framework for being bath
profitable and socially conscious, such companies are able to better
serve thelr communities and bea force fr change.
Case Study
Grameen Bank Considers Lending to the Non-Poor
Grameen Bank was founded In 1976 by economics professor
Muhammad Yunus n Bangladesh. This private bankmakes smallloans,
known as microcredit, tothe poorest of the poor without requiring
collateral. it was founded on the principe that loans interrupt poverty
better than charty because loans offer people the opportunity to
take the inltiative In business or agriculture, generating earings and
‘enabling them to pay off debt, The bank and Is founder were jolntly
‘awarded the Nobel Peace Prize In 2006,
® ‘Mter decades of operation, Grameen Bank faced a serious
