Wednesday, 13 October 2010

Bottom of the pyramid - Wikipedia, the free encyclopedia

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In economics, the bottom of the pyramid is the largest, but poorest socio-economic group. In global terms, this is the 2.5 billion people who live on less than $2.50 per day[1]. The phrase “bottom of the pyramid” is used in particular by people developing new models of doing business that deliberately target that demographic, often using new technology. This field is also often referred to as the "Base of the Pyramid" or just the "BoP".

Several books and journal articles have been written on the potential market by members of business schools offering consultancy on the burgeoning market. They include The Fortune at the Bottom of the Pyramid by C.K. Prahalad of the University of Michigan, Capitalism at the Crossroads by Stuart L. Hart of Cornell University and the first empirical article, Reinventing strategies for emerging markets: Beyond the transnational model, by Ted London of the University of Michigan and Hart. London has also developed a working paper, commissioned by the United Nations Development Programme, that explores the contributions of the BoP literature to the poverty alleviation domain.

Contents

[edit] History

The phrase “bottom of the pyramid” was used by U.S. president Franklin D. Roosevelt in his April 7, 1932 radio address, The Forgotten Man, in which he said “These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power...that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”

The more current usage refers to the billions people living on less than $2 per day, as first defined in 1998 by Professors C.K. Prahalad and Stuart L. Hart. It was subsequently expanded upon by both in their books: The Fortune at the Bottom of the Pyramid by Prahalad in 2004[2] and Capitalism at the Crossroads by Hart in 2005[3].

Prahalad proposes that businesses, governments, and donor agencies stop thinking of the poor as victims and instead start seeing them as resilient and creative entrepreneurs as well as value-demanding consumers. He proposes that there are tremendous benefits to multi-national companies who choose to serve these markets in ways responsive to their needs. After all the poor of today are the middle-class of tomorrow. There are also poverty reducing benefits if multi-nationals work with civil society organizations and local governments to create new local business models.

However, there is some debate over Prahalad's proposition. Aneel Karnani, also of the Ross School at the University of Michigan, argued in a 2007 paper that there is no fortune at the bottom of the pyramid and that for most multinational companies the market is actually very small. Karnani also suggests that the only way to alleviate poverty is to focus on the poor as producers, rather than as a market of consumers. Prahalad later provided a multi-page response to Karnani's article. Additional critiques of Prahalad's proposition have been gathered in Advancing the 'Base of the Pyramid' Debate.

Meanwhile, Hart and his colleague Erik Simanis at Cornell University's Center for Sustainable Global Enterprise advance another approach, one that focuses on the poor as business partners and innovators, rather than just as potential producers or consumers. Hart and Simanis have led the development of the Base of the Pyramid Protocol, an entrepreneurial process that guides companies in developing business partnerships with income-poor communities in order to "co-create businesses and markets that mutually benefit the companies and the communities". This process has been adopted by the SC Johnson Company[4] and the Solae Company (a subsidiary of DuPont)[5].

Furthermore, Ted London at the William Davidson Institute at the University of Michigan focuses on the poverty alleviation implications of Base of the Pyramid ventures. He has identified the BoP Perspective as a unique market-based approach to poverty alleviation. London has also developed the BoP Impact Assessment Framework, a tool that provides a holistic and robust guide for BoP ventures to assess and enhance their poverty alleviation impacts. Companies, non-profits, and development agencies in Latin America, Asia, and Africa have implemented this framework.

Another recent focus of interest lies on the impact of successful BoP-approaches on sustainable development. Some of the most significant obstacles encountered when integrating sustainable development at the BoP are the limits to growth that restrict the extended development of the poor, especially when applying a resource-intensive Western way of living. Nevertheless, from a normative ethical perspective poverty alleviation is an integral part of sustainable development according to the notion of intragenerational justice (i.e. within the living generation) in the Brundtland Commission's definition. Ongoing research addresses these aspects and widens the BoP approach also by integrating it into corporate social responsibility thinking[6].

[edit] Examples

[edit] Micro-credit

As The Economist reported on August 11, 2005, one example of “bottom of the pyramid” is the growing microcredit market in South Asia, particularly in Bangladesh. With technology being steadily cheaper and more ubiquitous, it is becoming economically efficient to “lend tiny amounts of money to people with even tinier assets”. The microfinance network discussed in the article, Sa-Dhan, argues that the availability of credit to the poor “helps the poor but allow banks to increase their business”.

[edit] Agriculture

Another example of the bottom of the pyramid targeting at work is eChoupal in rural India. ITC manages an agricultural trading company. To eliminate the inefficiencies in its supply chain caused by corrupt middle men at local rural markets, it created a network of “e-Choupals” (choupal = village square) in rural communities. Through these e-Choupals, individual farmers have been able to check the market trading price of their produce and sell it directly to ITC. Both the individual farmers and ITC have increased their revenues, because the layers of ineffiency no longer have a role in the transaction between seller and buyer.

[edit] Market-specific products

One of many examples of products that are designed with needs of the very poor in mind is that of a shampoo that works best with cold water and is sold in small packets to reduce barriers of upfront costs for the poor. Such a product is marketed by Hindustan UNILever.

[edit] Venture capital

Whereas Prahalad originally focussed on corporations for developing BoP products and entering BoPmarkets, it is believed by many that SME might even play a bigger role. For LPs, this offers an opportunity to enter new venture capital markets. Although several social venture funds are already active, true VC funds are now emerging.

[edit] Business and community partnerships

As Fortune reported on November 15, 2006, since 2005 the SC Johnson Company has been partnering with youth groups in the Kibera slum of Nairobi, Kenya. Together SC Johnson and the groups have created a community-based waste management and cleaning company, providing home-cleaning, insect treatment, and waste disposal services for residents of the slum. SC Johnson's project was the first implementation of the Base of the Pyramid Protocol.

[edit] BoP conferences

There have been a number of academic and professional conferences focused on the BoP. A sample of these conferences is listed below:

[edit] Footnotes

  1. ^ http://www.globalissues.org/article/26/poverty-facts-and-stats
  2. ^ The Fortune at the Bottom of the Pyramid at Warton Publishing
  3. ^ Capitalism at the Crossroads at Warton Publishing
  4. ^ Center for Sustainable Enterprise - Research - Field Projects - Kenya
  5. ^ Center for Sustainable Enterprise - Research - Field Projects - India
  6. ^ Sustainability Challenges and Solutions at the Base of the Pyramid at Greenleaf Publishing or The Ethical Rational of Business for the Poor – Integrating the Concepts Bottom of the Pyramid, Sustainable Development, and Corporate Citizenship at SpringerLink
  7. ^ http://www.nextbillion.net/sfconference
  8. ^ http://www.nextbillion.net/brazil05conference
  9. ^ http://www.nextbillion.net/mexico05conference
  10. ^ http://www.wdi.umich.edu/NewsEvents/Conferences/BoPConf2006.aspx
  11. ^ http://www.bop2007.org/
  12. ^ http://www.hse.fi/EN/research/programs/globalization/events/bop/
  13. ^ http://www.imtfi.uci.edu/imtfi_bopworkshop
  14. ^ http://bopimpact.nl/

[edit] References

[edit] Further reading

[edit] External links

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