A stroll through the slums in the Philippine capital Manila or remote Indian villages hardly brings to mind terms like market opportunity or profitability. But it won't take long until tiny mom-and-pop-shops - crammed up to the roof with humble mass products like disposable razor blades or ubiquitous cell phones - emerge as a reminder that even in the midst of poverty, demand is all around. Huge demand.
According to the World Bank, 4 billion people live below the poverty line, a threshold determined by a complicated formula. Development experts may call them the "base of the population pyramid." But their combined purchase power is estimated to be top- notch: 5 trillion dollars.
Western multinational companies have only just begun to sniff out this immense market, searching for new customers. Indian and Latin American corporations are way ahead in discovering the poor as a profitable opportunity. Ideally, it works both ways. While companies make money selling to the poor, they can also create jobs for the have-nots by transforming them into for example brokers for micro-credits, sellers of cell phones or repair experts for mini-computers.
"The working poor are creative and resourceful economic agents with an appetite for change," says Lars Thunell, head of the International Finance Corporation (IFC) in Washington, the World Bank Group's investment arm. "Pioneering companies are finding ways to tap into this potential, integrating low-income producers and customers into their value chains," Thunell says in a recent article.
Under this perspective, profit no longer sounds like a dirty word but becomes a means to an end - economic and social development. Toshiya Masuoka, director of a newly created department at the IFC that focuses on so-called inclusive business models, notes a survey done by the World Bank some years ago that confirmed what many aid experts have said for years about the poor.
"Many of them say: `Look, I dont want charity or someone handing out money, what I really need is a job," Masuoka told the German Press Agency dpa in a recent interview. His programme tries to pave the way for the poor into the world of business. Masuoka has no doubt that the concept works. Compared to other efforts to fight poverty, it has "a higher success rate in providing development impact," he notes. The idea of pitching commerce to the poorest of poor was trailblazed by the internationally renowned management guru Coimbatore Krishnarao Prahalad, the Indian economics professor who died last year. His 2004 book "The Fortune at the Bottom of the Pyramid" outlined his thoughts.
Before his death, Prahalad described to a university online magazine, Knowledge@Wharton, how his work affected the world of business. "The impact has been interesting and profound in many ways - much more than one could have expected," he said.
Prahalad described how he followed up on the results of such an approach by talking to the heads of companies ranging from Microsoft to pharmaceutical giant GlaxoSmithKline to media behemoth Thomson Reuters. "Uniformly, everybody ... essentially says not only that it has had some impact, but that it has changed the way they approach innovation and ... new markets," Prahalad said.
Ideas and products range from cheap mobile phones that now connect people in developing countries across vast rural areas to affordable miniature laptops. Portable, battery-run EKG machines are now carried about to serve the needs of the rural poor in India.
Small pushcarts are now used to distribute Coca Cola in East Africa via well-organized networks. The soda giant's manual distribution center model in Ethiopia and Tanzania, co-financed by IFC, created 12,000 new jobs, says Masuoka. "This is not a part of any charity, this is part of their value chain," Masuoka says. "This is really having an employment impact."
The IFC expects a lot from inclusive business models, as the creation of Masuoka's department last summer shows. IFC's investment experts so far have poured 4 billion dollars into 150 companies. In 2010 alone, that sum was 900 million dollars in 50 projects.
"The trend is up," Masuoka affirms. The International Finance Corporation has its focus firmly on local companies. Many of them seem to have already seized the potential. "Local firms in emerging markets have learned that focusing on the base of the pyramid is smart business," the IFC says in a background paper. "Creating relationships, brand loyalty, and business innovations today will drive their competitiveness and profitability tomorrow."
Western companies might risk missing the boat, experts warn. "There is a huge opportunity when you focus on these markets for making fundamentally interesting innovation," professor Prahalad urged. He cited Netbooks - small laptops originally designed for India's market that have mushroomed globally, including in western markets - as a striking example of how it works. "The way I see it, in 5 or 10 years, we will see more and more of this trend called by economists `reverse innovation - meaning that emerging market innovations come back to the developed world," says IFC's Masuoka. "If you are a company in the developed world and think about the future, you should pay attention to this."