The Business Solution to Poverty:
Designing Products and Services for Three Billion Customers
By
Paul Polak and Mal Walwick
Review
By
John E. Wade II
This is a book that cries out to those of all ages who want meaning and purpose in their life. The goal is simple—bring out of poverty those 2.7 billion people who live on $2 or less per day. As the authors graphically and specifically point out—this is far from easy. But, think about it, what in life of great importance is easily accomplished?
The book itself points out some of its potential readers: entrepreneurs or investors seeking practical ways to profit from new enterprises in emerging markets, executives at major global corporations who want to address the potential customers at the bottom of the pyramid, development practitioners in government, nonprofits, the United Nations or other such organization, philanthropists and investors who want to challenge world poverty, and concerned world citizens everywhere.
I agree heartedly with one of the first statements by the authors, “…we believe that the greatest potential for reducing poverty in today’s global environment lies in the power of business.” These 2.7 billion people “…constitute an enormous untapped market.” Estimates are that these people have collective purchasing power of $5 trillion and that as they move out of poverty that figure will double and triple. These poverty stricken people will be tomorrow’s middle class; and the authors state categorically, “Approaching the problem from the top down has almost never worked…”
I have written below a long review with lots of direct quotes because I have gotten permission to do so and because the book is so well written and simply worded that paraphrasing didn’t seem necessary or appropriate. For those who want to get a summary of the book/book review, here are the book’s “Takeaways,” with a bit of commentary from me.
1. “We believe there is one sure way, and only one way, to foster genuine social change on a large scale among the world’s poverty-stricken billions—by harnessing the power of business to the task.” I fervently agree.
2. “Conventional approaches to end poverty have largely failed, and as Einstein taught us, to continue believing they’ll succeed would be madness.” I agree with their point that conventional approaches have largely failed. But I must say I disagree with Albert Einstein. Being persistent in repeating the same approach to a human problem oftentimes is the only way to eventually succeed.
3. “The most obvious, direct, and effective way to combat poverty is to help poor people earn more money.” This may sound simplistic, but earning money can lead to sustainability whereas money through government or charity leads to low self-esteem and is very uncertain in the long term.
4. “Although a handful of development initiatives have succeeded in improving the livelihoods of as many as 20 million poor people, none has yet reached significant scale.” This is a major and overriding point in this book.
5. “Poor people have to invest their own time and money to move out of poverty.” Giveaways don’t work in the long term, for sure.
6. “The Don’t Bother Trilogy: If you don’t understand the problem you’ve set out to solve from your customers’ perspective, if your product or service won’t dramatically increase their income, and if you can’t sell 100 million of them, don’t bother.” Scale is critical for global success.
7. “To meet the biggest challenge in development—scale—your enterprise must aim to transform the lives of 5 million customers during the first 5 years and 100 million during the first 10.” I like the idea of having definite large-scale goals.
8. “Zero-based design requires that you begin from scratch, without preconceptions or existing models to guide you, beginning with your goal in mind—a global enterprise that will attract at least 100 million customers and $10 billion in annual sales within a decade, operating in a way that’s calculated to transform the lives of all your customers.”
9. “In designing products that will open up new markets among the world’s poor, ruthless affordability is the single most important objective.” This is a huge challenge with a simple goal, but very hard to do. However, since we are in the Innovation Age, I believe that we can do it.
10. “Design for extreme affordability rarely comes easily. Making anything both workable and cheap may take years of careful, incremental adaptation and revision.”
11. “Designing a branding and marketing strategy and a last-mile supply chain that will put your product or service in the hands of millions of customers is three-quarters of the design challenge.” This is a big problem in rural areas in particular.
12. “To achieve true scale, pick a problem that challenges the lives of a billion people.” This avoids a focus that is too small to defeat world poverty.
13. “The product or service you plan to commercialize must be culturally independent.” This allows scale country to country. The economics of scale is one of the key factors that allowed Henry Ford to lower the price of automobiles to make them affordable for average people. Volume of production will be a key to allowing this bottom pyramid to be able to afford the products envisioned by this book.
14. “A brilliant rich-country executive—or even an upper-class executive from the Global South—may be totally out of his or her element working with poor people.” To major corporations that I hope will heed this call, this may be a crucial consideration.
15. “Manufacturing at scale is possible through distributed (decentralized) production facilities only if parts or modules are precisely machined to near-zero tolerances and available space and the sequence of steps on the assembly line has been optimized.” I encourage you to read the whole book, including the case studies which I did not review, to comprehend this “Takeaway.”
16. “One of the greatest impediments to achieving scale is the high cost of delivering products and services, not just the ‘last mile,’ but the last 500 feet.” This is particularly true in rural areas where so many of those living on $2 or less per day reside.
17. “Decentralization is one of the keys to building a large, transnational business capable of making headway against global poverty while turning a generous profit.” Remember that profits are necessary to create sustainability and scale.
18. “A business that practices stakeholder-centered management can maximize the chances that it will not just survive but flourish over the long term.” I agree completely.
19. “Striving for the lowest possible environmental impact is smart business.” I believe climate change is one of the top problems of our planet and I’m certainly not the only one who has that view.
20. “To thrive over the long term, a business must optimize its most valuable asset—its people and the intellectual property they produce—by ensuring that they are well paid, treated with respect, engaged in building their own careers, and given ample opportunities to find meaning and balance in their jobs.” All the people in and out of our businesses globally should be treated with dignity, respect, and kindness.
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Paul Polak, one of this book’s authors, wrote, Out of Poverty. In it he explained how a market-driven nonprofit organization he founded in 1981, “…had lifted 17 million rural people into the middle class by rigorously applying practices they developed in the field in India, Bangladesh, Nepal, Somalia, Zambia, Zimbabwe, and new agricultural marketing practices—were revolutionary because they were market-driven and designed for and with $1-a-day farmers, and, not incidentally because they worked.” There are approximately one billion people still living on $1 or less per day. The authors spell it quite plainly, “…our primary concern in this book: a desire to eradicate poverty.” I must explain that they are writing about dire poverty, $2 or less per day, not the comparative type of poverty which lingers in developed nations.
The authors explain, “…traditionally, capitalist approaches have exploited poor people and done irreparable harm to the environment. But what we advocate is different: a way to achieve results on a global scale and solve your fundraising challenge without victimizing poor people or despoiling the environment.” I’m not sure I would agree with the “exploit” statement, but I wholeheartedly agree with this book’s approach and premise of using business techniques to conquer world poverty.
The authors make a wonderful point—that this poverty involves “…a horrendous waste of human talent. How many scientists, physicians, teachers, business innovators, gifted artists, and brilliant community leaders might emerge from the bottom billions if they were freed of the shackles of poverty?” This poverty causes great environmental damage, which claims the most damage to the poor themselves as they “…over-farm already poor soils, cut down trees for fuel, use local fuels for cooking and heating, and compete for fast-shrinking supplies of water. Lack of education, high infant mortality, and the need for more hands to increase family income lead to overpopulation, which adds a multiplier effect to the existing pressure that humanity exerts on our dwindling resource base…[with] practically all the projected increase in the world’s population between now and 2050…among people who live on $2 a day or less in the world’s poorest countries.”
There is a huge market potential with the emerging economies of the Global South making up approximately $12 trillion or eighteen percent of the globe’s total economic output. According to the authors, “Global South” transcends geography and “…refers to the generally less-developed, low-income countries typically classified as ‘developing nations,’ ‘underdeveloped countries,’ and ‘emerging nations—despite the fact that most of India, for example, lies north of the Equator, and Australia and New Zealand, which are by no means underdeveloped, lie far to the south of the line.” Increasingly, global businesses are coming to realize that their opportunities in developed countries are limited and that it is a matter of corporate growth to seek to serve “…the New Frontier.” I thoroughly agree with the authors as they wrote, “In business, life is change. No well-managed corporation with global aspirations can afford to overlook new market opportunities.”
To understand the location of the world’s poorest people, the authors explain that most are concentrated in four areas across the globe: the Indian subcontinent (including India, Pakistan, Bangladesh, Nepal, Bhutan, and Sri Lanka)—900 million; Southeast Asia (Myanmar, Vietnam, Laos, Cambodia, Thailand, Malaysia, Indonesia, Papua New Guinea, and the Philippines)—700 million; Sub-Saharan Africa (the dozens of nations that lie south of the Arabic-speaking countries on the Mediterranean coast)—roughly 500 million; and China—perhaps 300 million. These four areas encompass about 2.4 billion with another 300 million spread around the world.
The authors sum up their premise, “The remedy we propose is to tap the mainstream capital markets to fund large-scale, global enterprises that address the basic needs of these 2.7 billion people: needs for clean water, renewable energy, affordable housing, accessible health care and education, and, above all, jobs.” Their approach is founding businesses with a ten year goal of achieving a customer base of 100 million with revenues of $10 billion or more per year profitably enough “…to attract both indigenous and international commercial investors while minimizing its environmental impact to the greatest extent possible.”
***
The authors have a definite route that they call zero-based design. The first element of this formula is to listen to the poor people, not through pity, but as customers. Think like Steve Jobs and create markets. Scale is an essential component of this plan. That is, “Design for scale from the very beginning as a central focus of the enterprise, with a view toward reaching not just thousands or even millions of poor people but hundreds of millions.”
“Ruthless affordability” requires designing products and processes “…not just 30 to 50 percent less than First World prices but often an order of magnitude less, or 90 percent.”
Another crucial key is “private capital.” It is important to reach generous margins of profit “…which will play a central role in expanding any venture—drawing from a pool of trillions of dollars in private capital rather than the millions typically available for philanthropic; or government-sponsored programs.” This is a vital point and the key that’s missing in other approaches.
The next element is “last-mile distribution.” Because so many of these potential customers are in isolated rural areas, it is not only critical to plan for the last mile, but often the “last 500 feet.”
The authors’ list “aspirational branding” as the next element. This one surprised me. We are used to sophisticated branding in the developed world. But the authors explain this is perhaps even more important with those in the bottom of the pyramid.
The final element is “Jugaad innovation.” The term “Jugaad” is rooted in Hindu and refers to a creative or innovative idea that provides a quick, alternative way of solving or fixing a problem. This involves working with what you have, and might even be called ingenuity. Extensive testing and development are crucial.
***
Both social goals and profitability are important, “For example, if an enterprise adopts the mission of selling crop insurance to large numbers of poor farmers at an attractive price, embeds that mission into its DNA, and never wavers from it, transformative social impact is inevitable. The real challenge is earning attractive profits while doing it.” The authors refer to stakeholder-centered management which means that the business addresses the needs of customers, employees, the local communities, the environment and the owners.
Part One
Only Business Can End Poverty
I agree quite fervently that only business can end poverty, not only in the Global South, which is the subject of this book, but that premise applies globally. The authors describe examples of poor rural people; reading this is a must if you intend to get a serious idea of their life. There are a few general characteristics—“The poor just get by,” very much in a survival mode, “The poor receive little news. Most of the information poor people receive comes by word of mouth from families, neighbors, and friends, and occasionally by radio, filtered through a village culture little influenced by national and global news.”
“The poor rarely travel.” They are isolated and are “…rarely aware of the new ideas and new opportunities that surface so frequently in today’s fast-changing world.” “The poor have few choices.” The modern world is out of reach. Instead “…one out of five of their infants die of preventable illness…They’re vulnerable to whatever else comes along in the village where they live, whether it’s inferior health care, substandard food, dangerous transportation, or illegal activities by the police or village officials.”
“The poor live with misfortune never far away.” Things from uncertain rainfall to children’s bouts of severe diarrhea surround the poor. It’s not just because income is limited, but “…because what income they receive is irregular and unpredictable.”
The book provides some serious wisdom about this poverty in the chapter, “What is Poverty?” “It’s shocking. After the world’s rich nations invested more than $2.3 trillion over the past 60 years to end global poverty, billions of our fellow humans remain desperately poor…Top-down development programs administered by governments, international agencies, foundations, or big NGO, [Nonprofit Government Organizations] rarely work because they’re so vulnerable to government corruption, bureaucratic inaction, the distance between the planners and the supposed beneficiaries, and both distrust and a lack of interest on the part of people who live at the grass roots.”
“Giveaways breed dependence and self-doubt instead of change. Philanthropy isn’t the answer, either. Despite the severely limited funds available, they’re squandered on a great diversity of uncoordinated, small-scale efforts to address every problem under the sun. We can’t donate our way out of poverty. Even Bill Gates, with $70 billion at his disposal, has referred to his wealth as a drop in the bucket in our $70 trillion global economy.”
It is estimated that 925 million people go to bed hungry at night globally. “Poor people as we have come to know them in the Global South typically experience un- or underemployment; encounter barriers to opportunity based on their gender, race, ethnicity, or religion; lack some or all of the basic human needs, including clean water, nutrition, health care, education, clothing, and shelter; and all too often, lose hope and lack even the most basic self-esteem.” Surely we can do something about this. The light at the end of the tunnel is, in my opinion, this book, and its application with determination and persistence.
***
The next chapter is, “What Can Government and Philanthropy Do?” Since World War II global GDP went from $4 trillion to $70 trillion in 2012. The authors explain that the main improvements have been in public health and primary education. And it is true that the percentage of the planet’s people living below subsistence level has decreased from about a half to thirty-eight percent. But in absolute numbers of desperately poor people, there are more today (2.7 billion), than sixty years ago (2.6 billion).
United Nations aid (about $5 billion in 2012), non-military U.S. aid and other aid has had significant effect in particular places, but “their net effect on the incidence of global poverty is nil.” The author’s Takeaway is “The most obvious, direct, and effective way to combat poverty is to enable poor people to earn more money.” “Building infrastructure—the World Bank’s longtime favorite mission—allows top government officials to award construction contracts to their families, friends, and supporters, often with kickbacks in return. Unfortunately, massive foreign aid is often diverted to armies and police forces to preserve the power and hidden bank accounts of ruling elites, to the disadvantage of the country’s poor people.”
There are more than five million citizen-based organizations globally which attempt to fight poverty. While these efforts are earnest, admirable and effective, these organizations “…tend to be scattershot and are almost always on a small scale. Scale is the overarching issue for the citizen sector.” From time to time these groups develop effective ideas such as one which CARE introduced, a micro savings and loan program “…based on savings rather than debt and is managed by members of the community rather than professionals…These ‘village savings and loans’…now serve some six million people in 58 countries.”
Worldwide, microcredit is now considered “…one of the most favored methods undertaken to fight poverty.” However, it appears that many in the “$70 billion microcredit industry, practice fraud, demand usurious interest rates (sometimes even greater than those of moneylenders), and in at least two celebrated cases have made huge fortunes for their investors at the expense of their clients. In some countries, the results have been tragic: poor people overloaded with debt and nothing to show for it—and even, in one extreme case in India, a wave of dozens of suicides brought on by aggressive debt collectors.” Even in Bangladesh—“home of the microcredit movement and the country where it has expanded the most”—the country has gone down on a UN measure of poverty from 136th in 1991 to 146th twenty years later.
But not all is bad news. In health care, “The eradication of smallpox and the near elimination of polio, plus recent efforts to combat the spread of HIV/AIDS, have saved millions of lives and captured the public imagination.” The authors laud the efforts of the Bill & Melinda Gates Foundation in donating major sums of money to improve health care, “But so much more needs to be done!”
Education has been largely a success with literacy increasing significantly “…in recent decades in every region of the world.” UNESCO estimates that world literacy went from about fifty-six percent in 1950 to eighty-two percent in 2000. The authors explain, however, that schools in the Global South pay their teachers a pittance and have high teacher absenteeism. These children do learn how to read and write in some fashion though. The book encourages further efforts by governments in education, as there has been success previously, but states that better teacher salaries in the Global South would be helpful.
Other possible government advancements could be “…upgrading the legal system, expanding physical infrastructure, and improving business conditions. In practice, making police and the courts accountable would be a big step forward. Building more all-weather roads would help a lot, too. And the thickets of often obscure laws and regulations that make establishing a business a months-long nightmare in many countries should be streamlined.” Continuing, “in countries where they’re permitted (or can function under wraps where they’re not), citizen watchdog organizations can make a big difference by publicizing corruption, systematic uses of violence to stifle dissent, and other sins of government. International organizations such as Human Rights Watch, Transparency International, and Amnesty International are excellent examples on the global scale.”
***
The chapter, “Why Business is Best Equipped to Fight Global Poverty,” starts with a statement that I heartedly endorse, “It’s not just that traditional methods have failed. Businesses possess unique characteristics that are ideally suited to the task of innovating new approaches—and taking them to scale.” The authors explain—and I certainly agree with them—that private businesses encompass three “…overarching and undeniable advantages in addressing the challenge of poverty:
· Profitable businesses attract substantial capital.
· Successful businesses hire lots of people.
· Successful businesses are capable of reaching scale.”
The authors write—and again I fervently agree with them—that there are other factors that enhance the economic power of business as follows:
· “Businesses, especially well-established companies, often can marshal all the necessary specialized expertise in design, financial management, marketing, and other fields that are usually lacking or inadequate in either the public sector or the citizen sector.
· Private businesses tend to be less susceptible to political pressure than governments, multilateral institutions, and most citizen-sector organizations—especially in countries with weak governments.
· Prosperous enterprises stimulate economic growth in the communities where they do business.”
The World Bank estimate of global GDP for 2013 is $75 trillion. Approximately $1 trillion more is invested in the Global South as investors are “…eager to find opportunities for lucrative new investments there.” However, there are dire challenges “…such as loss of hope, caste or class barriers, alcoholism, drug addiction, adherence to self-defeating religious beliefs, the subjugation of women, the lasting effects of childhood malnutrition, and severe physical or mental limitations—not to mention usurious moneylenders and landlords or corrupt and oppressive governments.” The authors spell it out, “While improved education, health, political power, infrastructure, and nutrition all play important roles, we have no doubt that improved livelihood provides the most direct path to the end of poverty.” I fervently agree with this summation.
The authors declare that, “Once you start the process of moving families out of poverty, their neighbors take notice and begin, quickly or slowly, to imitate them.” The authors have decades of experience in the Global South and believe that “…the problems of poverty can be addressed on a large scale only through a new generation of multinational companies built to provide products and services expressly designed to meet the needs of the poor.” Each such company will be able to do the following:
· Transform the livelihoods of 100 million $2-a-day customers within 10 years
· Generate annual revenues of at least $10 billion
· Earn sufficient profits to attract investment by international commercial finance
Part Two
Zero-Based Design and the Bottom Billions
Recommendations given to launch a business that can transform the lives of 100 million poor people include the following:
· “Don’t take a course.
· Don’t get a MBA.
· Don’t read a book (except this one, of course.)”
First go to the people you want to help and “listen.” “The simple truth is you can’t talk people out of poverty, and donating stuff to them usually won’t make a lasting difference either.” I agree. The “Takeaway” is, “Poor people have to invest their own time and money to move out of poverty.”
Following is the trilogy of “Don’t Bother”:
· “If you haven’t talked to at least 100 customers in some depth before you start, don’t bother.”
· “If your product or service won’t earn or save three times the customer’s investment in the first year, don’t bother.”
· “If you can’t sell 100 million of your product or service, don’t bother.”
Another “Takeaway” was “To meet the biggest challenge in development—scale—your enterprise must aim to transform the lives of 5 million customers within 5 years and 100 million during the first 10.” It is important to design for a generous profit, and one of the best ways to measure profit is by “free cash flow (the amount of money your business has available after paying for personnel, overhead, interest on loans, and any necessary investments in developing new products, purchasing new assets, or opening new markets).” The business must pursue “ruthless affordability” for the poor people who require dramatically inexpensive materials, operations and overhead. Whether the customers are rural or urban, it is critical to arrive at “…last-mile (more accurately, last 500 feet) distribution.” Branding is necessary.
The book makes an optimistic statement worth repeating, and one which I concur, “…globalization has increased intercultural awareness, mobile phones have gone global with astonishing speed, concern has grown about global poverty, corporations are adopting socially responsible practices and policies (or pretending to do so), and young people leaving colleges and graduate schools have been demanding jobs that offer the opportunity for meaningful work.” As for myself, I can’t be classified as a young person anymore, but I have come to the definite conclusion that my calling is calling toward Heaven on Earth. This book review and my recommendation of the book itself are part of this ultimate quest.
One of three examples of ruthless design were outcomes of Stanford’s Entrepreneurial Design for Extreme Affordability. It is “…the Fertiloo, an affordable compost latrine that provides rural families with access to improved sanitation while offering a safe and easy way to contain their human waste and use it as fertilizer for crops. Designed to cost less than $100, the Fertiloo team received a grant from the Bill and Melinda Gates Foundation and is refining its design in the field in Haiti in collaboration with a local partner.”
There is a statement in the book that should be a red flag to major global corporations, “There’s already considerable evidence that major corporations will remain competitive in the global marketplace only by creating vibrant new markets serving $2-a-day customers at scale in addition to serving more affluent customers.” Another such bold comment is, “The corporations of the future will need to serve the bottom-of-the-pyramid customers as well as the rich to stay in business.”
According to the book, “…there are a billion people who never connect to electricity…Another billion people don’t have access to safe drinking water.” They believe there are three reasons that the needs of the bottom pyramid are not being met by existing businesses:
· “They don’t see the profit in it.
· They don’t have a clue how to design the radically affordable products and services that poor people need.
· They don’t know how to design and operate profitable last-mile supply chains.”
As an example of how corporations can move in the direction of solving these problems and addressing the opportunities, the authors point to Walmart and how they have prospered at higher levels of wealth with small margins and large volume. Incidentally, just a day ago I read an Investor’s Business Dailyarticle (December 24, 2013) entitled, “Africa’s Fast Growth Attracts Investment.” One of the interesting investments highlighted in that article was when “…Wal-Mart became one of the first big U.S investors when it paid $2.4 billion in 2011 to buy South African retailer Massmart.” The book states that Wal-Mart and others are not yet reaching that bottom pyramid. But I think they will; and they have to start by entering these Global South countries.
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In “The Ruthless Pursuit of Affordability,” the authors sum up a lot, “Products that are attractive to poor customers must indeed be affordable, but they also need to work well and look good. Poor customers are, if anything, more aspirational than the rich. And their demands and need for value are greater, too. When money is scarce, it’s got to be used as efficiently as possible.” An example of such a product is the treadle pump, “…widely regarded in development circles as one of the most successful income-generating innovations introduced to poor farmers around the world.” It “…is operated by an individual using StairMaster-like pedals to draw water from as deep as 20 to 25 feet underground or from lakes or streams….It’s estimated that a total of three million pumps have been put to work on small plots of land, primarily in South Asia and sub-Saharan Africa. These three million treadle pumps are now generating new net income of more than $300 million per year for one-acre farmers who live on less than a $1 a day—not a trivial sum to any but the very largest businesses on Earth.”
Step by step the authors explain how to go about designing such products; I encourage anyone with a practical interest to explore this chapter completely, as well as the rest of the book. The path to prosperity in Heaven on Earth depends on such actions.
The chapter, “Zero-Based Design in Practice: Low-Cost Drip Irrigation” is a case study of how drip irrigation for small acreage was developed. I will not retell the case study—I urge you to read the entire book; but the chapter has this “Takeaway,” “Design for extreme affordability rarely comes easily. Making anything both workable and cheap may take years of careful, incremental adaptation and revision. But it can be quite rewarding. During the past two decades, the area under drip irrigation and other micro-irrigation methods has risen at least six-fold globally, from 4 million acres (1.6 million hectares) to more than 25 million. Gains in China and India have been the most dramatic.”
The “Design for the Market” chapter explains how hard it is to solve the technical problems and has this “Takeaway,” “Designing a branding and marketing strategy and a last-mile supply chain that will put your product or service in the hands of millions of customers is three-quarters of the design challenge.” This chapter explains how the treadle pump was marketed successfully. I encourage all to read the whole of it. “Every key player in the distribution chain has to make an attractive profit…[Paul Polak, co-author] doesn’t work with any technologies unless the customer can get three times his money back in the first year by using the technology.”
The “Zero-Based Design in Practice: A Cautionary Tale” chapter gives a case study of a well-intentioned attempt of a MIT-conceived solution to the use of wood charcoal in places like Haiti. Such use “…results in devastating soil erosion—a major contributor to the hundreds of lives lost every year due to mudslides and flooding—and can also lead to…degradation of aquatic life along the coasts of Haiti…[and]causes respiratory problems in children and increases the risk of cancer.” I will leave this case study to you to decipher, only to say that “The fatal flaw in the project was that no one on the field team understood marketing.” The author gives a final assessment of what might have been done and I agree with them that succeeding in these ventures requires, “…a whole lot of work.” But if you do it right—over time—you can become a pathfinder toward Heaven on Earth.
