Exploration of the Economics of Poverty
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Published: Tue, 13 Feb 2018
A significant body of the literature has been dedicated to examining wide spreading of poverty and its gradual explosion issues together with pioneering steps in research and practice towards poverty eradication have created an unprecedented outburst of studies about business literature for poverty eradication. The following section is a review of literature about how multinationals attend low-income markets where poverty occurs on a large scale. The review is carried out with a concern about poverty alleviation and some implications and appropriate frameworks for MNC’s executives to help to alleviate poverty while selling to the poor. From this viewpoint, the literature review is divided into three main sections: BOP inititiative, buyer behavior and marketing strategies. It examines some key elements of the BOP initiative – companies’ motivation; the BOP business model; the role of micro finance. With a number of successful stories acknowledged in the literature, the section also reviews how to adopt MNC’s marketing mix to attend the BOP profitably.
3.2. Part 1: Poverty in Business Perspectives
Billions of people living in the extreme poverty, who are in many cases denied access to proper services, energy, water, health, and above all the opportunities to improve their economic and social outlook, is a significant societal problem. Even though the high economic growth of large-population countries, such as China and India, has brought about many job opportunities and brought down the overall poverty level, it is still not sufficient to reach other targets in the Millennium Development Goals (MDGs) (World Bank, 2004). Along with the increasing concern of NGO’s and other non profit organization towards poverty alleviation, business perspectives have been gradually positioned as a useful tool in contributing to poverty reduction. Such interest has appeared to become much more worldwide through being catalyzed by pioneer approaches, both in practice and theory, which have awakened business attention to the problem of poverty.
Indeed, there is an abundance of academic literature on the. It appear to have been dissected from all imaginable angles Poverty in business perspectives has a diverse appearance, such as the vast majority of 4 billion people living on less than $1 or $2 a day (Prahalad and Hammond, 2002), poor producers (Karnani, 2007), gender (Thierry, 2007), self-employed poor people, micro entrepreneurs, micro franchisees (Gibson, 2007), employees, business owners, etc. Within these much attention is lately placed not on poverty as a whole but on its attributed and its causes.
3.2.1. Companies’ Motivation to Attend Low-Income Markets
Much of the debate about poverty alleviation has been provoked by suggestions that multinational corporations (MNC) with extensive financial resources are in the best position to lead the process of selling to the poor. The construction of a new image of poverty in business perspectives, for example, is much contributed by the pioneering idea of Prahalad and Hammond (2002) who focus on the large buying power of 4 billion people earning less than $ 2000 each per year at the lowest tier of the economic pyramid €“ ‘Bottom of the pyramid’. Prahalad and Hammond (2002) advise private companies to view poverty as a potential of serving an unexploited, multitrillion-dollar market and alleviating the level of global poverty while still earning a profit. By infusing the profit motive into value creation, the hope is that private companies will take the leading role in serving the BOP and, thus, the purpose of alleviating poverty will more likely succeed. From this follows/Keeping this in mind, the main two motivations for profit seeking companies to attend this market is:
The opportunity to covert BOP segment’s purchasing power into profits; and
The ability to bring prosperity to the poor, and thus alleviate poverty.
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22.214.171.124. Purchasing Power and Profitability
A key component surrounding literature is that even poor people could be profitable customers.
a) Creating New Business Opportunities
Such strong view rests on the idea that the potential growth for many multinational (MNC) and medium sized companies does not rest on the low-income market in the developing countries. Instead, its source is the immense size of potential market of $13 trillion at purchasing power parity (PPP) that the two-thirds of the world population with unmet needs are supposed to represent. Projections and demographic trends also indicate that by 2050, more than 85% of the world’s population will fall within this category. This portends an abysmal decline in effective demand. By empowering the poor, businesses naturally create new business opportunities by raising effective demand and consumption levels.
b) Corporate Social Responsibility (CRS)
since it will help to reduce poverty and more importanlty for the company, it will be crucial to their long-term competitiveness and success. One of the most interesting implications of BOP is the radical impact it can have on a company’s core business model. .. for instance, claims that organizations which set out to empower poor communities by providing basic education and skills acquisition, improving local human capital, protecting the environment, and developing the culture of accountability and transparency, are practicing some components of CSR which is essential for the long-term sustainability of any company. Indeed, many large corporations have announced CSR benefits that impacts on their profitability and claim it to be a key element of development.
Besides, adds that a comprehensive set of CSR policies, practices and programmes incorporated in company’s business strategy can increase productivity, contribute to competitiveness, improve staff recruitment and retention rates and create a more positive corporate image. All in all, concludes that
d) Government support & Political Capital – It is obvious that businesses that empower the poor strike a compelling partnership with the government. Most of the time, politicians take undeserved credit for attracting such private investments etc.
126.96.36.199. Poverty Alleviation and Prosperity to the Poor
a) Job Creation Businesses whose products and services address basic and common needs can enter the bottom of the pyramid market segments more effectively, and with a deeper social impact through partnerships with highly innovative community groups. They can scale their impact significantly by leveraging their expertise and experience in developing skills and engaging such community groups actively in delivering their products and services. This way, communities are better served, if an increasing number of people engaged in the business are people from their immediate neighborhoods, giving it a local flavor and a compelling sense of stake in the business.
… adds that expansion by multinationals into emerging markets creates new jobs–product-distribution networks and shops, for example–and income earned from those jobs ripples through local economies, creating more new jobs, a phenomenon that economists call the multiplier effect.
b) Training, Education and Skills enhancement €“
Profit-seeking companies can also play an important role in educating BOP consumers. Banerjee and Duflo (2007) point out, that BOP consumers can be entrepreneurial and do several different types of jobs. However, due to their lack the skills they can not get higher paying jobs. The provision of funding and training is a way multinationals can support the poor. Education is also necessary not just for getting a job, but to make more informed decisions in other areas, e.g. health education can improve food choices. Besides, education and information can also help BOP negotiate better rates and recognizing counterfeit goods.
c) Community Development: Through basic empowerment in terms of education and job creation, the community systematically grows out of the crutches of poverty. Beyond the occasional CSR embarked upon by businesses, empowered indigenes gradually but steadily develop their communities by training other relatives of theirs and embarking on micro projects that eventually add up to improving the lot of their communities.
Not only, the company makes more profit, and the people’s lifestyle changes. The poor also benefit because they have access to services such as banking and insurance that once were denied them, he says.
3.2.2. Challenges of Attending Low-income Markets
Nevertheless, there is a great branch of the literature about the nature, scope, and value of serving low-income segments (Karnani, 2007a; Martinez and Carbonell, 2007; Aiyar, 2006; Jaswal, 2007) that questions the ease with wich multinationals may enter the BOP and whether profits exist there at all. They argue that it is very unlikely that companies will be able to attend the BOP market profitably. Landrum (2007) points out that the costs of serving this segment can be very high. BOP customers are usually much dispersed geographically; they are very heterogeneous, which reduces the opportunities for obtaining significant economies of scale; and their individual transactions usually represent a low amount of money. In addition, consumers at the BOP are very price sensitive, which, again, makes profitability a difficult goal to achieve. For example, Karnani (2007a) posits that the poor may want the same products as the rich do but by virtue of being poor, they cannot afford them.
The differences between business realities and development imperatives are not easy to reconcile, states () Some recent case studies also suggests that unlimited business opportunities and poverty eradication through profits may set unrealistic expectations for business executives (McFalls,2007). Second, the traditional timelines for achieving social goods versus profits differ (Harjula, 2005). Businesses may use a five-year horizon as their benchmark for returns. In contrast, social goals like reducing smoking and other unhealthy lifestyle behaviors may take generations.
Thus, rather than viewing the poor primarily as consumers, this group suggest a focus on this segment as producers, i.e.potential entrepreneurs that can improve their economic situation by increasing their income level. Karnani suggests that raising income will alleviate their poverty, provide cost effective products to other consumers, and allow the formerly poor to consume more. Raising their incomes may require that they become producers with stable jobs and wages.
Focusing on poor people as self-employed poor people, micro entrepreneurs, Gibson (2007) also suggested that constructing and running micro franchising models that pair franchisors (MNCs or non-governmental organizations), micro franchisors (independent business people) with other poor people to expand the business and get other poor people involved in a self-employment venture can help empower poor people to raise their standard of living and gain a greater degree of financial stability.
It postulates that if companies take the correct steps and devote sufficient resources to satisfying the needs of the BOP, they can overcome barriers to consumption. However, companies must be willing to invest time, resources and training to insure that the producers create products with some barriers to entry and are asonable level of productivity. BOP projects must be integrated into key areas in operations where decisions on new products and markets are made and executed. For most companies, BOP therefore requires comprehensive organizational change and heavy involvement of key business areas responsible for new market creation- something that far exceeds what is required to implement most other sustainability activities.
Therefore, while there are potentially compelling reasons for widening the definition of market opportunities beyond consumer goods for low-income segments, the following part of literature review focuses on the BOP concept in its original form, i.e., as a business strategy aimed at selling profit-seeking products to low-income segments while simultaneously contributing to the resolution of significant societal problems in these regions.
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