Life at the bottom of the pyramid: Are environmental technologies the way out?
The phrase “bottom of the pyramid” was popularized by C.K. Prahalad of the University of Michigan in his book The Fortune at the Bottom of the Pyramid, in which he proposed that the world’s 4 billion poorest people represent a tremendous market opportunity. Rather than treating the poor as victims and aid recipients, businesses and governments should see them as creative entrepreneurs as well as demanding consumers, he argues.
This theory has received considerable attention, perhaps because the bottom of the pyramid (BOP) market is enormous when measured as a whole. A recent study from the World Resources Institute (WRI) and the International Finance Corporation (IFC) concluded that the 4 billion people with annual incomes below $3,000 in local purchasing power (less than US$2 a day in many countries) constitute a $5 trillion global consumer market.
While wealthier market segments are generally well served and competitive, BOP markets are often poorly served, inefficient and uncompetitive, concludes the report. The private sector is increasingly tackling those issues, and a recent survey from the non-profit Aspen Institute showed that even business schools are responding to this need, with BOP-geared courses growing exponentially.
As economies expand many of those poor will become middle class, and that transition will require environmental goods and services. Without access to clean water, adequate energy and a healthy environment, economic development and the resultant social mobility will no doubt fail to occur in many countries.
While these needs remain largely unmet, traditional approaches have focused on achieving goals through public investments, subsidies, or foreign aid. Certainly such efforts are noble and worthy, but unfortunately have been largely unsuccessful.
The reasons for these failures are widely debated, but one school of thought holds that providing entrepreneurial activities, catering to demands based on willingness to pay, and encouraging market participation will be a more effective development approach. New business models are seeking to engage the world’s poor in the global economy by providing affordable goods and services.
These new solutions may involve a combination of market-based and traditional aid strategies – microfinance, entrepreneurial education, public-private partnerships, and other hybrid business models. Many business sectors have experienced growth as a result of these innovative new strategies, but others have yet to find the recipe for success, and there remain tremendous unmet needs and unfulfilled opportunities.
Some sectors with the greatest need have stumbled: privatized water systems have struggled to provide clean water as well as business stability, and the energy sector has had limited success serving off-grid communities and providing clean cooking fuels.
Even in these sectors, however, there are encouraging entrepreneurial ventures: affordable home water treatment systems allow households to purify water themselves, low-cost solar powered LED (light-emitting diode) lighting systems can illuminate homes at night, and efficient, multi-fuel stoves can reduce fuel costs and improve indoor air quality.
Clean water is a particularly important market. The United Nations estimates more than 1 billion people worldwide do not have access to a treated water source, resulting in increased sickness, child mortality and reduced opportunities for economic growth. While privatization of municipal water supplies has met with mixed results, a number of unique projects to provide low-cost water treatment technologies have been received positively.
Some organizations provide training on constructing water filters, or provide in-house units for a small fee, along with education on proper use. In some cases, microfinance or and education allow local residents to become ‘water entrepreneurs’. Many organizations have found that once time and money has been invested in a filter, it is more likely to be used properly and maintained over time. Community water treatment systems often become self-sustaining and encourage further entrepreneurial activities.
Energy is another area of crucial importance, both environmentally and economically. Electricity is required in many areas to raise living standards, but increased consumption of fossil fuels threatens the health of communities as well as the global climate. Displacing solid fuels used for cooking with sustainable alternatives is also a way to improve indoor air quality and to reduce health risks.
The booming worldwide energy market has led some major international firms to focus on providing cleaner energy to the world’s poor. Shell aims to sell 20 million affordable stoves in India by 2010, working with non governmental organizations and the public sector to develop low polluting biomass fuels and cooking devices. BP is introducing a stove which can use biomass or natural gas, in combination with microfinance and small-scale entrepreneurship programs. Philips has designed a wood stove which reduces air pollutants by 90% over traditional fires.
Renewable energy systems for electricity are also on the rise, particularly in rural areas. Solar photovoltaic, solar thermal, wind, biomass and micro-hydro power are all being marketed and sold in developing countries, often with financing options. Solar powered Light Emitting Diodes (LEDs) and pedal-powered battery chargers are among other innovative technologies being offered. In total, WRI and IFC estimate the BOP household market for energy at $228 billion, representing the annual spending of 2.1 billion people in 34 countries.
If one doubts the desire or ability of the world’s poor to participate in development and pursue opportunities for improved quality of life, one need only read the inspiring story of Malawi youth William Kamkwamba, who without any formal education or training, designed and built a windmill to provide electricity to his house. Throughout developing countries, there are people eager to contribute to their society by engaging in entrepreneurial activities and by participating in the world market.
Some criticize corporate participation in BOP markets, arguing that it is inappropriate to seek profits from those in poverty. Certainly for any enterprise seeking to tap the BOP market, social and environmental concerns must be addressed. In some cases public involvement may be appropriate. But data indicates that the world’s poor suffer from higher costs, lower quality and often a complete lack of many essential services despite development efforts. Self-sustaining, targeted business models such as outlined above are one way of helping those in need.
The business community generally is awakening to the role it can play in addressing the social and environmental issues. Further development of innovative business models and improving low-cost environmental technologies could benefit the private sector while at the same time improving living conditions and providing economic opportunities for the world’s poor at the bottom of the pyramid.