The Base of the Pyramid: An Overview of the Concept

By Xavier Forneris.

Yesterday, I wrote on a competition co-sponsored by IFC and the G20 on doing business at the “Base of the Pyramid”, or BoP. Some of you may wonder what is the base of the pyramid and if my eclecticism has now led me into Egyptian archeology.

The Base of the Pyramid –some call it the “Bottom of the Pyramid” but I prefer the term ‘base’-, or BoP, is simply used to describe the very large segment of the population who lives (or survives) on a low income. If we organize the world’s population according to income levels, it takes a pyramid shape, with few people at the top of the pyramid (mostly living in developed economies) and a majority of people at its base (mostly living in developing economies), as represented here:

There is no consensus on how many people live at the BoP because economists, governments and development institutions define poverty in different ways. Depending on whether one places (rather arbitrarily) the poverty line below $1 a day, $2 a day, or $10 a day, the BoP will include more or fewer people.

A 2005 World Resources Institute (WRI)/International Finance Corporation (IFC) study estimated the BoP population at about 4 billion people by defining the BOP population segment as those with annual incomes up to $3000 per capita per year (2002 PPP).

But whether it’s 3, 4 or 5 billion people, everyone agrees that the BoP hosts a very large population, mostly residing in Africa, Asia, Eastern Europe and Latin America.

The term is not new. According to wikipedia the term was used by President Franklin Roosevelt in a 1932 radio address during which he stated:

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 term resurfaced at the end of the 1990s when two professors of management and corporate strategy, the late C.K. Prahalad (Michigan’s Ross School of Business) and Stuart Hart (then with the University of North Carolina’s Kenan-Flagler Business School) published what is viewed as the first paper on the BoP: ”Strategies for the Bottom of the Pyramid: Creating Sustainable Development” (1999). Prahalad (who is known for his HBR paper on “The Core Competence of the Corporation” co-authored with Gary Hamel) and Hart are often considered the “fathers” of the BoP theory and essentially wrote about the BoP as a new strategy for multinational companies.

Before them, many development economists focused on the same socio-economic segment, without using the term BoP. For instance, when Hernando de Soto, the famous Peruvian economist (not to be confused with the Spanish conquistador!), wrote about “dead capital”, i.e., the $10 trillion in informal assets that are in the hands of the world’s poor (e.g., land without legal property titles) but cannot be mobilized to borrow money from financial institutions, he was concerned with the lowest echelon of the global socio-economic pyramid. And when Muhammad Yunus pioneered micro-credit with Grameen Bank in Bangladesh around 1983, what was he trying to do if not expand access to credit for people at the base of the pyramid?

As a concept, the BoP has gained traction with both the business and development communities over the past decade.

Multinational corporations which for a long time have been focusing on the middle and the top of the pyramid, i.e., people who could afford buying their products and services, are seeking new markets in a context of global economic crisis and this quest led them to pay attention to the BoP. What is interesting is that they are not only looking at the BoP as a source of new customers but also as a source of supply, partnership, and innovation. This is part of the notion of “inclusive business” (IB) which I will address in a forthcoming post.

And development economists and institutions whose primary concern is poverty alleviation are also very interested in the BoP approach for they have been looking for ways to offer targeted support to those at the base of the pyramid, the ‘poorest of the poor’.

The BoP as a framework thus offers a unique opportunity for these two worlds (the private sector, on the one hand, and development institutions, on the other) to collaborate and search for solutions to their respective challenges.

When I was introduced to the BoP concept in 2009 during a seminar given to our MBA class at UNC by prof. Ted London (University of Michigan’s Ross Business School), I was struck by how he summarized the key challenge for he private sector and development instiutions in one sentence:

How can business motivations for growth and profits be aligned with the development’s community’s effort to alleviate poverty?

I let you reflect on this question. In addition to further explaining the concept of Inclusive Business, I’ll prepare a list of ‘must-reads’ for those of you who are interested in further exploring the concept of BoP.

Sources:

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Will Harvard Business School succeed in reinventing its legendary MBA?

 By Xavier Forneris

Harvard Business School (HBS), one of the most prestigious producers of MBA’s worldwide, has introduced a big change to his curriculum. As reported in The Economist (12/3/2011), the “Field Immersion Experiences for Leadership Development” whose acronym is, conveniently, “FIELD”, is supposed to become as important as the well-established case method that Harvard has pioneered and was adopted by most business schools. It applies to the new cohort of 900 full time MBA’s who started their two-year program at HBS last summer.It apparently consists of 3 components, all introduced in the first year (the second year part of the FIELD is still under development):

  1. Team-building exercises. Each student is expected to lead a team for a specific project, with the objective of learning how to collaborate, give and receive feedback. 
  2. Field work: each student would be sent to a firm, among 140 in 11 countries, to work there for a week, in a sort of “structured learning by doing”. HBS alumni would certainly be mobilized to host students in their respective companies and HBS has vast network of alumni, dispersed globally.
  3. Each student will receive $3,000 in seed money and have 8 weeks to launch a small business. A vote will then take place among all students to select the most successul or promising venture(s), that will receive more funding.

Looking at these three items, my first observation was “Why, they didn’t have team-building exercises yet”? In my own MBA program, at the University of North Carolina’s Kenan Flagler School of Business, team-building was one of the first things we did, at the outset of the program. I’m surprised that HBS MBA’s didn’t have that until now. In fairness, I don’t have enough detail about what each item really entails so it’s difficult to judge how innovative that is. Also, my MBA was for Executives and the article is about the full-time MBA program. But I would be surprised if full-time MBAs at UNC do not have team-building exercises already built in their curriculum for year 1.

The Economist raises a good point when it says, talking about item #2 “It is unclear how much the one-week working assignments will achieve”. I fully agree. The idea of being embedded in company, whether a domestic or overseas one, is a great concept, but shouldn’t they make this a longer experience? The Economist quotes a management guru, Pankaj Ghemawat:

Litterature suggests that an immersion experence needs to be at least 2-3 week experience and be backed up with time in the classroom”.

Clearly HBS must have access to this research. It often is one of the leading and most prolific sources of management literature. By the time you get to China or India, get over jet lag, orient yourself in the company, it’s basically time to come home…I’m slightly exaggerating here, and it’s true that a lot of ground work preparation can be done over the course of several weeks before the actual student’s departure. Yet, one week seems very short, and with the pressure of the MBA course requirements one can question how much time the HBS students will actually devote to this preparation.

As The Economist also points out, it remains to be seen how item # 3 (seed money for start-up) is different from the traditional business plan competition. I don’t have the details but the difference may be the actual start of a business. In a traditional business plan competition, one does not actually have to start a business before the competition; if you win, you can then use the prize money to implement your project. Here, it seems that students will be required to actually start a business, not just dream one on a business plan, and do so in a relatively short period (2 months). To me, it seems to be the most innovative aspect of the FIELD initiative, the one I would have enjoyed doing if it had been part of our curriculum. What is often lacking in many MBA programs is the practical application of what you are learning in class and also a focus on entrepreneurship. There are some MBA specializing in entrepreneurship but it is my impression that most MBA’s are really designed to teach you how to operate within, manage and grow an existing business rather than how to start your own.

Finally, The Economist article explains that the initiative was approved by faculty, in a vote that was apparently not very enthusiastic, and only for a 3 to 5-year period to “experiment”. Finally, it says that the experiment should add 10 to 15% to the cost of the course, borne by HBS, at least in the beginning.

 Source/Read more: The Economist, Dec. 3, 2011