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A lot of people are talking lately about “The Long Tail,” a concept first put forward by Wired editor Chris Anderson.  (A lot of buzz was generated when his book of the same name was published earlier this month).  The basic idea, as described by Anderson, is that business is “increasingly shifting away from a focus on a relatively small number of 'hits' at the head of the demand curve and toward a huge number of niches in the tail.”  BOP enthusiasts – does this sound familiar?  

Well, you’re not the only ones who think so.  I ran across a couple of older posts on Anderson’s Long Tail blog in which he discusses the Base of the Pyramid hypothesis in the context of the long tail.  For instance, he observes that,

Both theories are based on the notion that if you break the economic and physical bottlenecks of distribution you can reach a huge, previously neglected market. They both recognize that millions of small sales can, in aggregate, add up to big profits. And they're both focused on ways to lower the cost of providing goods and services so that you can offer them at lower price point while still maintaining margins.

When he gets down to it, though, Anderson believes that the long tail and the BOP are fundamentally different – that the BOP is about increasing the size of the mass market to include low-income customers and producers, while the long tail is about serving increasingly nicheified markets:

So the Long Tail is made up of millions of niches. The [Base] of the Pyramid is made up of mass markets made [from] even more mass.  Both lower costs to reach more people, but they do so in different ways for different reasons. They're complimentary forces, but fundamentally different in their approach and aims.

I tend to agree with Anderson, more or less.  Of course, since his primary (sole?) source for BOP info is Prahalad, he sees the BOP theory as consumer-first, rather than as balanced between the BOP as consumer and the BOP as producer.  Despite this minor flaw, however, I think Anderson does a good job.  Check out the rest of his excellent blog for more on the long tail.

In the late 1800’s, Jacob Riis, a Danish immigrant in the United States, set out to document New York City’s teeming tenements on the Lower East Side.  His finished product, How the Other Half Lives, was an immediate success and is now recognized as a canonical work of American sociology.  By calling attention to the day-to-day activities of New York City’s forgotten underclass, Riis, along with a handful of other Progressive Era reformers like Upton Sinclair, catalyzed a political movement that would change the course of American history.

Here at Nextbillion, my colleagues are working on an equally ambitious project, which, in many ways, mirrors Riis’s 19th century work.  From what I have seen, their project, Tomorrow’s Markets, is a 21st century answer to the problems that Riis first identified in the 1890s.  

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How much momentum does the “base of the pyramid” hypothesis have behind it – and at what point does hope become hype? I recently read Untapped, the latest business/strategy book to discuss underserved markets and their profit potential, with a wary eye – would it live up to the hope, or fall victim to the hype?

As far as this book is concerned, hope wins out. Untapped: Creating Value in Underserved Markets stays away from hyperbole and isn’t overly reliant on anecdotes - if you want to explore the nuts and bolts of BOP business strategy, then Untapped is a must-read. What sets this book apart is the authors’ unwillingness to glaze over important details or jump to conclusions – Untapped is a serious examination of value creation in underserved markets.

I had the pleasure of interviewing two of Untapped’s four co-authors, John Weiser and Michele Kahane, who guided me through the book’s genesis and offered some insights into the secrets to BOP success. Our conversation is detailed below.

Rob Katz: How did this book come to fruition?

Michele Kahane: It all started in 1996 with the Ford Foundation’s Corporate Involvement Initiative, which brought the operational resources of companies to bear on community problems. At the time, it was pretty revolutionary for companies’ business units – not their CSR or philanthropy arms – to be “doing good.” We dug into the success stories coming out of the Initiative, which led us to our five success factors.

Rob Katz: The five success factors you outline in your book are:

1. mine local market information
2. when realities don't fit your model, try a new one
   
3. prepare to cope with cultural challenges
4. make a match with partners who can help you
5. improve the environment for doing business
   

Which of the five was the easiest to demonstrate with data and examples – and which was the most difficult to support?

John Weiser: It was clear throughout our research and writing that matching companies with effective partners was a precondition for success. It’s hard to make money by yourself in a new market – you’ve got to work with someone else. Two-thirds of our examples involved companies working with NGO partners, for instance.

From my perspective, the hardest one to write about was number three – change internal incentives and challenge cultural assumptions. What made it hard was that even though it was important, it’s an issue which is very sensitive. Many of the companies that we worked with didn’t want to have their challenges in this area, and how they addressed them, discussed in a book. They were worried that they would be seen to be racist, sexist, or “classist”. We had to work hard to come up with examples that we could actually write about.

Michele Kahane: I agree with John that the third factor was tough, but I also want to say that I think we succeeded in finding some solid proof. For example, financial service companies (banks, insurance companies) have for a long time assumed that low-income communities were bad credit risks, and many have been accused historically of redlining and discrimination. While they may not be comfortable admitting that their misperceptions of risks are related to cultural assumptions, examples like Fannie Mae provide ample evidence that low-income people can be good credit risks. The University of North Carolina studied this question very closely on behalf of Fannie Mae and the Ford Foundation, and found that there have been misperceptions of risk – although it is difficult to confirm the reason why bankers held these misperceptions.

Rob Katz: Critics of the BOP hypothesis often ask me how we can alleviate poverty by selling more stuff to the poor. How does Untapped address this?

Michele Kahane: The fact is that the poor, as consumers, do need critical goods and services – not serving them isn’t going to help them out of poverty somehow. This is especially true in the case of healthcare and financial services, where innovative approaches have enabled underserved communities to “consume” financial and healthcare services.

John Weiser: I agree with Michele, and I’ll add that we don’t focus exclusively on the BOP as consumers – a large part of Untapped is about low income individuals as entrepreneurs, producers, and workers. Marginalized markets, almost by definition, have yet to build wealth. We devote an entire chapter to workforce development, including the example of Manpower, which has everything to do with building incomes at the BOP – the BOP as a producer vs. the common BOP as consumer construction.

Rob Katz: You say that this book is about business strategies to serve untapped markets, yet many of your examples come out of the corporate philanthropy and CSR areas. How do you reconcile the seeming contradiction?

John Weiser: Not all of our examples are from the CSR or corporate philanthropy areas – some are, though, and that’s primarily because they are the most innovative examples of linking corporate citizenship to actual business. Just because something starts in the CSR department doesn’t mean it can’t become part of the core business. Companies that use corporate philanthropy as a research and development tool for new market development can succeed.

Rob Katz: Some companies are finding it hard to generate profits at the BOP – how can your five principles help them?

Michele Kahane: Businesses aren’t just “missing” profits – they have to develop them. That’s what CEMEX did from the consumer point of view – they went into a totally new market, understood it deeply, and worked hard to develop a profit center among poor people. Fair Trade is an example on the producer side, where the businesses went in and created value with farmers, and now both reap the benefits.

Rob Katz: So what are the next steps – when will the BOP hypothesis move to the next stage, and how will companies achieve broader success?

John Weiser: There is no silver bullet; companies need to work on a variety of fronts – internal and external – to make change happen. I see it happening in three steps. First, companies have to wake up to the opportunity that there’s a lot of money to be made here. Second, there needs to be a sectoral analysis of the opportunities. How are other people in my sector working in underserved markets, and where are my own opportunities? Third, there needs to be better financing for social innovation. The NGO partners that are so critical to these companies’ success are under funded. Governments that need to make regulatory changes to improve the business environment are also under funded. There’s some private sector money going in here, but not enough, and some of it is even flowing to the wrong places. Unless we can keep growing a vibrant social innovation sector, primarily the NGOs, there won’t be enough of or the right kind of partners for companies to learn and work with.

Michele Kahane: I’d challenge the idea that there has yet to be broad success. Some companies are serving underserved markets and don’t even realize it – they do it because it’s business. Their customers just happen to be this BOP constituency that we’re talking about. Rush Communications, Russell Simmons’ company, is a great example. He’s bringing telecom access to underserved markets and it’s not because these markets are underserved, it’s because there’s demand and Simmons sees that.

John Weiser: Operationalizing the BOP hypothesis requires sophisticated analysis and strategy, as well as multiple levers. You need a good business model, a decent environment in which to work, and you need good partners – without those three levers, no strategy can be successful in the long term.

Lost in the ongoing debate about low-cost computers and the digital divide is Argentina’s MiPC (My First Personal Computer) program. Global Voices’ David Sasaki nicely summarizes the ongoing debate over MiPC’s technology options (Intel and Microsoft exclusivity vs. AMD and Linux inclusion) and whether or not it’s succeeded from a business and development point of view:

MiPC...sold approximately 100,000 machines, far fewer than the great official numbers initially forecasted. What’s interesting is that, beyond the amount of PC’s sold, only around a 30 percent of them were purchased with State financing, providing evidence...that the role of the State is not absolutely definitive for the success of the plan.

What I like about Global Voices is how it brings non-US bloggers to the forefront – and this post is no different. For example, an Argentine blogger named Javier Salinas goes on record against Microsoft’s “Starter” software. BOP and digital divide readers will recall that Starter is one of Microsoft’s BOP products, “designed to offer an affordable and easy-to-use entry point to the Windows family of products that is tailored to local markets, in local languages, and is compatible with a wide range of Windows-based applications and devices.” So, how does it measure up to its users? Salinas complains:

Windows Starter really stinks. It’s so bad that it seems like a miracle that it even “functions.” It doesn’t just break your patience; there are also things that are impossible. A laptop with Starter edition fell into my hands and I had to make an ssh tunnel to connect to a remote MySQL database. Impossible. The tunnel was done, the remote connection was reachable, but the application wouldn’t access the database.

In Ecclesiastes, the son of David describes the resilience of earth and the futility of human action, explaining that, “One generation goeth, and another generation cometh; but the earth abideth for ever.” In the last two decades, ever since China began liberalizing its economy, a new generation of tech-savvy consumers has emerged, replacing the aging generation scarred by the excesses of the Cultural Revolution.  But as one generation replaces another here, it seems that the earth will not abideth for ever.  The air in China’s mushrooming cities, which are powered by coal-burning power plants, is so polluted that, on certain days, residents are advised to stay indoors lest they suffer severe health complications.  Now, according to the New Scientist, air pollution has become so bad that it is actually preventing condensation and exacerbating China’s current draught.  Realizing that its environmental situation is untenable, the Chinese government announced this January that it will end its addiction to coal—China burns more coal than the US, India, and Russia combined—by spending a whopping $200 billion on renewable energy sources over the next 15 years.  Such vast sums of money have captured the attention of industry giants, which are now scrambling to get a piece of the action.

In Sorbastow, a remote village in the mountainous region of Northwest China, Gulinar Sitka sits in front of the television, mesmerized by the peculiar people in faraway places that she watches on the screen.  Her new television is possible thanks to the government’s efforts to introduce solar panels into China’s most isolated regions.  According to National Public Radio, Sitka’s solar panel was designed and supplied by Shell Solar, a subsidiary of Royal Dutch Shell, which has provided 40,000 solar panels to ethnic minorities throughout China’s Xinjiang province.  The panels are subsidized by the Chinese government and sell for $60 each, about one tenth of a typical nomad’s income here.  They are expensive, but not unaffordable; Sitka’s neighbors recently received a panel as a wedding present from their parents.

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Mike Jarvis writes in PSD Blog today about the increasing demand for Fairtrade products as a sign of growing consumer trust in the quality and desirability of this relatively new business model. This is news that will not only give Coldplay's Chris Martin something to talk about in between writing songs informing us that the stars are, in fact, Yellow.... it will keep one Brazilian company ahead of the fashion curve.

AmazonLife sells material for bags and clothing that is made using Treetap, the company's name for a rubber they harvest from trees native to northern Brazil. Eco-friendly products are already gaining wide popularity with entrepreneurs like Josh Dorfman of Vivavi.com selling eco-chic home decor to Manhattan's elite. But AmazonLife takes it to the next level, providing high paying jobs to local farmers while ensuring that their products are sustainably produced. The company follows fairtrade policy by creating an equitable relationship with their rural suppliers and paying them a living wage. Their success shatters old myths that incorporating social and environmental goals into an enterprise's business plan will distract it from making solid profits - AmazonLife's products are already being used by some of Europe's major designers. I won't try to name any here, because I don't want to pretend I know anything about fashion- in fact I'm pretty sure I'm wearing mismatching socks as I write this. But when they say they supply to some of the industry players, I'll take their word for it. See for yourself, here.

In this Sunday’s Business section of the New York Times, Daniel Gross from Slate Magazine writes about the latest trend in international development: the $2 a day job. He begins his article discussing A to Z Manufacturing, a mosquito bed-netting business from Tanzania that pays its 2,000 female employees $1.80 a day. (At Nextbillion we have blogged about A to Z here and here.) Gross explains that many of the women who have low-paying jobs at this Tanzanian manufacturer earn almost twice as much as they did as street vendors and domestic employees.

By American standards, a $1.80 a day job would be outright exploitation. But in a country where 80% of the population earns less than $2 a day, A to Z’s wages actually place their workers in the top quartile of earners. In his article, Gross quotes the New York University economist Willliam Easterly, who explains somewhat rhetorically that, “To put it in the baldest possible terms, the more sweatshops the better. As you increase the number of factories demanding labor, wages will be driven up.”

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On this blog, Casas Bahias, Brazil’s largest retailer, which has garnered its financial success by extending affordable credit to low income consumers, has been championed as a successful BOP business model. Strictly in terms of the bottom line, I agree. However, there is reason to believe that some of its business practices may actually harm the BOP. Case in point: Before this year’s World Cup, Casas Bahia made an offer that low-income consumers could not refuse: Buy one $3600 Philips plasma screen television and get a second one for just $.40. Of course there was one condition: Brazil must win the World Cup.

The deluge of buying that followed the promotion was simply phenomenal; in just seven days the retailer sold 2,000 plasma televisions, a quantity that, according to Michael Klein, the Director of Financial Relations, Casas Bahia normally sells in seven months.

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In a New York Times article published in June, Business Joins African Effort to Cut Malaria, Sharon LaFraniere writes about the international mining company Billiton and its six year effort fighting malaria in Mozambique.  When more than one third of its staff fell ill with malaria and the mine’s operations came grinding to a halt, business executives realized that it was in their rational self-interest to put an end to the disease.  They teemed up with other businesses and three African governments and together, using better bed nets, pesticides, and drug treatment, they turned a malaria hot zone into an almost disease free environment.  Now, even after such success stories, inventors and health experts are looking for new tools to stamp out the disease.  One of the more interesting, and more controversial, tools is a malaria detecting wristwatch.  

According to an article published online at MSNBC, Gervan Lubbe, a South African inventor, has created a wristwatch which he believes will be vital for the continued fight against malaria.  Mr. Lubbe’s invention contains a tiny needle which pricks the skin 4 times a day and, using the drawn blood sample, tests for the malaria parasite.  If the parasite count tops 50, then an alarm is sounded and the user takes a medication which kills all traces of the disease.  

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In one of his most famous and eloquent passages, Karl Marx expresses awe at the transformative power of capitalism, writing that, “All that is solid melts into air, all that is sacred is profaned.”  In the last two decades, Wal-Mart, the embodiment of global capital, has almost single handedly transformed the world’s retail industry, and with it, the American cityscape.  As Wal-Mart and other corporations embrace economies of scale, those Mom-and-Pop stores on Main Street have, in Marx’s words, melted into air.  Now, Wal-Mart is poised to make another large social transformation, this time threatening to "desecrate," what for many, is the sacred ground of financial services.  In an article published in last week’s Wall Street Journal, Can Wal-Mart Cash In on Financial Services? Robin Sidel and Ann Zimmerman describe Wal-Mart’s foray into the world of check cashing, bill payment, money orders, and—our very favorite—remittances.

By employing the same strategy that is uses with retail items—Always Low Prices!—Wal-Mart has already made its presence felt in the world of financial services.  As the Journal notes, “Wal-Mart’s prices for the financial services are lower than many competitors.  Wal-Mart charges 46 cents for a money order, compared with as much as $1.30 at the post office.  The company also charges a maximum of $3 to cash a payroll check; check cashing firms usually charge 2% to 3% of the check’s face value.”  And according to Business Week, customers at Wal-Mart can transfer money to Mexico for just $9.46.  Some competitors charge two-times as much.

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