Session Title:
Pre-conditions, Limitations & New Models
Pre-conditions, Limitations & New Models
Date of talk or publication:
2005
2005
Speaker Name / Title:
Herman “Dutch” Leonard
Herman “Dutch” Leonard
Organization:
Harvard Business School
Harvard Business School
Description:
Many businesses are discovering that it can be profitable to re-engineer their products, packaging, distribution and delivery systems, and (perhaps most conspicuously) cost structures in order to be able to “do business with” lower-income people than they have previously served. Expansion of formal commerce with this hitherto largely ignored demographic group can indeed provide businesses with significant possibilities for growth in revenues and profits. It can be good for the businesses that engage in it because it spurs development of new lower-cost products or versions that can also be sold profitably to higher-income markets, because it provides a larger volume of sales over which to amortize development and other fixed costs, or simply because it provides an opportunity to sell more of a product at a profitable price.
But under what circumstances is the conduct of business transactions with the poor good for the poor themselves? Certainly not all transactions with low-income people are equally valuable. Even accepting the standard economic principle that voluntary transactions should be assumed to provide positive value to both parties, it is clear that some products and services are much more beneficial to the poor, and contribute a great deal more to the alleviation of poverty, than do others. If doing business with the poor is profitable for the business, then by immediate implication some part of the value created is being captured by the owners of the firm (presumably, though not necessarily, outside the low-income community).
A simple national and household income accounting framework is used to inquire about the conditions under which transactions with a lower-income community will be especially beneficial to the lower-income people themselves, and especially powerful in reducing poverty. Viewing a low-income community as an open economy trading with other, wealthier communities re-labels consumption items sold to a low-income community as “imports” that drain net earnings from the community. This is not necessarily bad on balance; if these products provide a significant enhancement to the quality of life of their users, the related income effects may be of secondary importance. But products made in the lower-income community and sold to outsiders are “exports,” with the associated stimulating income effects within the lower-income community. If the product or some part of it, or its distribution, or some other part of its cost structure could be designed so that it produced income within the community, its effects on poverty reduction would be much more powerful. The household and national income accounting framework is used to identify features of product manufacture, delivery, and value in consumption that are more likely to contribute to income growth and poverty reduction in lower-income communities.
Many businesses are discovering that it can be profitable to re-engineer their products, packaging, distribution and delivery systems, and (perhaps most conspicuously) cost structures in order to be able to “do business with” lower-income people than they have previously served. Expansion of formal commerce with this hitherto largely ignored demographic group can indeed provide businesses with significant possibilities for growth in revenues and profits. It can be good for the businesses that engage in it because it spurs development of new lower-cost products or versions that can also be sold profitably to higher-income markets, because it provides a larger volume of sales over which to amortize development and other fixed costs, or simply because it provides an opportunity to sell more of a product at a profitable price.
But under what circumstances is the conduct of business transactions with the poor good for the poor themselves? Certainly not all transactions with low-income people are equally valuable. Even accepting the standard economic principle that voluntary transactions should be assumed to provide positive value to both parties, it is clear that some products and services are much more beneficial to the poor, and contribute a great deal more to the alleviation of poverty, than do others. If doing business with the poor is profitable for the business, then by immediate implication some part of the value created is being captured by the owners of the firm (presumably, though not necessarily, outside the low-income community).
A simple national and household income accounting framework is used to inquire about the conditions under which transactions with a lower-income community will be especially beneficial to the lower-income people themselves, and especially powerful in reducing poverty. Viewing a low-income community as an open economy trading with other, wealthier communities re-labels consumption items sold to a low-income community as “imports” that drain net earnings from the community. This is not necessarily bad on balance; if these products provide a significant enhancement to the quality of life of their users, the related income effects may be of secondary importance. But products made in the lower-income community and sold to outsiders are “exports,” with the associated stimulating income effects within the lower-income community. If the product or some part of it, or its distribution, or some other part of its cost structure could be designed so that it produced income within the community, its effects on poverty reduction would be much more powerful. The household and national income accounting framework is used to identify features of product manufacture, delivery, and value in consumption that are more likely to contribute to income growth and poverty reduction in lower-income communities.
