Session Title:
Measuring Success at the Base of the Pyramid
Measuring Success at the Base of the Pyramid
Date of talk or publication:
2005
2005
Speaker Name / Title:
Michael Chu
Michael Chu
Organization:
Harvard Business School
Harvard Business School
Description:
After thirty years of development, commercial microfinance – the provision of financial services to low-income populations on a financially-sustainable basis – has many lessons to offer to the study of business and the global poor. Recent years have seen growing evidence, both in the literature and in capital markets, of the ability of leading microfinance institutions, particularly in Latin America and Asia, to generate superior economic returns. Less clear is the contribution successful microfinance makes to the reduction of global poverty. The following aspects of the creation of economic and social value in microfinance yields insights applicable to all endeavors to address the needs of the poor on a commercial basis.
Economic value:
• Solely from a business perspective, low-income populations constitute a legitimate market segment and experience has demonstrated that microfinance is capable of generating profitability levels similar, and superior, to activities in the traditional business sector.
• The differences between the base of the socio-economic pyramid, or low-income segments, and the top of the pyramid are substantial, as are the barriers that separate one from the other. This results in the coexistence of two segments of markedly different market conditions (such as pricing). Understanding and taking those differences into account is essential to effectively serving the base of the pyramid.
• Commercial microfinance is a highly dynamic industry and the business models that drive growth, cost, and profitability have evolved continuously over time. The capacity to innovate is likely to continue to be a key success factor long after the introduction of the “killer concepts” (such as base of the pyramid) that open new and undeveloped markets.
• The key drivers of success in commercial microfinance are common and cross geographic boundaries.
Social value:
• To critically assess the creation of social value by businesses that serve the base of the pyramid relies on the elaboration of a conceptual framework. A first attempt at such a framework is used to view microfinance.
• From a social perspective, a key question is how effective is microfinance as a response to global poverty. The difficulty of measuring the impact of initiatives such as microfinance using traditional approaches argues for an approach designed to meet the requirements of decision-making by practitioners rather than the research objectives of social scientists.
Economic and social value:
• The introduction of business models in social development anticipates the role of profits in the reduction of global poverty. The author reflects on the advantages and disadvantages inherent in the microfinance business model and conditions under which superior financial returns are a positive force and those under which they are a negative force in the lives of the poor.
The author further reflects on the potential to extend the lessons of microfinance to other business opportunities for providing goods and services sought by the poor and why they are likely to come from protagonists other than today’s leading companies.
After thirty years of development, commercial microfinance – the provision of financial services to low-income populations on a financially-sustainable basis – has many lessons to offer to the study of business and the global poor. Recent years have seen growing evidence, both in the literature and in capital markets, of the ability of leading microfinance institutions, particularly in Latin America and Asia, to generate superior economic returns. Less clear is the contribution successful microfinance makes to the reduction of global poverty. The following aspects of the creation of economic and social value in microfinance yields insights applicable to all endeavors to address the needs of the poor on a commercial basis.
Economic value:
• Solely from a business perspective, low-income populations constitute a legitimate market segment and experience has demonstrated that microfinance is capable of generating profitability levels similar, and superior, to activities in the traditional business sector.
• The differences between the base of the socio-economic pyramid, or low-income segments, and the top of the pyramid are substantial, as are the barriers that separate one from the other. This results in the coexistence of two segments of markedly different market conditions (such as pricing). Understanding and taking those differences into account is essential to effectively serving the base of the pyramid.
• Commercial microfinance is a highly dynamic industry and the business models that drive growth, cost, and profitability have evolved continuously over time. The capacity to innovate is likely to continue to be a key success factor long after the introduction of the “killer concepts” (such as base of the pyramid) that open new and undeveloped markets.
• The key drivers of success in commercial microfinance are common and cross geographic boundaries.
Social value:
• To critically assess the creation of social value by businesses that serve the base of the pyramid relies on the elaboration of a conceptual framework. A first attempt at such a framework is used to view microfinance.
• From a social perspective, a key question is how effective is microfinance as a response to global poverty. The difficulty of measuring the impact of initiatives such as microfinance using traditional approaches argues for an approach designed to meet the requirements of decision-making by practitioners rather than the research objectives of social scientists.
Economic and social value:
• The introduction of business models in social development anticipates the role of profits in the reduction of global poverty. The author reflects on the advantages and disadvantages inherent in the microfinance business model and conditions under which superior financial returns are a positive force and those under which they are a negative force in the lives of the poor.
The author further reflects on the potential to extend the lessons of microfinance to other business opportunities for providing goods and services sought by the poor and why they are likely to come from protagonists other than today’s leading companies.