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Volume 15, Number 6
June 2009

Laying a strong foundation at the base of the pyramid

The research of Srinivas Sridharan examines consumption and entrepreneurship among the global poor

Slumdog Millionaire, the Oscar-winning movie, is about a young man from the slums of Mumbai who wins the quiz show Who wants to be a millionaire. Although a fictional story, there are scenes that depict the remarkable entrepreneurial spirit of those who live in extreme poverty.

There is a growing belief among business academics and practitioners that market-based solutions might be a good way to raise those living at the bottom of the economic pyramid, some four billion people. In his research, Ivey Professor Srinivas Sridharan seeks to understand what he calls the “marketplace dimensions of life in poverty,” focusing on consumer behaviour and entrepreneurship.

Sridharan’s research applies to all impoverished settings, but his work is grounded in India, where he has developed a wide professional network. He describes the research methodologies used as “eclectic,” drawing findings from surveys, field work, qualitative studies, case study analysis, grass roots educational programs on marketplace literacy, and hands-on course work. He collaborates closely with the Subsistence Marketplaces Initiative at the University of Illinois (http://www.business.illinois.edu/subsistence). Sridharan’s work, published in prominent academic journals as well as notable books, has led to a number of findings that have important implications for businesses.

Although resource- poor, people living in poverty are rich in social networks. “These are the people you know – friends, neighbours, workers, and others who give you advice or credit,” says Sridharan. “These networks yield social capital, which has economic value.”

Social capital varies from individual to individual and from community to community. As a result, the perceived value of market-based products and services may also vary across communities. One implication for business, suggests Sridharan, is that pricing decisions be decentralized. By pricing a product in cooperation with local communities, a firm creates local buy-in, which can result in more of its products being sold.

Although economic theory argues that local input will drive prices down, Sridharan finds this is not the case in subsistence markets. “Very poor people don’t have time or appreciation for game theory,” he says. “If you sell a product they really value, they will likely agree with your price, or even reward you with a higher one.”

Sridharan also finds that life in poverty is entrepreneurial by its very nature. “This came as a surprise to me,” he says. “Poor people end up being highly entrepreneurial just to survive. They have a strong propensity to start their own businesses, often as a response to a setback in life.”

Another key finding is that consumption and entrepreneurship are inseparably entwined. Entrepreneurs in subsistence markets, unlike those in developed markets, tend to target customers exactly like themselves. As a result, these entrepreneurs understand their customers and are very customer-focused.

Because poor people tend to be highly enterprising, it’s important that businesses selling in these markets allow for entrepreneurial empowerment. For example, a manufacturer of jeans has made inroads in poor Indian communities by selling knockdown jean kits, which are put together locally by small businesses, who then sell them to local customers, often friends and neighbours.

Sridharan’s colleague Madhu Viswanathan runs an innovative course, Sustainable Product and Market Development for Subsistence Marketplaces, at the University of Illinois. MBA, engineering, and industrial design students understand the subsistence context through an international immersion experience and develop a product prototype and a business plan. From these projects, Sridharan and Viswanathan have gained a number of important insights.

First of all, says Sridharan, the process of successful product design must be more “iterative” than is the norm in developed markets. The getting of grassroots buy-in from poor communities takes a lot longer because of complex social relationships. “If you want to sell jean kits, it’s not just the tailor you have to co-opt, but also the financier of the tailor’s shed, his creditors, and if it is a rural setting perhaps village leaders who might prefer that their people work on the farm rather than make jeans.”

The process should also be more “immersive,” he says. An anecdote in the book ‘Africa Rising’ by University of Texas marketing professor Vijay Mahajan illustrates this well. The book discusses Procter and Gamble’s recent discovery that people in Africa were using Tide to wash clothes in old barrels rather than washing machines. “This is very different from the usage context for which Tide was formulated,” says Sridharan. “Product designers need to really immerse themselves in impoverished markets and develop an understanding of the unexpected ways in which products may be used.” He also finds that educational marketing materials are effective only when they are grounded in consumers’ everyday experiences and social contexts.

For business to successfully engage the enormous markets at the base of the pyramid, it needs to better understand the rich and complex relationships between consumer behaviour and entrepreneurship. “Living in poverty does not preclude opportunities that can produce win-win outcomes,” says Sridharan. “Although very low income imposes consumption constraints, it also produces an undying entrepreneurial spirit – a strong foundation for economic progress.”
 

Professor Sridharan's Homepage