The Globe PHOTOGRAPHY: GETTY IMAGES C ross the invisible line into the base of the economic pyramid in emerging markets and you enter a world of pitfalls. If a company embarks on an initiative that focuses solely on com- mercial gain, civil society and governments are likely to oppose it intensely, as the in- ternational water utility company Aguas del Tunari discovered in Bolivia. If a com- pany tries to stay under the radar by keep- ing its base-of-the-pyramid operations small, profits are likely to be meager, as Procter & Gamble found out with its water- purifi cation product in Latin America and Asia. Even if you focus mainly on social impact and consider profi ts secondary, the base of the pyramid is a risky place: Proj- ects that fail to make money will eventually be relegated to companies��� corporate social responsibility departments, as Microsoft discovered. Our research has shown a way to tra- verse this diffi cult landscape. Indeed, de- cent profi ts can be made at the base of the pyramid if companies link their own fi nan- cial success with that of their constituen- cies. In other words, as companies make money, the communities in which they op- erate must benefi t by, for example, acquir- ing basic services or growing more affl uent. This leads to more income and consump- tion���and triggers more demand within the communities, which in turn allows the companies��� businesses to keep growing. A corollary of that principle is that from the very beginning, scale is critical: Tentative forays into the base of the pyramid do not yield success. Segmenting the Base of the Pyramid To succeed, you���ll need to link your commercial interests with your constituencies��� well-being. by V. Kasturi Rangan, Michael Chu, and Djordjija Petkoski June 2011 Harvard Business Review 113 HBR.ORG 1157 Jun11 Rangan.indd 113 1157 Jun11 Rangan.indd 113 4/27/11 4:37:34 PM 4/27/11 4:37:34 PM

Business models that call for creating private and public value while aiming for scale are gradually becoming more preva- lent. Hindustan Unilever has succeeded by training tens of thousands of sales and distribution agents. The Afghan mobile network operator Roshan has succeeded by doing the same for small retailers. The lo- cal communities��� growing economic health boosts profi ts and prosperity for everyone along the value chain. In studying dozens of companies over many years, we have found that those with skill at simultaneously building private and public value tend to have a nuanced understanding of their constituencies. The 4 billion people at the base of the pyramid��� whose output represents one-third of the world���s economy���are not a monolith. To emulate the most eff ective pioneers, com- panies must commit to learning what con- stitutes value for the various components of this population. The way to start is to divide the 4 billion people into three basic segments. Segmenting by Living Standard The simplest way to analyze the base of the pyramid is to recognize that the income level of $1 a day separates the extremely poor from everyone else, and that people above that demarcation can be roughly di- vided into those earning $1 to $3 a day and those earning $3 to $5 a day. It���s not the only way to categorize this tier of the pyramid, but it���s a useful one. Low income. The adults among the roughly 1.4 billion people who live on $3 to $5 a day typically have a couple of years of credit, they turn to moneylenders for loans at exorbitant rates and are vulnerable to ex- ploitation by middlemen. Unlikely to reach a $5-a-day standard of living, they nonethe- less strive to improve their circumstances. They need gainful employment and inex- pensive items for day-to-day living. Extreme poverty. The bottom 1 billion lack basic necessities: suffi cient food, clean water, and adequate shelter. War, civil strife, and natural disasters have displaced many from their homes. They are forced into transactions that are irregular even by the standards of informal markets. Some live in barter economies others are bonded laborers. Women often have to walk long distances along nonsecure pathways to fetch water. Poor health, lack of nutrition, fi nancial vulnerability, limited education, and a dearth of marketable skills shut them out of the organized economy. The precari- ousness of their daily existence precludes participation in the market as consumers or producers. The lucky ones receive aid from nonprofi t and international agencies or government relief programs. Segmenting by Value-Creation Role In addition to segmenting the people at the base of the pyramid by standard of living, businesses need to understand the roles those people can play in the value-creation relationship: as consumers, coproducers, or clients. Consumers. Companies can provide value to consumers by directly addressing their needs for services such as clean water, better sanitation, education, and credit. A SUBSISTENCE $1���$3 A DAY 1.6 BILLION PEOPLE LOW INCOME $3���$5 A DAY 1.4 BILLION PEOPLE EXTREME POVERTY BELOW $1 A DAY 1 BILLION PEOPLE secondary education and the skills needed to enter the job market. Many earn semi- regular incomes as construction workers, petty traders, drivers, or low-level staff in public and commercial establishments. They conduct their transactions in both for- mal and informal markets, and they tend to live near or among the people who occupy the next layer up in the pyramid���those with incomes of just over $5 a day. Families in the $3 to $5 segment often own such con- sumer goods as bicycles, televisions, and cell phones. As they strive for higher educa- tion and steadier, better-paying work, they need good housing and access to credit and to health care specialists. Many of them have a reasonable hope that they or their children will achieve a modestly higher liv- ing standard. Subsistence. The bulk of the roughly 1.6 billion people who live on $1 to $3 a day are poorly educated and low skilled. Al- though they typically have some income as day laborers or temporary workers, their earnings are not steady. Many need im- proved sanitation, health care, and educa- tion. They can typically aff ord one square meal a day, but the nutritional content is often substandard. If they live in slums or shantytowns, they might work as helpers or assistants in petty trade. In rural areas, they are likely to be temporary, migratory farmhands during sowing or harvesting seasons. As both consumers and produc- ers, they conduct transactions in informal markets, which often bustle with activity but are inefficient because they lack in- frastructure and supportive institutions. Without bank accounts or access to formal All four of these strategies can be applied through- out the base of the pyramid, but each has a sweet spot in one of the income segments. Which Value-Creation Strategies Work Best at the Base of the Pyramid? 1 2 3 4com-part-Formingmercial Providing ap- propriate and aff ordable products and services directly to consumers Sweet spot: LOW INCOME Enlisting indi- viduals or small businesses to provide e��� cient reach and coverage Sweet spot: SUBSISTENCE Engaging the community to coproduce value���for example, in the supply chain Sweet spot: SUBSISTENCE nerships with governments and NGOs Sweet spot: EXTREME POVERTY 114 Harvard Business Review June 2011 THE GLOBE 1157 Jun11 Rangan.indd 114 1157 Jun11 Rangan.indd 114 4/27/11 4:37:41 PM 4/27/11 4:37:41 PM