By Adva Saldinger
11 November 2013 in Devex Impact
The challenges of scaling successful development interventions is often discussed and bemoaned.
In their new book “The Business Solution to Poverty,” Paul Polak and Mal Warwick argue that a solution to the challenges of scale is using market-based approaches and building businesses that from the outset are designed to scale and reach up to 100 million $2-a-day customers.
Polak, who previously wrote “Out of Poverty,” described 25 years of his work addressing poverty through market-based solutions as the founder of iDE. He partnered with Mal Warwick to write this book as a way to take the distillations of his experiences to the next level and address the challenge of scale.
The authors detail how to design a whole new set of businesses designed to sell products and transform the lives of 100 million $2-a-day customers in 10 years, and earn enough revenue to attract significant commercial investors. Polak himself has created four companies at various stages of early development, which exemplify the model the book puts forward.
“For me, the motivation is not just to create companies but to transform both poverty and business,” Polak told Devex Impact. “I think business needs to find new virgin markets and this is a massive virgin market opportunity. And poverty needs to reach scale and can only get there by using big business approaches.”
Here are a few excerpts from our interview with both authors:
What will it take for the ideas that you write about in the book and the type of businesses you recommend to actually come to fruition or be accepted in the mainstream?
Warwick: It will take proof of concept. It will require that one or more of the companies that Paul is now establishing will achieve scale and significant impact and prove to people with the resources — whether they are entrepreneurs, investors or executives in existing companies — that it is possible indeed to take this approach.
Polak: It will happen when we make a lot of money. At this point I’m targeting the companies to make a lot of money because that is what will attract the investment capital, and let’s face it, big business operates through profits. I think these are massive virgin markets waiting to be developed. The risk is higher than the average investment. The return, if successful, should be higher. When we get to a certain point in scale and demonstrate growth in profitability other companies will jump in.
Can market-based solutions and businesses really reach the poorest of the poor, including those living on less than $1 a day and struggling to provide basic needs like food and housing? If so, how, and has it been proven?
Warwick: Yes. It has been proven on a reasonably large scale through the work of iDE over 25 years. A market-based approach that involved treating people not as recipients of charity but as customers and selling them products that enabled them to increase their incomes. This is all based on the realization that to lift people out of poverty, to enable people to lift themselves out of poverty, requires an understanding that it is about money. If they don’t have the resources to pay for the things that they need in their lives, then no matter how healthy they might be, no matter how well educated, they’re not going to be able to rise to the middle class. When you give people jobs or you sell them products that enable them to dramatically increase their incomes from farms or that allow them to save money on such things such as bogus remedies for constant health care problems, then you are helping them to rise out of poverty.
Polak: All of iDE’s work was with people who lived on less than $1 a day, focusing on 1-acre farmers, who eked out a living. It’s a totally false myth that those people don’t have money to invest. They are actually enterprising. These families have customs that require them to save some money — the dowry practice is very common [in some areas]. So they set aside that money but they’re not going to spend it on something that is at all risky. They’ll just sit and watch for two years while somebody else uses treadle pumps and if they consistently make money then they might finally invest in one. Because they can’t afford to make a mistake.
You use iDE’s work as an example of success, but those efforts reached 20 million over the course of 25 years, and in the book, you write that companies should reach 100 million in 10 years. Why hasn’t iDE’s work, or other similar interventions, reached the type of scale you argue for in the book?
Polak: That is why I left iDE. I didn’t want to lead iDE away from its mission. Its mission is to enable prosperity for dollar-a-day, one-acre farmers. But iDE is a nonprofit using grant funding and I think there are limitations in that. So if we’re using market-based approaches, the next step is to use them for commercial approaches. There isn’t a limit to scale. There are several limitations to scale in the iDE approach, one is you get grant money, there’s only so much grant money and there’s a lot of competition for it. So what’s the amount of development funds available? About $150 billion? The market in business is $75 trillion, so if you can crack the profit conundrum you’ve got access to a much bigger source of finance. And scale is demonstrated every day by big business. Procter & Gamble has several billion-dollar brands. They don’t start unless they can [scale], for most of their brands their target is a billion dollars at least.
Do you think that existing businesses can adapt and create these new business models? Or, do you think the companies will be new endeavors?
Warwick: Paul’s emphasis is on existing large companies. He’s open to engineering a revolution in big business and bring them into and their resources into, the marketplace. I suspect, a little differently, that the largest share of response to this model will come from entrepreneurs. Whether they call themselves or think of themselves as social entrepreneurs, they are in any case, people with an inherent understanding, an intrinsic understanding, of business and business principles and they will take the approach along the lines that we outline understanding how bold a vision it is and how high the risk is. The big companies may shy away from anything that smacks of big risk.
Polak: My view is that it is applicable to big business currently but not salable. I’ve got several people from big business who are helping me. I always start with an open mind, so I started seeing if I could get big business into this field and I also started companies from scratch. I’ve been partially successful in getting tremendous interest from big business.
Warwick: But none of those companies is investing in a business of the sort that we write about in the business solution to poverty.
You propose that these businesses start with the target of reaching 100 million people. Why 100 million, which is such a large number?
Polak: Because you start from the size of the problem. In the book we talk about zero-based design. If you start from scratch, you don’t start by saying well we’ve got so many people in a village here’s what we can do in a village. You say, what’s the problem? Well, there are more than a billion people who don’t have access to clean drinking water. So how do you make a meaningful dent in that? One hundred million is only 10 percent, but if you can do 100 million, it can stimulate maybe two or three other companies. So 100 million doesn’t provide the solution to a billion but it provides a model that can scale.
Warwick: We believe, and we are hardly alone in this, that the biggest hurdle in development is scale. There are hundreds, perhaps 1,000s of brilliant projects underway around the world, some of them undertaken by NGOs, some by development organizations, some by the U.N., and foundations fund pilots of various sorts. But it is extremely rare that any of these pilot projects or early efforts is ever taken to scale in any meaningful way. It’s extremely rare.
Are there industries or places where the model doesn’t work?
Warwick: First of all we do need to clarify that we’re not talking about just selling people anything and everything. We are talking about products or services that will one way or another put more money in their pockets. So, undoubtedly there will prove to be some problems that can’t be addressed successfully when people are living on $2 a day or less.
What sectors have the most potential?
Polak: It’s unlimited. All you’ve got to do to reach 100 million people is that you have to identify a market that has potentially a billion customers with the notion that 10 percent market penetration is reasonable. There are a limitless numbers of those opportunities. There’s a billion people who need eyeglasses who don’t have them. There is a huge market for affordable biomedical devices. You can run down the list — sanitation, water, energy, just about every place you turn. I’m seeing more opportunities than we can possibly address, it’s beyond my bandwidth.
What is the role of donors? Bilaterals? Multilaterals? Foundations?
Polak: For one thing they can invest. Foundations can make program-related investments, philanthropists can take risks all the time so it would be no great difficulty for them to take a risk in investing in a company where if it works they might even get their money back or a lot more besides. I do think that that is a primary role for investors. There are sources of expertise at many of the donor agencies and tapping that expertise in some areas might be extremely useful. There is definitely a place for the government. I don’t think we’ll end up selling safe drinking water to everyone who needs it. There are probably going to be some people in a village who can’t afford it, there will be some people who are too scattered to make a market. The public sector can fill in and donors can fill in. There’s also a place for facilitating enterprise development and creating some fair rules, except that in a lot of these very poor countries the governments are ineffective and corrupt. So it’s very difficult. But there’s a need for a level playing field, for facilitating markets. There is all kinds of potential growth for philanthropy and for public investment but we feel that the role of market-creation has never been tested even to a tiny fraction of its potential.
Reprinted with permission from Devex, the largest online community for international development.