The media coverage of the award of the Nobel Peace Prize last week drew attention to the microfinance movement but, in the process, missed the real significance of this movement.
Last week the Norwegian Nobel Committee awarded the Nobel Peace Prize to Muhammad Yunus, one of the most prominent evangelists for micro-credit in developing economies, and to the Grameen Bank in Bangladesh, the lending institution that Yunus founded. As the official press release indicates, the award was made
. . . for their efforts to create economic and social development from below. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights.
This award left many people scratching their heads – certainly Yunus and Grameen Bank are not playing any direct role in promoting peace. The Economist magazine even raised the question whether it was appropriate to award the Nobel Peace Prize at all this year.
Now, if Yunus and the Grameen Bank are making a significant contribution to the elimination of world poverty, they are certainly indirectly helping to foster global peace. The problem is that the evidence for this contribution is mixed at best, as suggested by analysts here, here and here.
Truth be told, it is likely that micro-credit will be only one element in helping to address global poverty. Its impact can be, and likely is, greatly over-stated. Without the broader institutional reforms that are required to release and amplify the entrepreneurial energies of people in developing economies around the world, micro-credit is likely to remain a band-aid that fails to address the more profound causes of global poverty.
The growing hype about the role of micro-credit in relieving third world poverty, intensified by this award, risks diverting attention from the real significance of the broader microfinance movement and parallel business innovations.
Muhammad Yunus and the Grameen Bank, founded thirty years ago, created significant innovations in terms of distribution approaches for delivering low monetary value products to dispersed populations of very low income customers. Initial loans from Grameen Bank start at about $15 and the average size of a loan is only about $200.
How does Grameen Bank do this? It fosters social networks in remote villages that take on a lot of the administration and monitoring costs that banks traditionally assumed. Rather than establishing expensive branch offices in each remote village, Grameen Bank sent “center managers” out into the villages. Yunus, in his book Banker to the Poor, outlines his philosophy:
Conventional banks ask their clients to come to their office. It’s a terrifying place for the poor and illiterate. . . . The entire Grameen Bank system runs on the principle that people should not come to the bank, the bank should go to the people. . . . If any staff member is seen in the office, it should be taken as a violation of the rules of the Grameen Bank. . . .It is essential that [those setting up a new village Branch] have no office and no place to stay. The reason is to make us as different as possible from government officials.
Rather than setting up a branch office, the center managers help to organize lending groups of 5 – 10 borrowers, typically women, the target customer segment of Grameen Bank. These lending groups assess each participant's needs and this determines sequence of who will get loans first - the most needy get the first loans. The loans are not covered by any legal documents or collateral. As loans are made, Grameen Bank relies on a variety of mechanisms to manage risk – for example, initial loans are for very small amounts and weekly payments are required as a way to get early visibility on potential default risks.
But the most potent risk management mechanism is the lending group itself. Since a default by any member of the lending group means that the entire group will be unable to obtain any further loans, there is both significant support from the group as well as peer pressure to keep default rates low (how low is actually open to some debate). Over the years, Yunus has used this innovative distribution model, relying on locally organized groups of consumers, to spin out a series of affiliated enterprises. These enterprises offer a broad range of services, ranging from cell phone service to equipment leasing services. For more information about Yunus and Grameen Bank, check out Banker to the Poor, written by Yunus and David Bornstein's The Price of a Dream: The Story of the Grameen Bank.
Looked at through an innovation lens, Grameen Bank represents one of the earliest examples of a powerful form of business innovation that I have described as open distribution. This innovation is being pioneered by a range of companies in South Asia (primarily India) to deal with the challenges of cost effectively reaching dispersed populations of low income, rural customers. Early pioneers of this model in India include ICICI Bank, ITC with their e-chaupal network, Tata Motors and Cummins (a US company pursuing these innovations through their Indian subsidiary). (For great summaries of the first two pioneers, see C.K. Prahalad's The Fortune at the Bottom of the Pyramid, for a brief discussion of Tata Motors, see Manjeet Kripalani's article in Business Week "Asking the Right Questions" and for the Cummins Story, see my article (with JSB) on "Innovation Blowback".)
As I indicated in the earlier blog posting, this open distribution model has several key components:
- increased modularity (both in products and processes)
- aggressive leveraging of existing third party (and often non-commercial) institutions in rural areas to more effectively reach target customers
- creative use of information technology carefully integrated with social institutions to encourage usage and deliver even greater value
This open distribution model stands in sharp contrast to Western forms of innovation in retail distribution by companies like Wal-Mart, Tesco and Metro. Rather than leveraging economies of scale and scope in the branches and regional distribution centers as these Western companies have done, the pioneers of the open distribution model seek to tailor the value delivered to customers through creative leveraging of third party institutions and social networks.
Western distribution models work great if the customers know exactly what they want or are prepared to invest in the search through endless aisles of products (and not a salesperson in sight!) to find what they need. In contrast, the open distribution models represent a promising cost-effective approach to help customers find products that are most relevant to them and then help them to get the most value out of the use of the products.
Now, reading this, some will see that this is a very interesting business innovation in developing economies but will remain skeptical about its relevance for Western economies. This is where innovation blowback comes in. There are some interesting opportunities to use innovations being pioneered in developing economies to fashion attacker strategies designed to take market share from established incumbents in the larger, more developed Western economies.
Think about it. As competition intensifies, why couldn’t the open distribution approaches emerging in South Asia be used to create powerful new ways to significantly reduce the costs of reaching customers in more developed economies while at the same time delivering much more tailored value to these customers? Of course, some modifications may be required. Rather than lending groups in remote villages, why not think of creative ways to catalyze and shape social networks in cyberspace? Rather than tapping into local social institutions, why not find interesting ways to leverage the shared experiences that give rise to reputation systems or other social institutions emerging on the Internet?
Let’s tie this in to another popular concept shaping business initiatives today – the long tail. As Chris Anderson defines the long tail business opportunity, it is shaped by three forces – and one of them is something he calls “democratizing distribution”. In particular, he is talking about reducing the cost of access to small niches of customers.
Now, Chris is a media guy so the examples he uses for democratizing distribution generally come from the media business and especially digital media. But when I look at the open distribution models emerging in South Asia, I see some powerful examples of democratizing distribution that extend well beyond digital media products or services to include such hard core physical products as automobiles and diesel engines. Surprisingly, Chris doesn’t even acknowledge, much less discuss, these innovations in democratizing distribution in his book. Yet, these examples add powerful evidence of the opportunity to extend the long tail business opportunity into a much broader range of physical products.
As the long tail unfolds, customers are going to look for more and more help in finding the products and services that matter most to them. As I have discussed before, they will look for agents and partners that can help them to significantly increase their return on attention. Massive, standardized “big box” retail formats will continue to play a role in driving efficient physical product distribution. The real value, though, will increasingly be created and captured by those who harness open distribution models to develop a much deeper understanding of individual customer needs and use that understanding to be more helpful in connecting customers with the products and services that matter most to them.
In this context, the business innovations pioneered in remote rural villages of South Asia may be more relevant than we might first perceive. Perhaps Yunus and the Grameen Bank will end up having less impact on eliminating world poverty than they might hope. But they might just be early pioneers in a much bigger trend – business innovation seeking to deliver more value at lower cost to customers around the world.
Entrepreneurship and business innovation are key ingredients in shifting economic activity from zero sum to positive sum games. Positive sum games, by expanding the overall returns, tend to dampen conflict and foster collaboration while zero sum games, with a fixed set of resources, intensify conflict. In this respect, the entrepreneurship of Muhammad Yunus indeed may contribute to global peace by inspiring entrepreneurs everywhere.