Creating a Middle Class: The Role of Companies

A frequent comment in my interviews with executives from sub-Saharan African (SSA) companies has been, “What really drives this company is job creation… of course, we want to make money, and we do make money… but our real driver is to create employment.” I mentioned this in a previous post. But I want to bring it to our conversation again because something just clicked in my mind – it may sound simple and obvious, but it just clicked.

Over the last few days, I have been attending the annual meeting of the Strategic Management Society where one of the presenters made a simple point: Explicit needs are the ultimate source of profit, and he linked this to purchasing power.

A middle-class neighborhood in Main Land Lagos
A middle-class neighborhood in Main Land Lagos

There’s much talk about “the rise of the African middle class.” It increased from 111 million people in 1980 to 313 in 2010 – or from 26% to 34.3% of the continent’s population in that period, according to data from the African Development Bank. Middle class is defined in relation to average income, which is lower in Africa than in the rest of the world. In Africa, daily expenses for the upper middle class are US$10-20; US$4-10 for the lower middle class, and US$2-4 for those in the “floating class.” The poverty line in the developing world was set at US$2/day at the time these estimates were provided (2011 – not fully up to date, but good enough to make sense). Thus, Africa’s middle class is not quite comparable to that in the developed world. (For an illustration of how a taxi driver lives in Kenya, see the related post on Kenya’s middle class and economic growth).

And here is where my click comes in:

It’s often the case that companies from developed countries take individuals’ purchasing power as a given. Some enjoy higher purchasing power, others little. Some belong to the upper economic class, some to the middle class, and most to the so-called “Bottom of the Pyramid” (about 4 billion people according ot the Bottom of the Pyramid Knowledge Center). Companies decide which group(s) to target, and adjust their products and prices taking into account the willingness to pay and the purchasing power of the various groups. Most companies ignore the “Bottom of the Pyramid”; others realize they are an important market segment, and adapt their products in such a way that the cost structure makes them affordable at as low a price as possible while the company can still make a profit.

What we tend to forget is that the rise of the middle class is not independent of a company’s actions. To the extent that companies take job creation as a central purpose, and compensate their employees fairly, the “Bottom of the Pyramid” will be able to move up to the middle class – one that can not only access products to cover basic needs but that can also have a minimum level of comfort that allows a more dignified life. In turn, this will boost company profits – needless to say, provided companies do the right things in the right way.

Any thoughts on this?

 

 

 

5 thoughts on “Creating a Middle Class: The Role of Companies

  1. I think that trend will continue and for sure will enlarge that middle class. This is part of the development of the countries and societies. The circular flow of incomes will be responsible for it.

  2. Being more influential is certainly the issue, but how? I think that the whole EU strategy towards Africa (which is a total failure sofar) must be totally reconsidered. No other option.

    1. Thank you for your comment, Marc-Henry. I think the way to go for European companies is to partner with African ones. Jointly, serve the needs of the local markets, create new jobs, and in this way contribute creating that middle class.

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