by C.K. Prahalad, Wharton School Publishing, 2005.
This book describes how large firms can help to eradicate poverty in the developing world while at the same time making a profit. The bottom of the pyramid (the “BOP”) are the 4-5 billion people who live on less than $2 a day and who represent 80% of humanity. By co-creating solutions that encourage large-scale entrepreneurship, this could create the largest and fastest growing markets in the world. Old solutions will not work in BOP markets; firms must innovate. By forcing managers in large firms to rethink their assumptions, BOP markets can serve as catalysts for creativity. Detailed case studies (including an accompanying CD) provide examples of innovative approaches to BOP markets.
(Reviewed by Kevin Barham in November 2005)
(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.
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This is a book that could change the world view of many Western managers. It shows how, while still making a profit, large firms can help to eradicate world poverty by encouraging large-scale entrepreneurship among the poor.
Collectively, the world’s billions of poor people have immense entrepreneurial capabilities and buying power. “The real source of market promise,” says C K Prahalad, one of the world’s most influential business academics, “is not the wealthy few in the developing world, or even the emerging middle-income consumers. It is the billions of aspiring poor who are joining the market economy for the first time.”
[C K Prahalad is Professor of Corporate Strategy at Michigan Business School and co-author with Gary Hamel of the global bestseller Competing for the Future.]
As Prahalad points out, developmental aid, governmental support, and localised non-governmental organisation (NGO) based solutions have not redressed the problem of world poverty. Although NGOs have tried to promote the idea of local solutions and local entrepreneurship, the idea of large-scale entrepreneurship as a solution to poverty has not taken root.
The challenge is to combine the resources, scale and scope of large firms with the knowledge and commitment of NGOs and the communities that need help. Together, they can co-create solutions to the problems at the “bottom of the pyramid”. (Prahalad is fond of acronyms and throughout the book he refers to the bottom of the pyramid as the “BOP”. Some people would prefer to call it the “base of the pyramid”, incidentally.) These are the 4-5 billion people who live on less than $2 a day and who represent 80% of humanity. It is not about serving an existing market more efficiently. New and creative approaches are needed to convert poverty into an opportunity for all concerned.
The first part of the book sets out a framework by which firms can actively and profitably engage at the bottom of the pyramid. The focus is on the changes that all players – the large firm, NGOs, governmental agencies, and the poor themselves – must accept to make the process work. The second part of the book describes 12 case studies in a wide variety of businesses where the BOP is becoming an active market. These are backed up by a CD with video stories including conversations with BOP consumers and company managers.
The real test, Prahalad concludes, is to move from the “pyramid” to the “diamond”. The economic pyramid is a measure of income inequalities (with the very poor constituting the large base of the pyramid and the rich at the apex). If these inequalities are changing, then the pyramid must change to a diamond shape with a substantial middle class in the middle layers and a proportionately smaller number of poor at the bottom. When the pyramid changes to a diamond, it means the bulk of the population is middle class.
As Prahalad demonstrates, the market potential at the bottom of the pyramid is huge – 4-5 billion underserved people with an economy of more than $13 trillion PPP. [Purchasing Power Parity measures how much a currency can buy in terms of an international measure, usually dollars.]
Partnering with the poor to innovate and achieve sustainable win-win scenarios could create the largest and fastest growing markets in the world.
Successful approaches create opportunities for the poor by offering them choices and encouraging self-esteem. Entrepreneurial solutions that do this place a minimal financial burden on the developing countries in which they occur.
We need to start with three basic assumptions:
The BOP markets have remained “invisible” for too long because of the “power of dominant logic”. Assumptions such as “the poor cannot afford our products” or “the poor do not have a use for products sold in developed countries” have prevented businesses from seeing a vibrant market opportunity at the bottom of the pyramid.
The BOP market has some distinguishing characteristics:
There is money at the bottom of the pyramid. Developing countries offer tremendous growth opportunities. While the purchasing power of individuals is much lower than those in developed countries, by virtue of their numbers the poor represent a significant latent purchasing power that must be unlocked. The poor often pay a premium – a “poverty penalty” - for the products because of inefficiencies in access to distribution and the role of local intermediaries. These problems can be solved if private businesses with their scale, scope of operations and management know-how decide to serve the BOP, bringing efficiencies for themselves and potential consumers.
Access to markets. The bottom of the pyramid does not lend itself to a single distribution solution. Urban areas are a magnet for the poor and their population density allows for intense distribution opportunities. Access to distribution among the rural poor continues to be problematic. They are not only denied access to products and services, but also knowledge about what is available and how to use it. Worldwide, the cost of reach per consumer can vary significantly across countries.
The BOP markets are brand-conscious. Although the dominant assumption is that the poor are not brand-aware, on the contrary they are very brand-conscious. They are also extremely value-conscious by necessity.
The BOP market is connected. The spread of wireless devices (China has an installed base of over 250 million cell phones; India has 100 million) plus television and the availability of PCs in kiosks at a low price per hour gives BOP consumers unprecedented ability to communicate with each other. It allows them to establish new patterns of communication away from their villages. It gives them unprecedented access to information and ability to engage in a dialogue with the wider community.
BOP consumers accept advanced technology readily (contrary to popular belief). BOP consumers are willing to adopt new technologies because they have nothing to forget.
The task of converting the poor into consumers, says Prahalad, is one of market development. He points to a number of implications:
Creating the capacity to consume. To convert the BOP into a consumer market, we have to create the capacity to consume. As the BOP is relatively cash-poor and has a low level of income, the BOP consumer has to be accessed differently. One rapidly-evolving approach is to make unit packages that are small and therefore affordable. As many poor subsist on daily wages and have to use cash conservatively, a “single-serve” revolution for a wide variety of products (for example, shampoo, ketchup, tea, coffee, aspirin) is sweeping through BOP markets. It is proving so popular that even firms producing high-end merchandise have to adopt it to remain viable long-term players.
Innovative purchasing schemes are another approach. In Brazil, more BOP consumers buy appliances through retailer Casas Bahia because the firm provides credit even for consumers with low and unpredictable income streams. The Mexican cement manufacturer CEMEX has a scheme in the “do-it-yourself” market whereby it helps consumers learn to save and invest. It creates a pool of three women who save as a group and discipline each other to stay with the scheme; it facilitates consumption by bundling savings and access to credit with the ability to add another room to their homes.
Creating the capacity to consume is based on three principles:
The need for new goods and services. The BOP provides opportunities for the development of new products and services. PRODEM FFP, a Brazilian financial services company, introduced automated teller machines that recognise fingerprints and use colour-coded touch screens so that even illiterate BOP consumers can use them. Casas Bahia sells furniture oriented toward the BOP markets.
Dignity and choice. When the poor are converted into consumers, they get more than access to products and services, they acquire the dignity of attention and choices that were previously reserved for the middle class and rich.
Trust is a prerequisite. Both sides – the large firms and the BOP consumers – have traditionally not trusted each other. However, firms approaching the BOP market must focus on building trust between themselves and the consumers. (Casas Bahia insists its managers must work as truck drivers in the shanty towns so they become better educated about their customers.) Although multinational firms assume the default rate among the poor is likely to be higher than rich customers, the opposite is often true.
To participate in BOP markets, businesses must learn to innovate. Many multinational firms have approached BOP markets with their existing portfolio of products and services but traditional products, services and management processes will not work. Because these products have been priced and developed for Western markets, they are often out of reach of potential BOP customers and their features and functions are inappropriate.
A new philosophy of product development. The BOP will challenge the dominant logic (the beliefs and values) of managers in multinational companies. For example, the basic economics of the BOP are based on small unit packages, low margin per unit, high volume, and high return on capital employed (as opposed to large unit packs, high margin per unit, high volume and reasonable ROCE).
Also, while the choice of technologies is not usually constrained by infrastructure in Western markets, infrastructure can vary substantially, especially within countries as vast as China, Brazil or India. The supply of electricity can be erratic. Advanced technology solutions, such as a regional network of PCs, must coexist with poor electrical and telecom infrastructures. Hybrid solutions that integrate backup power sources are a must.
A new philosophy of product development and innovation reflecting the realities of BOP markets is needed. This is based on 12 critical principles of innovation. All firms interested in approaching BOP markets will have to consider how these principles apply to their business.
Achieving the right combination of scale, technology, price, sustainability and usability requires that managers start with a “zero-based” view of innovations for the BOP market. By forcing managers in large firms to rethink and re-examine their assumptions, BOP markets can serve as catalysts for new bursts of creativity. The biggest advantage is often in challenging the capital intensity and managerial cost structures assumed in large firms.
Prahalad identifies four sources of opportunity for a large firm that invests the time and energy to understand and cater to BOP markets:
The BOP can be a source of innovations for not only products and processes, but also for business models. BOP markets can collapse the time frames taken for products, technologies and concepts to diffuse in the system. Many of the drivers of change and market growth – deregulation, digitisation, increasing connectivity and accompanying change in people’s aspirations, favourable demographics and access to credit – are simultaneously present in BOP markets.
These drivers interact to challenge the (relatively slow) “S” curve that is the model for the diffusion of innovations in the developed world. Changes that took 15 years in the developed world may take only three years in BOP markets. The challenge in BOP markets is that managers have to cope with a perpendicular “I” curve (indicating very rapid change). This can rapidly propel some markets and equally rapidly destroy some traditional ones. Rapid growth can also make new demands on firms (for example, such as the need for rapid expansion of distribution systems).
ICICI Bank in India is an example of how the costs of managing can be lowered. ICICI works through a network of self-help groups (SHGs) which perform several of the functions the firm would have handled traditionally. This cuts costs and risk for the firm and at the same time creates new consumer-entrepreneurs. Business management skills, technology and contacts are pushed down to the local grassroots level. The traditional roles of the firm, the distributor and the consumer converge. Functions such as advertising, credit management, risk analysis and market development are assumed by the consumer-entrepreneurs. The boundaries of the firm extend beyond its legal parameters and begin to engage and empower the large “informal sector”. The SHGs become a huge resource multiplier for the firm and create a win-win situation for both consumer-entrepreneurs and the firm.
Large firms working in BOP markets must also learn to live with a wide variety of relationships with a large number of institutions – public policymakers, government officials, NGOs, the World Bank, etc.
In BOP markets, the large firm can create a “private sector ecosystem” and act as a “nodal” firm. (ICICI Bank with its 10,000 SHGs is such an ecosystem.) The aim is to tap into the vast, dormant resources, purchasing power and entrepreneurial drive at the bottom of the pyramid.
A market-based ecosystem is a framework that allows private sector and social actors, often with different traditions and motivations, and of different sizes and areas of influence, to act together and create wealth in a symbiotic relationship. The concept of an ecosystem suggests that each constituent in the system has a role to play and that they are all dependent on each other. The system adapts and evolves and is resilient and flexible.
Components of the ecosystem might include: NGOs, extralegal NGOs, micro-enterprises, small and medium-sized enterprises, co-operatives, large local firms, and multinational firms. The relative importance of each component will vary across countries.
A firm such as HLL in India does not have legal control over the entire ecosystem in which it operates, although it can have direct influence on all elements of the system. It provides the framework, the intellectual direction and the processes by which the system is governed and operated. It also provides expertise and technical and quality standards. It is a nodal firm that facilitates the entire functioning of the network. Access and influence are more important than ownership.
Ecosystems can transform the basis for commercial transactions within a developing economy. Three steps are important in building what Prahalad calls “transaction governance capacity” (TGC) among the poor:
Ultimately, the goal is to bring as many people as possible into the inclusive market so they can enjoy the benefits.
Prahalad recognises that, while managers of large firms might be convinced about the opportunity at the bottom of the pyramid, many will have doubts about the ability of large firms to operate in these markets because of corruption. Sometimes, he says, the impact of micro regulations and local customs that are opaque to Western managers may be interpreted as corruption. We need to understand the difference between corruption and local practice. Alliances with local firms and NGOs can provide visibility to these understood but not explicit local practices.
Prahalad devotes a chapter to how governments can develop their transaction governance capacity at a national level and tackle corruption. The real problem, he says, is how bureaucracies deal with citizens. TGC is about eliminating the opaqueness in the system and providing ease of access. TGC must fulfil four criteria: access to information and transparency for all transactions; clear processes so selective interpretation by bureaucrats is reduced/eliminated; speed with which the process can be completed by citizens; and trust in the system, a result of the first three criteria.
The e-Governance story of the state of Andhra Pradesh in India shows how digital technologies can be used to enhance TGC. The aim here was to use the Internet to make the state’s government responsive and citizen-centric. The state government set up “eSeva” (e-service) to provide ease of access to government services via the Internet or through kiosks set up by the government.
As Prahalad says, building TGC is not only the job of the government. Market-based ecosystems created by large firms can also increase TGC in a society. The combination of the two, with the use of digital technologies, can rapidly transform the TGC of a country. [Managers seeking further guidance in this area might refer to Fighting Corruption: A Corporate Practices Manual – A Practical Guide for Corporate Managers, François Vincke and Fritz Heimann (eds), International Chamber of Commerce, 2003.]
As BOP consumers get an opportunity to participate in and benefit from the choices of products and services made available through market mechanisms, the accompanying social and economic transformation can be very rapid.
BOP consumers are very entrepreneurial and can easily imagine ways in which they can use their newly found access to information, choice and infrastructure. They adapt to new technology without any difficulty and are willing to experiment and find new and unforeseen (by the firm) applications for the new technology. (Farmers using the e-Choupal quickly understood the strength of the Internet and started using the system for other non-business-related and socially beneficial tasks, for example).
Technology is breaking down barriers to communication. As BOP consumers increasingly enjoy the benefits of dialogue, access, transparency, the ability to analyse risks and benefits, and make informed choices, the chances of change in tradition will be increased.
BOP consumers now have a chance to upgrade and improve their lives. By gaining access to a legal identity, they can participate more effectively in society and gain the benefits of the available opportunities. They do not have to remain marginalised.
The emancipation of women is an important part of building BOP markets. Women are central to the whole development process and often play an important entrepreneurial role in the market ecosystems. “Empowered, organised, networked and active women” are changing the social fabric of society. However, very little explicit attention has been paid to co-opting women in efforts to build markets and lead the development process. “Large firms will do well to keep this in mind in their efforts to create new markets at the BOP.”
There will always be the rich, but a measure of development is the number of people in a society who are considered middle class. More important, social transformation is about the number of people who believe they can aspire to a middle class lifestyle. It is the growing evidence of opportunity, role models, and real signals of change that allow people to change their aspirations. The goal should be to change the pyramid rapidly into a diamond.
Prahalad urges us to stop thinking of the poor as victims or a burden and start recognising them as resilient and creative entrepreneurs and value-conscious customers. If we do so, a whole new world of opportunity will open up. Four billion poor could be the engine of the next round of global trade and prosperity.
Entrepreneurship on a massive scale is the key. The poor themselves are willing to experiment, learn and change. The bottom line is simple, says Prahalad: “It is possible to do well by doing good.”
How far Prahalad presents a convincing case for the role of large firms in eradicating poverty is open to argument. He devotes a large part of his book to in-depth case studies of innovative practices in BOP markets. If you are wondering if his ideas will work, perhaps the case studies will provide some evidence of the potential benefits. Prahalad says that he has tried to present a picture of possibilities. He admits that his examples are “but islands of excellence in a sea of deprivation and helplessness.”
Casas Bahia, Brazil’s largest retailer. Through a unique approach to customer service, it has developed an innovative business model to serve the BOP. One of its innovations is a passbook that allows customers to make small instalment payments for merchandise. Every month the customer must enter the store to pay the bill – this maintains relationships with clients. Financed sales are 90% of all sales volume. To maintain low default rates, salespeople “teach” consumers to buy according to their budget.
CEMEX, Mexico, a multinational cement manufacturing company, provides housing for the poor profitably. An innovative experiment “Patrimonio Hoy” (“savings/property today”) enables poor people to pay for services and building materials to upgrade their homes. It offers access to credit (by providing materials in advance) not available to the poor otherwise.
Annapurna Salt, India. Iodine deficiency is the leading cause of mental disorder among the poor. Iodised salt is the best vehicle for iodine supplementation because salt is one of the few commodities that is universally consumed across socio-economic and geographic segments. However, because salt has to be transported long distances to reach consumers, it tends to lose iodine en route. HLL created the Annapurna brand based on technology that guaranteed no loss of iodine. Project Shakti (“strength”) is a direct-to-consumer initiative using women’s self-help groups for entrepreneur development, training them to operate as a rural direct-to-home sales force.
HLL of India saw an opportunity to help prevent diarrheal disease at the same time as leveraging health messages to increase sales of soap. (Soap in India is perceived as a beauty product rather than a preventive health measure.) It worked with a public-private partnership of government, the private sector and academia to promote handwashing with soap. “Lifebuoy Swasthya Chetna” (Lifebuoy Glowing Health) is a low-cost, scalable and sustainable initiative to create behavioural change that focuses on promoting the message among school children in selected villages.
Jaipur Foot, India. This is an artificial foot and lower limb prosthesis manufactured by BMVSS, a non-profit organisation. Previously, artificial limbs imported from abroad or locally made did not facilitate common postures in India such as sitting cross-legged. The Jaipur Foot was designed for local conditions using locally-sourced materials and low-cost artisan production processes. It uses the camp system to reach remote areas whereby administrators, doctors, technicians and artisans travel there to set up a temporary facility.
Aravid Eye Care System, India. Motivated by a vision to eradicate needless blindness in India, Dr Venkataswamy introduced innovations to bring world-class eye care to the poor. Focusing on innovations in the organisation of workflow – from patient identification to post-operative care, Aravind has built the world’s leading eye care institution.
ICICI Bank, India. Many of the problems at the BOP require system-wide reform, not piecemeal solutions. ICICI is involved in an attempt to change the system in the area of access to credit for BOP customers. BOP customers depended on local money lenders charging usurious interest rates. The question is how a large bank can access BOP consumers and at the same time provides them with cost-effective service. ICICI decided to go through village-level women’s self-help groups which it helps to organise. The 20 women in a typical SHG are taught the disciplines of saving, holding meetings, discussing priorities and investing. The bank lends the money to the SHG (not the individuals). The SHG then disburses the money among its membership based on needs and evaluation of their projects. The SHGs thereby become an extension of the bank and promoters of other SHGs in neighbouring villages. The new distribution system is said to have totally changed the traditional system and created a level of transparency that would have been impossible before.
ITC e-Choupal, India. Now that ITC has built a rural network (described above), the network can accommodate other providers of farm inputs, such as financing, crop and rain insurance, better seeds, and farm equipment to flow through the same system. Farmers are learning to connect to the rest of the world via the Internet and base their prices on information from markets abroad. ITC has a vision for e-Choupals evolving into a full-fledge “orchestrator” of a two-way of exchange of goods and services between rural India and the world.
Voxiva, a “social venture” pioneered in Peru, aims to expand services to poor communities in developing countries, with a particular emphasis on public health information. It started by developing a system that allows public health workers in remote regions of Peru to monitor the outbreak of infectious disease and communicate information to the central public health administrators in Lima. It uses a wide variety of devices – telephones, wireless and PCs – to communicate. The system takes the structured information and converts it into databases that can be readily viewed by authorities. It provides a real-time, low-cost, effective surveillance system which has found applications in the US and other countries.
All the above cases are highlighted on the accompanying 35-minute CD which also includes information on E+Co (a pioneer in developing alternative energy sources for remote areas), EID Parry (another Internet network for farmers in India); and e-Governance in Andhra Pradesh.