Chapter The Market at the Bottom of the Pyramid Chapter Products and Services for the - PDF document

The Ecosystem for Wealth Creation Development as Social Transformationalleviation. We start with a simple proposition. prosperity. It can be a source of innovations. Serving the BOP consumers 1 The Fortune at theBottom of the PyramidPART 01.qrk 6/17/04 8:01 PM Page 1 will demand innovations in technology, products and services, andbusiness models. More importantly, it will require large firms to workcollaboratively with civil society organizations and local governments.It will require organizational and governance innovations as well.of a solution to the problem of poverty. The opportunities at the BOPcannot be unlocked if large and small firms, governments, civil societyorganizations, development agencies, and the poor themselves do notis the key. This approach will challenge the prejudices about the Òroleat the BOP.among the various players. More importantly, the poor themselves are willingsector, the importance of collaboration across the various groups will become from successful, large-scale experiments involving the entire private Private enterpriseEconomicdevelopmentand socialtransformationDevelopmentand aid agenciesCivil societyorganizationsLocal governmentBOP consumersBOP entrepreneurs 01.qrk 6/17/04 8:01 PM Page 2 the worldÕs 4 billion poorÑpeople who live on far less than $2 a day. Inaccomplish. For more than 50 years, the World Bank, donor nations,various aid agencies, national governments, and, lately, civil societyorganizations have all fought the good fight, but have not eradicatedpoverty. The adoption of the Millennium Development Goals (MDG) bycentury, povertyÑand the disenfranchisement that accompanies itÑremains one of the worldÕs most daunting problems.The purpose of this book is to change that familiar image on TV. It isWhat is needed is a better approach to help the poor, an 3 The Market at the Bottom of the Pyramid 1 01.qrk 6/17/04 8:01 PM Page 3 poor, civil society organizations, governments, and large firms can createthe largest and fastest growing markets in the world. Large-scale andwide-spread entrepreneurship is at the heart of the solution to poverty.idea stage as private enterprises, both large and small, have begun toof eradicating poverty.see, more than 4 billion constitute the BOP. These are the people who THE BOTTOM OF THE PYRAMID (BOP)the pyramid are the wealthy, with numerous opportunities for generating than $2 per day. They are the subject matter of this book. The Fortune at the Bottom of the Pyramid Figure 1.1Source:Prahalad, C. K., and Hart, Stuart, 2002. The Fortune at theBottom of the Pyramid, Strategy+ Business, Issue 26, 2002. � $20,00075 Ð 100$1,500 Ð $20,0001,500 Ð 1,750$1,5004,000 01.qrk 6/17/04 8:01 PM Page 4 organizations helping the handicapped walk and helping subsistenceThere are banks adapting to the financial needs of the poor, powercompanies reaching out to meet energy needs, and constructionoffering them choices and encouraging self-esteem.solutions such as these place a minimal financial burden on thedeveloping countries in which they occur. First, while cases certainly can be found of large firms andmight have done to the poor is to ignore them altogether. The poordepend only on what is available in their villages. If large firmscharacteristics of a market economy, new to the BOP, can facilitatedramatic change at the BOP. Free and transparent private-sectorbecome a business development task shared among the large private The Market at the Bottom of the Pyramid5 01.qrk 6/17/04 8:01 PM Page 5 Second, the BOP, as a market, provides a new growth opportunitysolutions cannot create markets at the BOP. the private sector. They must become part of the firmsÕ corehe Power of Dominant Logicwhich we perceive the world are colored by our own ideology,groups that is focusing on poverty alleviationÑthe World Bank, richcountries providing aid, charitable organizations, national governments,the task of eradicating poverty. Consider, for instance, the politicians and bureaucrats in India, one ofthe largest countries with a significant portion of the worldÕs poor. Indiais home to more than 400 million people who qualify as being very poor.Independent India started with a deep suspicion of the private sector. ThecountryÕs interaction with the East India Company and colonialismindigenous private sector was not very positive, either. The private sector The Fortune at the Bottom of the Pyramid 01.qrk 6/17/04 8:01 PM Page 6 was deemed exploitative of the poor. This suspicion was coupled with anlarge industrial projects in the public sector (owned by the Indiandistribution and global trading in essential commodities. IndiaÕs generalnurturing market-based ecosystems that included the large and the smallpublic sector (mostly large firms with significant capital outlay as insteel), the private sector with large firms strictly controlled by thegovernment through a system of licenses, and a small-scale sector. TheBecause of the disparities in wealth and the preponderance of the poor,ÒequalizedÓ wealth distribution. Taxation, limits on salaries of toprich. However, the data increasingly does not support this distinction.There are as many rural rich as there are urban poor. Poverty knows noThe changing perspectives are shown in Table 1.1.This much-needed and desirable transition is in its infancy. Theindividuals, political parties, and sections of the bureaucracy. This is thefamiliarity are not easy. We also believe that it is equally difficult for a The Market at the Bottom of the Pyramid 01.qrk 6/17/04 8:01 PM Page 7 quality of implementation of projects focused on the poor, be it buildingPrivate-sector businesses, especially MNCs (and large local firms thatmarket opportunity at the BOP. For example, it is common in MNCs tohave the assumptions outlined in Table 1.2. These assumptions dictateBOP markets in particular. BOP markets with managers in MNCs and those in large domestic firmsthose at successful MNCs. These biases are hard to eradicate in largefirms. Although the dominant logic and its implications are clear, it is The Fortune at the Bottom of the Pyramid Table 1.1Changing Dominant Logic of Public Policymakers in India FromTo The poor are a problem.The poor represent a market.one step further and recognizes that if large similar situation.) Poor as wards of the state.Poor as active consumers/entrepreneurs.The poor do not appreciate new Creative bundling of the most technology. Old technology solutions advanced technology with a local flavor. Follow the Western model of Selectively Òleap-frogÓ and innovate. development. Focus on resource constraints.Focus on creativity and entrepreneurship. Capital limitations.Limitations of information and access. Imagination constraints. Efficiency in a known model.Innovation to develop a new model., Volume 3, Number 4, 2002. 01.qrk 6/17/04 8:01 PM Page 8 cost. We will show that a 10 to 200 times advantage (compared to theMost charitable organizations also believe that the private sector isFrom aid focused on largeHistorically, governments, aid agencies, nongovernmentalorganizations (NGOs), large firms, and the organized (formal and legal The Market at the Bottom of the Pyramid able 1.2The Dominant Logic of MNCs as It Relates to BOP AssumptionImplicationThe poor are not our target customers; Our cost structure is a given; with our cost they cannot afford our products orstructure, we cannot serve the BOP services.market.The poor do not have use for products We are committed to a form and sold in developed countries.functionality. The poor might needsanitation, but canÕt afford detergents informats we offer. Therefore, there is no market in the BOP.Only developed countries appreciate The BOP does not need advanced and pay for technological innovations.technology solutions; they will not pay for The BOP market is not critical for BOP markets are at best an attractive long-term growth and vitality of MNCs.distraction.Intellectual excitement is in developed We cannot assign our best people to work markets; it is very hard to recruit on market development in BOP markets. managers for BOP markets.Adapted from C. K. Prahalad and Stuart Hart, The Fortune at the Bottom of the Pyramid, 01.qrk 6/17/04 8:01 PM Page 9 opportunities at the BOP. The dominant logic of each group is different,but the conclusions are similar. During the last decade, each group hasbeen searching for ways out of this self-imposed intellectual trap. Toeradicate poverty, we have to break this implicit compact through aBOP-oriented involvement of the private sector. difficult nonetheless. However, once we cross the intellectual barrier, thehe Nature of the BOP MarketThe nature of the BOP market has characteristics that are distinct. Wethe BOP.here Is Money at the BOP The Fortune at the Bottom of the Pyramid Private sector, including MNCs 01.qrk 6/17/04 8:01 PM Page 10 offer tremendous growth opportunities. Within these markets, the BOPrepresents a major opportunity. Take China as an example. With aeconomy. However, the U.S. dollar equivalent is not a good measure of(PPP), China is already a $5.0 trillion economy, making it the secondlargest economy behind the United States in PPP terms. Similarly, thenine countriesÑChina, India, Brazil, Mexico, Russia, Indonesia, Turkey,population. In PPP terms, this groupÕs GDP is $12.5 trillion, whichrepresents 90 percent of the developing world. It is larger than the GDPof Japan, Germany, France, the United Kingdom, and Italy combined.Now, consider the BOP within the broad developing countryopportunity. The dominant assumption is that the poor do not havemoney to spend and, therefore, are not a viable market. Certainly, thenations. However, by virtue of their numbers, the poor represent aand Warden Road (now redesignated B. Desai Road), a higher incomeas 5 to 25 times what the rich pay for the same services (Table 1.3).magnitude differs by country. The poverty penalty is the result of localintermediaries. Large-scale private-sector businesses can Òunlock thispoverty penalty.Ó For example, the poor in Dharavi pay 600 to 1,000 The Market at the Bottom of the Pyramid 01.qrk 6/17/04 8:02 PM Page 11 Although 25 percent interest might look excessive to a casual observer,from the point of view of the BOP consumer, access to a bank decreasesrates that a commercial bank would charge. The bank can make atop-of-the-pyramid customers). We argue later that the BOP consumersorganized private sector decides to serve the BOP. The organized sectorsanitation, clean running water, and better homes, but will spend it onitems traditionally considered luxuries. Without legal title to land, theseown a pressure cooker and blender, 56 percent own a gas stove, and 21 The Fortune at the Bottom of the Pyramid Table 1.3The Poor and High-Cost Economic Ecosystems ItemDharaviWarden RoadPoverty PremiumCredit 600Ð1,000%12Ð18%53.0 Municipal grade $1.12$0.0337.0 Phone call $0.04Ð0.05 $0.0251.8 (per minute) Diarrhea medication$20.00$2.0010.0 Rice (per kg)$0.28$0.241.2C. K. Prahalad and Allen Hammond, ÒServing the WorldÕs Poor, Profitably.Ó Harvard 01.qrk 6/17/04 8:02 PM Page 12 percent of their income on connectivity. ccess to BOP Markets Urban areas have become a magnet for the poor. By 2015 there will be10 million residents. Collectively, these cities will account for about 1.5access to information about products and services. However, this is stillaccess to dispersed rural communities. Worldwide, the cost of reach per The Market at the Bottom of the Pyramid 01.qrk 6/17/04 8:02 PM Page 13 This approach is not new. Avon is one of the largest cosmetics operations800,000 ÒAvon ladiesÓ as distributors to reach even the most remotehe BOP Markets Are Brand-Consciouscontrary, the poor are very brand-conscious. They are also extremely value-conscious by necessity. of the largest retailers of consumer durables, such as televisions, washinguniversal. In a way, brand consciousness should not be a surprise. Anincluding those at the BOP. Therefore, aspirational brands are critical forBOP consumers. However, BOP consumers are value buyers. Theyexpect great quality at prices they can afford. The challenge to largehe BOP Market Is ConnectedContrary to the popular view, BOP consumers are getting connected andthe BOP. For example, by the end of 2003, China had an installed base of The Fortune at the Bottom of the Pyramid 01.qrk 6/17/04 8:02 PM Page 14 worldwide wireless growth. Telecommunications providers have made ituniversal, from Grameen Phone in Bangladesh to Telefonica in Brazil.Further, the availability of PCs in kiosks at a very low price per hour andof connectivity among those at the BOP. The net result is aneach other, with the firms from which they wish to purchase goods andof communication away from their villages. With cell phones and TV,opportunities to engage in a dialogue with the larger community. As aforce for assessing product quality, prices, and options available to them.The spread of good bargains as well as bad news can be very rapid. Forchocolates sold by Cadbury, a large and very successful MNC. Ten yearsConsumers Accept Advanced Technology Readily Contrary to popular belief, the BOP consumers accept advancedtechnology readily. researcher. For example, ITC, an Indian conglomerate, decided to(literally, Òvillage meeting placeÓ) allowed the farmers to check prices The Market at the Bottom of the Pyramid 01.qrk 6/17/04 8:02 PM Page 15 soybean futures at the Chicago Board of Trade. The e-Choupal networkmargins. Similarly, women entrepreneurs in southern India, given a PCimagined. Most interestingly, in Kerala, India, fishermen in traditionalchanged lives at the BOP.adopt new technologies because they have nothing to forget. Moving tohe Market Development Imperativeprivate-sector firm. We consider the risks and benefits to the private-sector firm later. Here, we reflect on the incentives for the BOPconsumer, who is so far isolated from the benefits of access to regionalconsumer has to be accessed differently. poor has been to provide the product or service free of charge. This has thefeel of philanthropy. As mentioned previously, charity might feel good, but The Fortune at the Bottom of the Pyramid 01.qrk 6/17/04 8:02 PM Page 16 convenience. They can afford, for example, to buy a large bottle ofuse cash conservatively. They tend to make purchases only when theyhave cash and buy only what they need for that day. Single-servebecome the norm for a wide variety of products, as shown in Table 1.4. Measured in tons, the size of the Indian shampoo market is as large asthe U.S. market. Large MNCs, such as Unilever and Procter & Gamble(P&G), are major participants in this market, as are large local firms.India. The entrepreneurial private sector has created a large market at The Market at the Bottom of the Pyramid able 1.4Creating the Capacity to Consume: Single-Serve Revolution Single-Serve Value at Retail Rs.$Typical Products 0.500.01Shampoo, confectionary, matches, tea 1.000.02Shampoo, salt, biscuits, ketchup, fruit drink concentrate2.000.04Detergent, soap, mouth fresheners, biscuits, jams, spreads, 5.000.10Biscuits, toothpaste, color cosmetics, fragrance, bread, cooking oil, skin creamNote:Shampoo and biscuits are shown under different price ranges because these items areavailable in multiple single-serve and low unit pack quantities. 01.qrk 6/17/04 8:02 PM Page 17 Through a very sophisticated credit rating system coupled withcustomers. Cemex, one of the worldÕs largest cement companies inAffordabilityquality or efficacy. The Fortune at the Bottom of the Pyramid Figure 1.3 123519981999200020012002 01.qrk 6/17/04 8:02 PM Page 18 cash to purchase the necessities for that day. Stores that close at 5:00PM. Further, BOP consumers cannot travel great distances. Storesdefer buying decisions. Availability (and therefore, ) is a critical factor in serving the BOP consumer. allows for efficiencies for both the farmer and the buyer. By focusing on the BOP consumersÕ capacity to consume,difficult for them to access the traditional market for goods andhe Need for New Goods and Servicescream at less than $0.05 per serving, affordable by all at the BOP. Thisof nutrition for the poor. Now, Amul is planning to introduce a natural The Market at the Bottom of the Pyramid 01.qrk 6/17/04 8:02 PM Page 19 whether the product can be a success. However, the experimentation iswhat the game is about. Similarly, the popularization of pizza by thePRODEM FFP, a Bolivian financial services company, hasintroduced smart automated teller machines (ATMs) that recognizefingerprints, use color-coded touch screens, and speak in three localCemex, as we saw earlier, provides access to good quality housing.Through Tecnosol, the BOP consumers in rural Nicaragua have access toclean energy from renewable sourcesÑsolar and wind power. Previously,Now they have energy that is affordable enough to run their households.The farmers we interviewed at an ITC e-Choupal were very clear. Thethey had to sell their produce at the prices offered on that day. Theyto be very demeaning.Ó Not any longer. Now, the same farmers canaccess information on the Web across all the mandis and can decidewhere, when, and at which prices they want to sell. Similarly, women in The Fortune at the Bottom of the Pyramid 01.qrk 6/17/04 8:02 PM Page 20 has created a revolutionary level of choice for consumers at the BOP. Forshe can buy a sachet of shampoo or detergent or pickles; if she is notsatisfied with her purchase she can switch brands the next day. Firmsnot trusted each other. The mistrust runs deep. However, private-sector firmsconsumers here venerate the founder, Mr. Klein, for giving them theworry. The same is true for Bimbo, the provider of fresh bread and otheris the largestThe poor pay on time and default rates are very low. In the case of ICICIlessons are clear. Through persistent effort and the provision of world-class quality, private-sector businesses can create mutual trust and The Market at the Bottom of the Pyramid 01.qrk 6/17/04 8:02 PM Page 21 responsibility between their companies and BOP customers. Trust isBenefits to the Private Sectorbusinesses focus on the BOP. It is clear that the consumers (the poor)economy of more than $13 trillion PPP. The needs of the poor are many.However, to participate in these markets, the private sector must learnto innovate. Traditional products, services, and management processeswill not work. In the next chapter, we discuss a philosophy of innovation Helen Cha, Polly Cline, Lilly Liu, Carrie Meek, and Michelle Villagomez ÒDirectSelling and Economic Empowerment in Brazil: The Case of Avon.Ó Edited bySyed Firdaus Ashraf. ÒWorms Found in Chocolate Packet,Ó www.n-Logue.comSaritha Rai. ÒIn Rural India, a Passage to Wirelessness.Ó The New York TimesHarish Damodaran. ÒTry AmulÕs New Ice Cream andÑBe Relieved.Ó The HinduRoberto Hernandez and Yerina Mugica. ÒWhat Works: Prodem FFPÕs MultilingualSmart ATMs for Micro Finance.Ó World Resources Institute, Digital Dividendwww.bimbo.com The Fortune at the Bottom of the Pyramid 01.qrk 6/17/04 8:02 PM Page 22