09:35 March 23, 2010
This is a summary of C K Prahalad & Allen Hammond’s seminal work "Serving the World’s poor profitably"
Improving the lives of the billions of people at the bottom of the economic pyramid is a noble endeavour. It can also be a lucrative one. Let’s look at two scenarios:
The global economy recovers from its current stagnation but growth remains anaemic
Deflation continues to threaten
The gap between rich and poor keeps widening
Incidents of economic chaos, governmental collapse, and civil war plague developing regions
Private investment and enterprise helps creates jobs and wealth in developing nations
Hundreds of millions of new consumers into the global marketplace every year
China, India, Brazil, and South Africa become new engines of global economic growth
Both of these scenarios are possible…
Which scenario comes to pass will be determined primarily by one factor: willingness of big, multinational companies to enter and invest in the world’s poorest markets.
Achieving this goal does not require them to spearhead global social development initiatives for charitable purposes. They need to act in their own self interest to reap the enormous business benefits of entering developing markets.
In fact, many innovative companies – entrepreneurial outfits and large, established enterprises alike – are already serving the world’s poor in ways that generate strong revenues, lead to greater operating efficiencies, and uncover new sources of innovation.
For these companies – and those that follow their lead – building businesses aimed at the bottom of the pyramid promises to provide important competitive advantages as the twenty-first century unfolds.
Everyone knows that the world’s poor are distressingly plentiful. Fully, 65% of the world’s population earns less than $2,000 each per year – that’s 4 billion people. But despite the vastness of this market, it remains largely untapped by multinational companies.
Companies assume that people with low incomes spend little on goods and services and what they do spend goes to basic needs like food and shelter. They also assume that various barriers to commerce – corruption, illiteracy, inadequate infrastructure, currency fluctuations, bureaucratic red tape – make profitable business impossible.
But such assumptions reflect a narrow and largely outdated view of the developing world. Many multinationals are already successfully doing business in developing countries (although most currently focus on selling to the small upper-middle-class segments of these markets) Their experience shows that the barriers to commerce – although real – are much lower than is typically thought.
Moreover, several positive trends– from political reform, to a growing openness to investment, to the development of low-cost wireless communication networks – are reducing the barriers further. Once the misperceptions are wiped away, the enormous economic potential that lies at the bottom of the pyramid becomes clear.
Let’s explode some popular myths:
Myth: The poor have no money
It sounds obvious on the surface, but it’s wrong. While individual incomes may be low, the aggregate buying power of poor communities is actually quite large. The average per capita income of villagers in rural Bangladesh, for instance, is less than $200 per year, but as a group they are avid consumers of telecommunications services.
Grameen Telecom’s village phones, which are owned by a single entrepreneur but used by the entire community, generate average revenue of roughly $90 a month – and as much as $1,000 a month in some large villages. Customers of these village phones, who pay cash for each use, spend an average of 7% of their income on phone services – a far higher percentage than consumers in traditional markets do.
Myth: The poor have no money for luxury items
Contrary to popular perception, the poor often do buy “luxury” items. That’s because buying a house in Mumbai, for most people at the bottom of the pyramid, is not a realistic option. Neither is getting access to running water. They accept that reality, and rather than saving for a rainy day, they spend their income on things they can get now to improve the quality of their lives.
In the Mumbai slums of Dharavi, for example, 85% of households own a television set, 75% own a pressure cooker and a mixer, 56% own a gas stove, and 21% have telephones.
Myth: Goods sold in developing markets are incredibly cheap and hence there is no room for competition and profit
In reality, consumers at the bottom of the pyramid pay much higher prices for most things than middle-class consumers do. This means that corporations with economies of scale and efficient supply chains can capture market share by offering higher quality goods at lower prices while maintaining attractive margins.
Throughout the developing world, urban slum dwellers pay, for instance, between four and 100 times as much for drinking water as middle- and upper class families.
Food also costs 20% to 30% more in the poorest communities since there is no access to bulk discount stores. On the service side of the economy, local moneylenders charge interest of 10% to 15% per day, with annual rates running as high as 2,000%. Even the lucky small-scale entrepreneurs who get loans from nonprofit microfinance institutions pay between 40% and 70% interest per year – rates that are illegal in most developed countries.
Myth: MNCs would only exploit the poor, not serve them in the right spirit
The informal economies that now serve poor communities are full of inefficiencies and exploitive intermediaries. So if a microfinance institution charges 50% annual interest when the alternative is either 1,000% interest or no loan at all, is that exploiting or helping the poor? If a large financial company such as Citigroup were to use its scale to offer micro loans at 20%, is that exploiting or helping the poor?
The issue is not just cost but also Quality. MNCs provide basic quality goods and services at reduced costs that raise the Bottom of Pyramid (BoP) standard of living – while generating an acceptable return on investment. The result benefits everyone.
The business opportunities at the bottom of the pyramid have not gone unnoticed. Over the last five years, we have seen nongovernmental organizations (NGOs), entrepreneurial start-ups, and a handful of forward-thinking multinationals conduct vigorous commercial experiments in poor communities. Their experience is a proof of concept. Businesses can gain three important advantages by serving the poor –
Hindustan Lever, the Indian subsidiary of Unilever, recently introduced what was for it a new product category – Candy – aimed at the bottom of the pyramid. A high-quality confection made with real sugar and fruit, the candy sells for only about a penny a serving. At such a price, it may seem like a marginal business opportunity, but in just six months it became the fastest growing category in the company’s portfolio. Not only is it profitable, but the company estimates it has the potential to generate revenues of $200 million per year in India and comparable markets in five years. There is equally strong demand for affordable services.
TARAhaat, a start-up focused on rural India, has introduced a range of computer-enabled education services ranging from basic IT training to English proficiency to vocational skills. The products are expected to be the largest single revenue generator for the company and its franchisees over the next several years. Citibank’s ATM-based banking experiment in India, called Suvidha, which requires a minimum deposit of just $25, enlisted 150,000 customers in one year in the city of Bangalore alone.
BOP markets are hotbeds of commercial and technological experimentation. The Swedish wireless company Ericsson has developed a small cellular telephone system, called a MiniGSM, that enable local operators in BOP markets to offer cell phone service to a small area at a radically lower cost than conventional equipment entails. Packaged for easy shipment and deployment, it provides stand-alone or networked voice and data communications for up to 5,000 users within a 35-kilometer radius.
The MIT Media Lab, in collaboration with the Indian government, is developing low- cost devices that allow people to use voice commands to communicate – without keyboards – with various Internet sites in multiple languages.
The Indian company n-Logue connects hundreds of franchised village kiosks containing both a computer and a phone with centralized nodes that are, in turn, connected to the national phone network and the Internet. Each node, also a franchise, can serve between 30,000 and 50,000 customers, providing phone, email, Internet services, and relevant local information at affordable prices to villagers in rural India.
A lack of dependable electric power stimulated the UK-based start-up Freeplay Group to introduce hand-cranked radios in South Africa that subsequently became popular with hikers in the United States.
Since BOP markets require significant rethinking of managerial practices, it is legitimate for managers to ask:
Is it worth the effort...YES it is.
For one, big corporations should solve big problems – and what is a more pressing concern than alleviating the poverty of 4 billion people?
It’s hard to argue that the wealth of technology and talent within leading MNCs is better allocated to producing incremental variations of existing products than to addressing the real needs and opportunities at the bottom of the pyramid. Through competition, multinationals would bring to BOP markets a level of accountability for performance and resources ...something that neither international development agencies nor national governments have demonstrated during the last 50 years.
Participation by MNCs could set a new standard, as well as a new market-driven paradigm, for addressing poverty. The potential for expanding the bottom of the market is just too great to ignore. It is simply good business strategy to be involved in large, untapped markets that offer new customers, cost-saving opportunities, and access to radical innovation.
The business opportunities at the bottom of the pyramid are real, and they are open to any MNC willing to engage and learn.