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green@work : Magazine : Back Issues : Spring 2005 : Cover Story

Cover Story

A New World of Opportunity
Can business reap profits, eradicate poverty and solve environmental problems by turning the poor into consumers?

by Phil Storey


More Cover Story Articles

Eradicating Poverty through Profit

A black-and-white photograph of two elephants, each with a person perched on its back, winding their way through a forest in rural India. Professor C.K. Prahalad likes to begin presentations by showing this picture to the audience and asking them what they see.

“Everybody looks at elephants running around in the northeastern part of India,” he says.
“That’s one image. What they’re carrying is more interesting. They are carrying electronic polling booths. In 2004, India went through a massive election. Four-hundred-and-fifty million people voted; 1.5 million polling booths—all of them totally electronic. And we haven’t done that yet here.”

This is a metaphor Prahalad likes to use to challenge common assumptions about the developing world: When we look at the billions of poor people in China or India or other developing nations, do we see the elephants—poor technology and infrastructure, abject poverty and disease? Or do we see the electronic voting booths—innovation and opportunity for technological leapfrogging? Understanding and leveraging the business possibilities in serving the world’s poor while giving them economic opportunity is the subject of Prahalad’s latest book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profit.

Seeing beyond the curve and identifying industry-changing strategic concepts is nothing new for Prahalad. In 1994 he and Gary Hamel changed how businesses conceive themselves by introducing the concept of “core competencies” in their best-selling book, Competing for the Future. At the time, BusinessWeek wrote that Prahalad “may well be the most influential thinker on business strategy today.”

And he hasn’t slowed down. In the last decade he has continued teaching at the University of Michigan’s Ross School of Business, consulted with some of the world’s top companies, written numerous articles in business journals and started his own technology company. In fact, The Fortune at the Bottom of the Pyramid was Prahalad’s second book to come out in 2004. BusinessWeek identified his first, The Future of Competition: Co-Creating Unique Value with Customers, co-authored with Venkat Ramaswamy, as one of the year’s 10 best business books.

Lifting the Bottom of the Pyramid
Prahalad opens The Fortune at the Bottom of the Pyramid with a simple proposition: “If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up.” The new world Prahalad sees includes profits for corporations and growing prosperity for the poor. Prahalad’s goal is to turn the economic pyramid into a diamond, lifting the bulk of the population into the middle class. Clearly he’s not tinkering around the edges of business and development strategies, and he spends the rest of the book making a solid case for the viability of his model, as well as outlining principles and guidelines from the success stories he uses.

The basic argument of the book is that traditional development strategies—carried out by governments and non-governmental organizations (NGOs)—have been ineffective in alleviating large-scale poverty, and that the advanced business systems of the developed world haven’t tried to engage the poor in a sustained and smart fashion. As a result, despite all our technological and managerial capacity, the poorest pay a premium for basic products and services (such as paying a 500 percent interest rate to local money lenders), and pervasive poverty remains as large a problem as ever.

In the book, Prahalad sets about dismantling misconceptions, relating examples from throughout the developing world across a wide range of industry sectors (see inset: Case Studies) and identifying principles for success. Rather than trying to sell stripped-down versions of products and services designed for affluent western consumers, companies need to reinvent what they offer in ways that deliver greater performance at lower prices. Even more challenging, companies will have to create markets at the bottom of the pyramid, not just enter them—developing the range of conditions (an economic ecosystem, as Prahalad calls it) that allow people to act as consumers. Even in the face of such challenges—in fact, because of them—Prahalad asserts that companies that successfully engage the bottom-of-the-pyramid market will not only profit, but also reap the rewards of unprecedented learning and innovation.

In December, at a conference organized by the World Resources Institute in San Francisco called “Eradicating Poverty through Profits,” green@work spoke with Prahalad about these concepts.

The subtitle of your book is a pretty bold statement of what you think is possible. What do you think the rate of change can be?

I think countries that are moving in this direction, within my lifetime will change the composition of poverty. For example, there are only two countries that have a long shot at meeting the millennium developmental goals. One is China, the other is probably India. Why is it happening? It is because the private sector is actively engaged. It may happen in South Africa, but it is more difficult. I believe that the more we think about the private sector as a partner in the developmental process, the more likely we are to win. But the more we keep it out of the developmental process, the chances are higher that it will not happen. Because we’ve tried that for 50 years. It hasn’t worked.

What puts companies is a position to take advantage of the bottom-of-the-pyramid market?
I say you better pay attention to three A's: access, availability and affordability. If you look at the ITC case or if you look at the ICICI case (see inset: Case Studies), it’s all about providing access to poor consumers—to either financial services or global markets. Making it affordable by fundamentally reducing the cost of both the manufacturing and distribution of products and services. And third, it’s easily available. You don’t have to trek 40 miles to go and get it. If you look at Aravind Eye Hospital, or if you look at Jaipur Foot, if you look at cardiac care, telecardiology—all of them are breaking down the entire traditional system to make sure at least those three tests are met. At the same time, you have to create world-class capabilities.

I do not start with the assumption that you can have two levels of quality in healthcare. The poor people need as good quality as the rich people. They hurt just as much. You have to start by saying, how do we get world-class quality, and at lowest cost possible? In a funny way, if you think about, this is exactly what Wal-Mart has done for the United States. Now everybody can buy a DVD player, because it’s at $29 or $39. If it was at $500, fewer people could afford it. Do they have to build a global supply chain; do they have to source it in China and India and all over the world, wherever they can get those costs, in order to serve American consumers, and now increasingly global consumers? The answer is yes. And that’s exactly the process I’m describing.

How do you then take the same ideas—not to large population clusters, which is what is required for a Wal-Mart to work—but to highly decentralized, dispersed population cultures so they get the same benefits without necessarily having to change where they live? I think that’s the basic thesis. Actually, in America it should not come as a surprise. The Singer sewing machine was the first interesting (example). The rich people didn’t need sewing machines; the poor needed them. So you say it’s $100, but you can give me $5 a month. That’s how they built a global company. We have had long experience. Model T. Henry Ford made it possible for ordinary people to buy a car as he built a global company.

So the question is, do we have the next wave of disenfranchised poor people whom we want to bring into the markets, and create inclusive capitalism?

You also talk about the forgetting curve, which is a bigger challenge than the learning curve. Would you describe what you mean by that?

I think we are all creatures of our own socialization, and the lenses through which we see the world depend on how we were socialized. If we start by saying that poor people are not our customers, poor people cannot pay for and use advanced technologies, poor people have no use for the kinds of products and services we have—if you start with those assumptions—you don’t see the opportunity at all.

The fundamental task at the bottom of the pyramid is market development. It is creating new markets, it is creating new consumers, it is creating new products and services. Therefore, what we have learned in working in a developed market like the United States or Europe may become an impediment. For example, if I came and said, we have to sell something at 1 cent at retail and make money, people are going to say you’re crazy. If I come to people and say we have to give single serve because that is what will enable more capacity to consume, and what we have done successfully is make bigger and bigger packages, people are going to say that’s against what we do here. I look at it and say, it need not be, because the economic rationale in the United States is, “I don’t want to go very often to the store. I have enough cash so I can use cash as a way to inventory convenience.” The poor people in the developing countries do not have cash, and therefore they have to have a method by which they can access markets and not mind the frequent trips to the store. So we have the same economic tradeoff, but from a different starting point.

So to shift from how to create packaging that allows people inventory convenience, to how to create packages that allow people the ability to consume, even though they have to go more frequently, is a huge shift. And once you have come to terms with it, we are smart enough to find the ways of doing it. So the key is, I find, crossing the mental barrier of our own socialization. That is why I say, selectively forgetting our past is important. Not all of it, but selectively forgetting.

Many environmentalists see consumerism as a problem, yet you advocate turning the poor into consumers.
I think sometimes we tend to be somewhat elitist. The people who are talking about consumerism (being) bad are the same people who use shampoo, detergent, oil-guzzling cars, electricity like we are using here, air conditioning. So my starting point is, let’s give them the choice and let them figure out what to do. Over a period of time they will learn how to protect their own environment.

Single serve has come under tremendous criticism by environmentalists. I say, OK, now that we have created the capacity to consume, the large companies are not stupid. They are going to learn that if they don’t create the backbone for developing an ability to have biodegradable packaging, they’re going to be under tremendous pressure from public policy, from every possible basis. So they’re going to find a way of developing it. So what I think we will see is that we will increase the consumer base, we will create some new problems of resource use—resource abuse—and we will solve the problems as we go along. We have gone through exactly the same in this country. We abused our rivers, and now we are trying to do remediation. But the good news is that we were the first ones to abuse and then do remediation. Now everybody else in the rest of the world knows what can happen.

So take for example emissions from the automotive industry. The toughest standards today are in China. Not necessarily well enforced, but all new cars will have to comply. That’s tougher than what is available in the United States. The same companies that are creating cars in China to those standards will not do it here. And they complain about California standards.

So will the biggest advances in sustainable manufacturing and consumption come from the bottom of the pyramid, and flow to the developed countries?
Absolutely. Actually, it’s going to start from there, because we cannot manufacture products and services for such a large population base without focusing on sustainability. So we will be forced to bring green products to the bottom of the pyramid first. Therefore, opening up the bottom of the pyramid has a natural advantage in inventing technologies and solutions to our problems.

Once you bind yourself to a very complex base of limitations on what you can and cannot do, then you start innovating. So I think that there’s a lot more vibrant experimentation on these issues, because people are focused on the bottom of the pyramid, and therefore I look at is as a major source of innovation. Not all kinds, but a major source of it.

Along with new strategies and new models of governance you suggest in your book, will there need to be new ways of evaluating financial performance?
I don’t believe that we need a new way. I agree that companies have to be accountable for more than profits, on their environmental record and so on. Having said that, profit is the engine, and I don’t think we should change that at all. Unless the company is profitable, it cannot access markets to fund the growth. And ultimately the consumers should benefit and so should the investors. My thesis is about bringing the interests of the investors and the interests of the consumers into focus, into total alignment. So what the book is trying to do is build a harmonization of the interests of the consumers who are being underserved, the interests of the company that is looking for growth opportunities, and the interests of shareholders who want value creation. It is all at the same time.

So I look at how every contradiction we have seen has been proven to be wrong. Let me give you examples. Quality vs. cost. TQM solved the problem. Then we said we can’t have differentiation and low cost. Mass customization solved the problem. You can’t have innovation and efficiency. We know it is possible today, when you can innovate and be very efficient. The bottom of the pyramid and sustainable development is exactly the same. You can’t create billions of new consumers and be profitable because they don’t have money? No. If you can create the capacity to consume, you can grow dramatically. So I want this to be juxtaposed in what we have done in other areas where we thought it’s not possible.

How big of a challenge will it be to institute checks and balances to ensure that the poor actually benefit from this?
It’s a huge challenge. I’m not underestimating, because that would be very Pollyannaish. The middlemen who have benefited from asymmetries are not going to just disappear tomorrow. They also have enormous political clout because they are the richest people; because they’ve been able to exploit. I’m saying it in a positive way, as a businessperson: That’s what they did. They took advantage of a bad situation. They’re not going to go away. Having said that, what digital technologies are trying to do is allow people to start conversations across villages, across small towns; where people are saying, if you’re getting money at eight percent, why am I paying 10? If you are getting something for X, why am I paying Y? And the connectivity is going to fundamentally change the equation, because asymmetries can only be managed with no information or very opaque systems. Therefore the development of the cell phone and the PC and ubiquitous connectivity is going to create a revolution that none of us can stop. That is what gives me optimism.

You’ve been focused on this for a long time. How often are you surprised?
Actually, I’m fascinated by the amount of innovativeness that is possible. That’s what surprises me, every time. It’s always, why didn’t I think about it? Because, people are doing the most creative things, and what would have been impossible to conceive five years ago is becoming quite normal. For example, five years ago you would not have had a conference (like “Eradicating Poverty through Profit”). There are more than 1,000 people, and 50/50 from companies and the development community. The fact that you are here. Five years ago we wouldn’t have conceived it--it would have been a separate meeting of civil society organizations and maybe some developmental economists, but the business guys didn’t want to bother.

So what is most satisfying for me is, five years ago I was a voice in the wilderness, and now it looks like it is the center stage. And if that can happen in five years, we can transform our societies fast. Because there is tremendous momentum that we can build with success stories, role models, credibility. And that is the reason for bringing these people here. They are not messing around at the margins with 25 consumers; they are transforming the country with millions of consumers. That is what I think we need. Out of the 1,000 people here, at least 200 people are going to say, why can’t I do it? Now imagine what happens if 200 people try and 10 people succeed. We have transformed another 100 million people. That is our goal. Make sense? And I think it’s a very simple agenda. Not complicated, but one that can work.

We need 1,000 evangelists who will not just preach, but do, and 1,000 will lead to 100,000. It is like the idea of a tipping point. Exactly the same.

What is your dream of what India and China and South Asia will look like five or 10 years from now, as a result of people embracing these ideas?
At least I can say for India, in five years no company operating in India will talk about the bottom of the pyramid as if it is a distinctly different market. When they talk about a market it will automatically include what we call today the bottom of the pyramid. And it’s already happening. That’s where I start in my book. CSR is not sustainable. Business is.


Case Studies

Aravind Eye Hospitals
Aravind is a chain of eye-care hospitals in India that, thanks to revolutionary workflow innovations, offers diagnosis, sight-restoring surgery, and post-operative care for between $50 and $330. Its pricing scale allows Aravind to offer care for free to the poor, while operating the world’s largest eye-care system at a profit.

Casas Bahia
Casas Bahia is Brazil’s largest retail chain, selling electronics, appliances and furniture mostly to the poor; 70 percent of the company’s customers have no consistent or formal income. Casas Bahia serves this market profitably through an innovative store credit program and a strong focus on customer service.

CEMEX Patrimonio Hoy
CEMEX is the largest cement manufacturer in Mexico and the third largest in the world. In the late 1990s the company began a program called Patrimonio Hoy (“savings/property today”) to reach the low-income market in Mexico, offering access to credit, quality building materials, strong customer service and professional advice for family building projects. The program allows the poor to build or expand their homes faster and at higher quality, and opens the low-end market to other business opportunities.

ICICI Bank
The second largest bank in India, ICICI Bank has developed new business models for bringing banking services to the country’s hundreds of millions of poor. In partnership with non-profits and independent microfinance institutions, ICICI Bank has established a network of nearly 10,000 village-based self-help groups that develop local women’s management capacity and administer loans at rates much better than those offered by local money lenders. The Bank is developing more innovative financial services for India’s rural poor, including low-cost ATMs in rural villages.

ITC e-Choupal
The Indian conglomerate ITC conceived its e-Choupal program as a way to streamline and reengineer its purchase of soybeans from rural farmers. With the recent deregulation of agricultural product marketing, ITC installed Internet-connected kiosks in rural towns so they could purchase directly from farmers. This not only reduced transaction costs for both ITC and farmers, but ITC’s direct access to information from farmers and farmers’ access to wider information (such as soybean futures prices on the Chicago Board of Trade, weather forecasts and expert agricultural advice) allow for better strategic decision-making.

Jaipur Foot
Jaipur Foot is both a prosthetic foot design and an organization that provides and services prosthetic feet and legs to some 16,000 poor in India each year. While prosthetic legs in the United States cost an average of $8,000, the Jaipur Foot costs only $30, can be fabricated and fitted in a single visit by low-skill workers, and meets the more demanding performance requirements of the rural poor—sitting cross-legged, squatting, walking on uneven ground and even climbing trees.

Discuss these concepts and learn more at www.nextbillion.net, WRI's Development through Enterprise community Web site.

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