Companies can Make Fortune at the Bottom of the Pyramid

Rajesh N. Kumar

James Cook University

Table of Contents

Executive Summary 3
Background 4
Introduction 4
What is the BoP Strategy 6
What is the Driver for MNCs to Focus on BoP Market 9
Is There a Buying Potential at the BoP 9
Behavior of Consumers in Asian Market 10
Sector With Highest Potential of Business in BoP Market 11
Recommendation 12
How to Approach the BoP Community - Innovation 14
Implement Innovative Approach to tap BoP Market 15
References 16
Appendix A 17
Appendix B 18

Executive Summary

This report explores published journals, blogs and books around The Bottom of the Pyramid (BoP) being the breakthrough in the Strategy for businesses across segment and analyse what steps would lead to success through the journey of business around the 4 billion population existing in the bottom of the pyramid layer. Methods of analysis include statistical and market trend, and ratios of performance. Main area of focus is Asian market through the report as they account to 3/4th of the population residing in the bottom of the Pyramid, given the uniqueness of this region around culture, market behavior, people mentality and social dynamics. Gaining that knowledge would become important to have a break through into this market and ensure it’s a sustainable business.

The report would also try to analyze companies that had an early access into this market, and how some still failed to make profit

And we would conclude the report with statistics to prove how to gain access into BoP market, and ensure long term sustenance by making profit. We would also cover the key role of the 1/7th population of the world, who do a survival with less than 2 $, and how they influence the business model in this market

Our Recommendation would be as following:

• Understanding the Cultural difference between East & West Market. And the role that plays to make business at the BoP market

• What is the right approach and principal of BoP as stated by some of the renowned authors and research professors

• What is the social dimension to doing business in BoP, and the difference that would bring in uplifting the average economy of Human beings

• Change in Industry mind set and driving business into Rural

Limitation of this report would be that it takes views from various author’s study, which would give us a perspective and approach to enter the BoP market. However, may not provide laid out plan to gain profit in this business model. The reports view might be limited to the sources and references of the company within the discussion and may not cover or applicable for all type of business. And lastly, it is a general perspective which is limited to this report and not a direct indication of any specific Company or Organizations performance, as the statistics are relevant to the report on the date when it was published.

Background:

As per World Bank (16-09-2008), 1.4 billion people (one in four) in the developing world were living below US$ 1.25 a day in 2005. Overall the poverty rate had a steady downfall from Sixty to Forty percent across the South Asia region from 1981 to 2005. While in India the same trend was showing a uphill with Increase in the number of people poverty line going up from 420 million in 1981 to 455 million in 2005.

The key assumption in the Developed countries is that the poor have no purchasing power, not brand-conscious, and are not skilled enough to accept advanced technology and therefore do not represent a viable market, (as cited in Author).

Through this report we are going to be focused mainly around Asian market. Since, the bulk of the 4 billion people at the base of the pyramid, who account for 75% of the world’s population, live in Asia. According to the World Resources Institute, Asia’s base of the pyramid market is a whopping $3.47 trillion, far above than the rest of the Globe trending in billion’s as cited in Development Asia, 2, (2008).

Introduction:

London and Hart (2004) as they stated that the developed/matured markets are becoming more saturated, and making it more difficult to sustain the market and are looking for new avenues to enable profit to the shareholders. This led to multinational companies turning towards emerging markets (EMs) in the developing world.

The first step towards west moving towards east (Here American & European Companies are referred to as West and India/South east Asian countries have reference to East)

London et al. (2004) stated for MNCs the BoP population poses wonderful prospects and unique encounters. Followed by the unique argument by Prahalad and Hart (2002) stated doing business with the 4 billion poorest people will require ‘Innovation in technology and business models’.

MNC’s planning to do business in the developing countries generally come across the cultural shock, and always fail to recognize the social behavior of the people in the Asian world, as that plays an important role to do business in this market. They should also realize same size does not fit all, the approach and reach has to be customized to the need of this people in BoP and at core we need to approach this market as a booming potential for employment opportunity in the Asian country, where the 3/4th of the poorest people reside and we should also recognize that this is where you notice high population growth. This has to be seen as an opportunity, given that they would have a high ratio of younger population, which is important for the success of any Organization to grow and sustain in the long run.

It is also important to understand the purchasing potential that lies with the BoP market.

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Source: Richard Fletcher, The Impact of Culture on Marketing at the Bottom of the Pyramid – a Relationship Creation and Network Development Approach

The perception which dwells the BoP market is the lack of spending potential, as the poorest of the poor live in country side or uptown market slums, and they usually do not hold any bank accounts or assets. They have no formal education, and are hard to reach via conventional methods of Sales & Distribution as stated by Prahalad et al (2002)

MNCs should recognize that the first step towards Globalization or to adopt a strategy to notice increased profit, with low cost, large business pipe line and long term sustainability is to recognize the potential with the emerging market, as they move towards the wave of urbanization, and the emerging cities with increased buying potential is an indicators of the future needs lie in the emerging markets. The consumers in emerging economies are moving up the market spend as their earning increases, and statistics shows that spend has increased by 10% in countries like India & China year on year (asiaNBC).

Please refer the illustration below adapted by Prahalad and Hart (2002) to depict some of the most common Assumption and associated Implications noticed by the MNC’s

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Source: http://www.csrwire.com/pdf/Prahalad-excerpt-001-022.pdf (Pg. 9/22) [pic]

What is the BoP Strategy

Before we embark in the journey to understand the strategy, it’s key to know what led to the development of BoP Strategy. As per Prahalad, it was his view to solve the problem of poverty and to improve the economic scale. It was a Co-Creation solution towards economic development and Social transformation as illustrated in Appendix A1.

The 12 principles of Innovation as stated by Prahalad needs attention to penetrate into the BoP market. In simple terms it should be an Affortable Product, ease of access to consumers, and available across location. Chakrabarti also talks about the approach to rural in his study being Availability, Affordability, Acceptability & Awareness

The MNC’s should always look at the future potential that the BoP market carries, as a study in Social Entrepreneurship by Global Health University indicates that the BoP popullation could spike up to 6 billion people in the next 40 years.

It is important to take into account that the strategy does not focus only on creating cheaper products by manufacturing at low labor costs and increasing environmental and social concerns (asianbc).

To gain experience in the BoP market and to set a position to tap into the market. It is critical to engage NGO, authorities and end-users from BoP market in different stages of solutions, and by accepting other levels of revenue. Else, this would become a huge road block in breaking through the market (asianbc).

It is also essential to recognize the market that is seen beyond the urban solution. As at core the BoP market evolves from the rural and it’s important for MNC to devise the strategy in a manner that it becomes a household brand names.

In the study conducted by Chakrabarti on the potential of rural market, he indicated more and more MNC’s are turning to tap into the rural markets. And the ones that have the head way are Hindustan Lever, ITC, Coca-Cola, LC Electronics, Britannia, LIC, HDC Standard life, ICICI, Philips, Colgate, Palmolive and most of the Telecom companies.

He also cites example of some of the brands such as Coke/Pepsi or Chic/Pantene or Colgate/Close up or Ariel/Surf or Lays/Cheetos that have made the way into the rural as household brands.

The interesting fact that Chakrabarti shared in his study indicated that the rural India, with a population of 700 million, would over grow more than 4 times it’s potential compared to some of the markets such as South Korea and Canada. Also he stated that Hindustan Lever made soap called Lifebuoy, which was sold at 0.03$ for 50 gm and Coca cola had a great success by selling coke for 0.096$ for 200 ml coke with returnable glass bottle. Now Eighty percent of new drinkers for coke come from the rural markets. The table below how diverse the market has penetrated into the BoP strategy and the role that is played by ’Innovative pricing’ to make it ’Affordable’.

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Source: http://www.csrwire.com/pdf/Prahalad-excerpt-001-022.pdf (Pg. 17/22)

To name some of the Organisations, which entered the BoP strategy to fulfil the dream of Prahalad to eradicate poverty and to enable exposure to the poor to products that they always felt they can’t afford to experience. These are the social entrepreneurs, who led Organisation such as Tata Nano car, the Aravind Eye Hospital cataract surgery, and Grameen Bank’s micro loans are few Organisations to name some(asianbc).

Given the exposure within Singapore, we could also name IKEA furniture as a Western example of a company that has made cost effective, high design and relatitively well-designed and high quality furniture available to larger market by well thought production and distribution strategy(asianbc).

Another such example in the low-income segment was the venturing of Danone, the French Dairy company who joined hands with the micro credit organization, Grameen Bank, to provide specially fortified yoghurt to families in Bangladesh at 5% of the usual price. And the way they managed to do so was by thinking of Innovative strategy for distribution. By using wide network of small entrepreneurs – local women, who go from house to house.

These are the companies, which have truely given thought to the strategy of Availability, Affortability, Accessability, & Awareness.

What is the Driver for MNC’s to Focus on BoP Market

Prahalad and Hart (2002) who analysed the key drivers for MNCs to focus on BoP market state that the increased access amongst the poor to Television and information through News paper created more awareness amongst the BoP segment about various products and services in the market. Thus creating the want or aspiration to share the benfits. Followed by, homogenous environment enabling the MNCs to invest in the developing countries and additional support extended by NGO’s.

The market over the period is shrinking in the Tier 1, 2 & 3 layer and is driving the MNCs to explore the untapped market at Tier 4 to enable ongoing increased dividends for the share holder. Innovative market and approach is the need of hour to have increase in revenue in any business sectors.

Rural market had over the period grown more demanding and the need has arised for MNCs to start creating products and services for rural populations.

Is There a Buying Potential at the BoP?

To enable the buying power at the Tier 4 segment it’s crucial that we enable access to credit, and enhance the earning potential of the poor (Prahalad and Hart, 2002)

Prahalad (2004) stated in his analysis that China is already $5.0 trillion economy, second after the United States in purchasing power parity (PPP). In his report he indicated that the developing countries – China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa, and Thailand are home to 3 billion people, representing 70% of the developing coutries population. In PPP terms, this group’s GDP is 12.5 trillion, and it’s larger than the GDP of Japan, Germany, France, the United Kingdom, and Italy combined.

Prahalad (2004) The poor tends to premium for every thing that they consume from rice to credit compared to the rich society. For example. In the slum dwelled area of Dharavi, outside Mumbai, India, pay a penalty of 5 to 25 times more than a rich in the neighbouring area of B. Desai Road, Mumbai, India. This situation is driven mainly due to monopolies, lack of access to proper systems, poor distribution, and strong traditional situation that is built over the period.

For example, the poor in Dharavi pay 600 to 1,000 percent interest for credit from local money lenders. In a similar scenario, if a bank step’s in for micro lending they could easily afford to do the same at 25 percent (Prahalad – 2004).

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The Poor and High-Cost Economic Ecosystems
Source: http://www.csrwire.com/pdf/Prahalad-excerpt-001-022.pdf (Prahalad - 2004, Pg. 12/22)

Behavior of Consumers in Asian Market

Anthony (2012) said in his blog that quality is a relative concept. You certainly do see obvious differences in perception in certain categories. For example, Western market in cosmetic industry sell a lot of Tan creams, as that is considered to be a beauty enhancer for western women. However, same may not be true in Asian markets as the standard is glowing skin, so supermarkets are packed with skin whiteners.

Anthony (2012) very well stated that if you can figure to get a $ 1 from each Chinese [Indian, Brazilian or Nigerian] customer..? It is a brutally hard to crack the social barrier, so ignoring them isn’t an option and it becomes inevitable to partner with local players to get lead on the social behavior and pattern of the emerging market consumers.

It is ease to build loyalty amongst the BoP market, as they have limited risk appetite and reluctant to switch brands as selecting a non-popular product has higher implications for lower income consumer. According to D’Andrea (2003) reference used by Fletcher in his article , indicates that the consumer products accounts for 30-35% of total spend in emerging markets, and 50-75% with the lowest layer of socio-economic groups.

Fletcher had bought out these differences between cultures and their attitude towards past, present and the future, and it impacts on the degree of excitement to adopt newer technologies and he also stated that different cultures exhibit different degrees of individualism and collectivism and this influences intent to adopt something new or the ones well tested in the market.

Some researchers have been clearly carried out to highlight this difference in behavior between West and Asia, and Fletcher had sited the behavior and response pattern from Bradley (2003). This has a key relevance when planning to cater to BoP markets.

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Source: Fletcher , p. 5 (http://www.unice.fr/crookall-cours/iup_cult/_docs/_Fletcher%20-%20Cultural%20Differences%20marketing%205687.pdf )

Another model, which Fletcher had adopted in his report to indicate the buyers behavior pattern is Maslow’s hierarchy of needs, which shows the order in which needs are satisfied by buyers. Research by Schutte and Ciarlante (1998) shows that Asia not only has difference in the way which needs are satisfied, they also differ on the actual needs compared to ‘west’. The figure below illustrates the unique difference between Asia and West, when it comes to be driver or inhibitors that drive the market strategy

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Hierarchy of needs between different cultural groups
Source: Fletcher, p.5 (http://www.unice.fr/crookall-cours/iup_cult/_docs/_Fletcher%20-%20Cultural%20Differences%20marketing%205687.pdf )

Sector With Highest Potential of Business in BoP Market

(Hammond et al, 2007) Asia with a 2.86 billion people with income of $3.46 trillion represents 42% of purchasing power. The sector markets consumers range widely in size within Information and communication technology, or ICT ($51 billion as measured, but probably twice with the rapid growth in this sector within BoP). Some are medium scale, such as health ($158 billion), transportation ($179 billion), housing ($322 billion), and energy ($433 billion). And some are truly large, such as food ($2,895 billion) and the smallest of the sector is water with a potential of $20 billion.

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Source: Hammond et al (2007), http://pdf.wri.org/n4b_full_text_lowrez.pdf

Recommendation:

The recommended approach to tap into the BoP market would need key consideration to the following as stated in report (The Next 4 Billion, Market Size and Business Strategy at the base of the Pyramid, Hammond, Kramer, Katz, Tran and Walker, 2007).

• Significant unmet needs: BOP society has no access to bank and modern financial aids. They live in unapproved settlements, and lack access to basic needs for a quality living such as water, sanitation, electricity and basic health care support (Hammond et al – 2007). • Dependence on informal or subsistence livelihoods is poverty traps: They lack the ability to sell their labor, handicrafts, or crops and are restricted to local employment or exploited by mid brokers. Farmers and Fisherman are the ones most uniquely vulnerable to the natural resources destruction (Hammond et al – 2007). • Impacted by a BOP penalty: Many in the BOP pay a higher price for basic goods and services than the richer consumers, and they often receive a lower quality in return (Hammond et al – 2007).

Understanding the sectors, such as ICT, food and health care play a massive business potential within the BoP market.

As part of the business strategy, the following has to be focused to achieve market share. Also refer Appendix B1 from London and Hart (2004) for additional learning’s captured around strategies that have worked well and the ones that didn’t do well in the BoP market:

1. It is important to have a unique solution, product, services and Technologies that would satisfy the BoP needs, such as point of use systems in water sector, healthier products in food, microfinance and low-cost remittance systems in finance sector, housing and energy.

2. Localizing value creation by having a targeted investment in building capability and training the local vendors & suppliers, and enabling franchisee or agent strategy. This would build confidence on the product or service and would get local engagement and motivation to drive the marketing and sales of the product. Telecom sector is the best example to the amount of localization by enabling local phone entrepreneurs and resellers.

3. Enabling access to goods or services – Enabling financial independence by reducing the purchase barriers, prepaid or other creative business models through financing approaches or deployment of low-cost technologies. Examples occur in food, ICT, and consumer business line (in packaging goods and services in small unit sizes, or “sachets”). And cutting across multiple sector is the micro-financing that range from microloans and mortgages

4. Unconventional partnering with governments, NGOs, or groups of multiple stake holders to bring the necessary complementing skills to the table.

It is recommended to use one or more than one of these strategies serially or in a combination to attain sustained market share.

Find below the indicative list of some of the companies that have performed well in the BoP market in various sectors and different regions. Recent days have new entrants into this market some to name are Microsoft (software), DSM (food supplements), Royal Philips (health care), Thomson Reuters (information), GlaxoSmithKline (pharmaceuticals), Intel (computing), Vodafone (telecom), ING (microfinance), and Monsanto (agriculture) as stated in Prahalad (2009).

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Source: Prahalad (2009), Introduction to the Fortune at the Bottom of the Pyramid, Revised and Updated 5th Anniversary Edition

How to Approach the BoP Community - Innovation

As per Prahalad (2006) in his Innovation Sandbox, expresses the importance of innovation through every step of penetrating into BoP market:

1. The Innovation must result in a product or service of world-class quality. (Prahalad, 2006) 2. The innovation must achieve a significant price reduction – at least 90 percent off the cost of the comparable product or service in the West. (Prahalad, 2006) 3. The innovation must be scalable: It must be able to be produced, marketed, and used in many locales and circumstances (Prahalad, 2006) 4. The innovation must be affordable at the bottom of the economic pyramid, reaching people with the lowest levels of income in any given society (Prahalad, 2006)

Implement Innovative Approach to tap BoP Market

(Prahalad, 2006) & (Prahalad, 2009) The Innovation Sand Box approach

1. Scalability: Unless the solution can be scaled, it would not be effective. As the businesses at the BoP are highly volume-sensitive and scale is critical

2. Pricing: It has to be priced in the most affordable manner for variant market segment. Prahalad talks about Price-Profit = Cost, and not Cost + Profit=Price

3. Modern technologies: It is becoming imperative that dramatic cost reduction is not possible without combination of technology & science

4. High standard with Global recognition of quality, safe solution, organic sustainability and aesthetics

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Source: Prahalad (2009) Introduction to the Fortune at the Bottom of the Pyramid, Revised and Updated 5th Anniversary Edition, http://www.ftpress.com/articles/article.aspx?p=1398628&seqNum=5

Reference

Author, A. (No date published). Bottom of the Pyramid Innovation. AsiaNBC, a project of the Universe Foundation, Asia Innovation Management Magazine. Retrieved from http://www.asianbc.dk/page13784.aspx

Chakrabarti, S. (No date published). India’s Rural Market – “The Fortune at the Bottom of the Pyramid”. Retrieved from http://www.abesit.in/pdfs/Success_Through_Excellence.pdf

Fletcher, R. (No date published). The Impact of Culture on Marketing at the Bottom of the Pyramid – a Relationship Creation and Network Development Approach. Retrieved from http://www.unice.fr/crookall-cours/iup_cult/_docs/_Fletcher%20-%20Cultural%20Differences%20marketing%205687.pdf Hammond, A. L. , Kramer, W. J. , Katz, R. S. , Tran, J. T. , Walker, C. (2007). The Next 4 Billion, Market size and Business Strategy at the base of the Pyrami. Research by World Resources Institute, International Finance Corporation. Retrieved from http://pdf.wri.org/n4b_full_text_lowrez.pdf Jaiswal, A. K. (2007). Fortune at the Bottom of the Pyramid: An Alternate Perspective. Journal of MIT press, 2-28.

London, T. and Hart, S. L. (2004). Reinventing Strategies for emerging markets: beyond the Transactional model. Journal of International Business Studies, 1-21

Prahalad, C. K. and Hart, S. L. (2002). The Fortune at the Bottom of the Pyramid. Journal Strategy+business issue, 26, First Quarter

Prahalad, C. K. (2006). The Innovation Sandbox. Journal of Strategy business issue, 44, Autumn. Retrieved from http://www.strategy-business.com/media/file/sb44_06306.pdf Prahalad, C. K, (2009). Introduction to the Fortune at the Bottom of the Pyramid.The: Eradicating Poverty Through Profits. Revised and Updated 5th Anniversary Edition.

Rimando, L.(2008). Fortune at the Bottom. Development Asia, No. 2.Retrieved from http://development.asia/issue02/feature-02.asp World Bank (16-09-2008), Press release no. 20080916, Washington, DC, Author

Appendix A1

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Source: Prahalad. C. K. (2004), Bottom of Pyramid Framework, http://www.csrwire.com/pdf/Prahalad-excerpt-001-022.pdf

Appendix A-2

12 Principles of Innovation for Bottom of the Pyramid Markets

Prahalad provides the following building blocks for creating products and services for Bottom of the Pyramid markets:

1. Focus on (quantum jumps in) price performance 2. Hybrid solutions, blending old and new technology 3. Scalable and transportable operations across countries, cultures and languages 4. Reduced resource intensity: eco-friendly products 5. Radical product redesign from the beginning: marginal changes to existing Western products will not work. 6. Build logistical and manufacturing infrastructure 7. Deskill (services) work 8. Educate (semiliterate) customers in product usage 9. Products must work in hostile environments: noise, dust, unsanitary conditions, abuse, electric blackouts, water pollution 10. Adaptable user interface to heterogeneous consumer bases 11. Distribution methods should be designed to reach both highly dispersed rural markets and highly dense urban markets 12. Focus on broad architecture, enabling quick and easy incorporation of new features
Source: http://www.12manage.com/methods_prahalad_bottom_of_the_pyramid.html

Appendix B-1

The below 2 Appendix B-1 and B-2 are represenation of the study conducted by London and Hart (2004) in there research to analyse the Companies have listed out the strategies that have worked well in BoP, and also listed out the companies that have seen success and failure

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Source: http://e4sw.org/papers/JIBS.pdf , London and Hart (2004)

Appendix B-2

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Source: http://e4sw.org/papers/JIBS.pdf , London and Hart (2004)

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