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Bottom of the Pyramid (BoP)
Gökhan Dikmener, Business Outreach Coordinator UNDP Private Sector Office, Turkey
Plan
o Summary of first two seminars
o BoP Concept & Development
o Examples
o BoP Effects on Corporate Strategies
Summary : Seminar I
o Definition of poverty
o Measurement of poverty o Money metric
o Basic needs
o Capabilities
o Social Exclusion
o “Human development is a process of enlarging people’s choices.”
o Human Development Index o Health, education and standard of living are dimensions that are basic and can be
measured
o Millenium Development Goals
Summary : Seminar II
o Definition of CSR
o UN Global Compact
o Driving forces of CSR o Consumer preferences
o Reputation
o Social Licence to Operate
o Walmart Case o Sustainable Product index
o UN Global Compact - Accenture Survey
Summary : Seminar III
o Aid is not sustainable
It must be an investment
o (Profitable) businesses are sustainable
Also stabilize a region
Promote entrepreneurism and social mobility
o Prahalad:
the poor are a viable market
ICT can make a difference
Plan
o Summary of first two seminars
o BoP Concept & Development
o Examples
o BoP Effects on Corporate Strategies
BoP Concept
o In economics, the bottom of the pyramid is the largest, but poorest socio-economic group.
o The more current usage refers to the people living on less than $2 per day, as first defined in 1998 by C.K.Prahalad and Stuart L. Hart.
o Prahalad proposes that businesses, governments, and donor agencies stop thinking of the poor as victims and instead start seeing them as resilient and creative entrepreneurs as well as value-demanding consumers.
Overview
BoP Strategic Logic
o New Market: Massive & growing
underserved market (Prahalad & Hart, 2002; Prahalad 2004; Hart 2005)
o Radical Innovation: Incubation site for “disruptive
Tier 1 technologies” (Hart & Christensen, 2002)
o Competitive Pre-emption: Breeding ground for next-gen, global-scale competitors (Christensen, Craig, & Hart, 2001)
Base of the Pyramid Sector: More than Meets the Eye
Purchasing Power Parity (PPP)
Informal Economy (Small enterprises, bartering, sustainable Livelihood activities, subsistence agriculture)
Hidden Assets
Size as % of GNP
Nigeria: 70% Mexico: 40% Brazil: 30% Germany: 20% Japan: 10% USA: 10%
$ 9.3 trillion in assets worldwide without legal title
Understanding the Real Value of Emerging Consumers
Poor as a Market
o Very high existing costs
o Real purchasing power
o Already purchase “luxury” items
o Able to adapt to new technology
Being Poor is Expensive
o Drinking Water
4-100x the cost compared to middle class
Lima, Peru: 20x base cost, plus transportation
o Food: 20-30% more (even in poor areas of US)
o Credit:
10-15% interest/day is common (>1000% APR)
Grameen Bank is 50% APR
o Cell phone:
$1.50/minute prepaid (about 10x) in Brazil
Suburbs of Mumbai (Bombay)
The “Yes, but…”s
o Corporate cost structures are a given…
“The poor cannot be our target customers because, with our current cost structures, we cannot compete in that market profitably.”
o Our focus is on products, not functionality. We worry about ‘detergents’, not ‘cleanliness’
“The poor cannot afford, nor can they have any use for, the products and services sold in developed markets”
o Our emphasis is product and process innovation, not business innovations
“Only the developed markets appreciate and will pay for new technology—the poor should adapt and use the last generation for themselves.”
Wrong!
Wrong!
Wrong!
The “Yes, but…”s (contd.)
o We do not see the Bottom of the Pyramid forcing us to innovate around sustainable development
“The Bottom of the Pyramid is not important to the long term viability of our business. It should be served by governments and non-profits.”
o Managers do not get excited about business challenges that have a humanitarian element to them
“Intellectual excitement is in the developed markets—it would be hard and expensive to recruit, train and motivate managers to tackle such a challenge.”
o If this was a viable and important marketplace, someone would have already tackled it successfully
Wrong!
Wrong!
Wrong!
Prahalad’s Suggessions
o ICT is a tool for regular business
Larger reach at lower costs
Lower transaction costs
Better pricing, planning, supply chains…
o Enlightened management
Focus on ROI, not margin (or product cost)
Solve the whole problem (e.g. ice cream packaging)
Local content, local adaptation, local training
C.K. PRAHALAD
C.K. Prahalad: "Doing Well by Doing Good" http://www.youtube.com/watch?v=jhkq_6HERe0
“The aspiring poor present a prodigious opportunity for the world’s wealthiest companies. But it requires a radical new approach to business strategy.”
C.K. Prahalad and Stuart Hart “The Fortune at the Bottom of the Pyramid”, Strategy+Business, January 2002
Criticism on Prahalad’s BoP Model
o Karnani proposes that there is no fortune at the bottom of the pyramid and that for most multinational companies the market is actually very small.
o Karnani also suggests that the only way to alleviate poverty is to focus on the poor as producers, rather than as a market of consumers.
o The most significant debate over Prahalad's proposition comes from Aneel Karnani.
“The popular 'bottom of the pyramid' (BOP) proposition argues that large companies can make a fortune by selling to poor people and simultaneously help eradicate poverty. While a few market opportunities do exist, the market at the BOP is generally too small monetarily to be very profitable for most multinationals. At the same time, the private sector can play a key role in poverty alleviation by viewing the poor as producers, and emphasize buying from them, rather than selling to them.”
Karnani, Aneel G., Fortune at the Bottom of the Pyramid: A Mirage. Ross School of Business Paper No. 1035; California Management Review, Forthcoming.
Plan
o Summary of first two seminars
o BoP Concept & Development
o Examples
o BoP Effects on Corporate Strategies
Examples
o One example of “bottom of the pyramid” is the growing microcredit market in South Asia, particularly in Bangladesh.
o With technology being steadily cheaper and more ubiquitous, it is becoming economically efficient to “lend tiny amounts of money to people with even tinier assets”.
oThe microfinance network argues that the availability of of credit to the poor “helps the poor but allow banks to increase their business”.
Micro-credit
Agriculture
oTo eliminate the inefficiencies in its supply chain caused by corrupt middle men at local rural markets, ITC created a network of “e-Choupals” (choupal = place of gathering) in rural communities.
oThrough these e-Choupals, individual farmers have been able to check the market trading price of their produce and sell it directly to ITC.
oBoth the individual farmers and ITC have increased their revenues, because the layers of inefficiency no longer have a role in the transaction between seller and buyer.
Case: Compartamos Banco
Revenue US$ 370.0 Million (2009)
Net income US$ 79.7 Million (2009)
Total assets US$ 709.2 Million (2009)
Employees more than 8,000
1990 - Commenced operations as NGO 2000 - Incorporated as a SOFOL (Sociedad Financiera de Objeto Limitado) 2001 - We established our first Certificados Bursátiles program and completed the first of three issuances. We became the first microcredit lender in the world to issue debt in the capital markets. 2006 - Transformed into a commercial bank 2008 - Incorporated to the IPC 2010 - Ranked 1st on a list of the Best Companies to work in Mexico for presented by the Great Place to Work® Institute.
Case: Compartamos Banco
Examples (contd.)
o Whereas Prahalad originally focused on corporations for developing BoP products and entering BoP markets, it is believed by many that SME might even play a bigger role.
o For LPs, this offers an opportunity to enter new venture capital markets.
oAlthough several social venture funds are already active, true VC funds are now emerging.
Venture capital
Market-specific products
o One of many examples of products that are designed with needs of the very poor in mind is that of a shampoo that works best with cold water and is sold in small packets to reduce barriers of upfront costs for the poor.
oSuch a product is marketed by Hindustan UNILEVER.
Examples (contd.)
o Whereas Prahalad originally focused on corporations for developing BoP products and entering BoP markets, it is believed by many that SME might even play a bigger role.
o For LPs, this offers an opportunity to enter new venture capital markets.
oAlthough several social venture funds are already active, true VC funds are now emerging.
Venture capital
Market-specific products
o One of many examples of products that are designed with needs of the very poor in mind is that of a shampoo that works best with cold water and is sold in small packets to reduce barriers of upfront costs for the poor.
oSuch a product is marketed by Hindustan UNILEVER.
Examples
Content
o BoP Concept & Development
o Examples
o BoP Effects on Corporate Strategies
Plan
o Summary of first two seminars
o BoP Concept & Development
o Examples
o BoP Effects on Corporate Strategies
BoP Effects on Corporate Strategies
Many Companies are Beginning to Experiment with the BoP
Nutristar, Nutridelight (nutritional drink), Pur (water purifier) Hindustan Lever (detergent for the poor in India and Brazil), Annapurna (iodized salt for the poor) Making solar power affordable (India) Banco Real, microcredit in Brazil
BoP Effects on Corporate Strategies (contd.)
Vodacom community services in South Africa, joint venture between Vodafone and Telkom SA Solar powered digital camera in India and community information systems Program in South Africa to help entrepreneurs enter the supply chain and profit from new business ventures Water for all program and to periurban areas in Brazil
Case: GE
For decades, GE has sold modified Western products to emerging markets. Now, to preempt
the emerging giants, it’s trying the reverse.
The Idea in Brief o The model that GE and other industrial manufacturers have followed for decades – developing high-end products at home and adapting them for other markets around the world – won’t suffice as growth slows in rich nations.
o The tap opportunities in emerging markets and pioneer value segments in wealthy countries, companies must learn reverse innovation: developing products in countries like China and India and then distributing them globally.
o While multinationals need both approaches, there are deep conflicts between the two. But those conflicts can be overcome.
o If GE doesn’t master reverse innovation, the emerging giants could destroy the company.
Case: GE (contd.)
Vijay Govindarajan: How GE is Disrupting Itself http://www.youtube.com/watch?v=8BvPUcZpGK8
Case: GE (contd.) Reverse Innovation in Practice
Case: GE (contd.) Reverse Innovation in Practice
Case: GE (contd.) Reverse Innovation in Practice
Case: GE (contd.) Reverse Innovation in Practice
Case: GE (contd.)
GE’s Frugal Innovation Principles o Take the needs of poor consumers as a starting point and work backwards. Instead of adding ever more bells and whistles, strips the products down to their bare essentials.
o There is more to this than simply cutting costs to the bone. Frugal products need to be tough and easy to use.
o Being sparing in the use of raw materials and their impact on the environment.
o Frugal innovation is not just about redesigning products; it involves rethinking entire production processes and business models.
o Squeeze costs so they can reach more customers, and accept thin profit margins to gain volume. Three ways of reducing costs are proving particularly successful:
Contract out ever more work. Use existing technology in imaginative new ways. Apply mass production techniques in new and unexpected areas such as health
care.
What we know so far?
o Business Models. Incremental adaptation of existing products and business models is not effective in the BoP
A new low cost system built from the ground up is necessary o Partnerships. Success in the BoP requires new and different partnerships
Trust-building with locally embedded partners is key to overcoming lack of formal institutions
o White Space. Need for protection or “firewall” along with new metrics
Existing corporate “antibodies” will stifle BoP initiatives if not dealt with
What we know so far? (contd.)
o Innovation. The BoP offers the ideal conditions for incubating new, leapfrog technologies
The logic of disruptive innovation applies in the BoP, including the potential for up-market migration
o Born BoP. Most successful BoP ventures thus far have come from the developing world
Large incumbent firms from the developed world are encumbered with decades of institutional practices, mental models, and infrastructure honed for the top of the pyramid
Thank You !
