Fortune at bottom of pyramid According to this proposition there is market at bottom of pyramid and that MNCs can serve them profitably while simultaneously helping in eradication of poverty Some scholars believe that provision of better quality products and unaffordable products is leading less to eradication of poverty and more to exploitation of poor people (Karnani, 2007)

Example of fair and lovely (skin whitening cream) and Casa Bahia (electronic goods retailer) has been cited frequently in terms of unethical practices. (Davidson, 2009)

A poor women may purchase cauliflower for the entire family instead of buying skin whitening cream. A poor person might end up paying monthly installment for purchase of television rather than saving that money for future investments or healthcare

There is further debate that treating poor people as customers is less important compared to treating them as supplier/ producers/ employees, wherein the benefit for both the parties is comparatively higher compared to when multinationals treat them as consumers (Karnani, 2007)

Base pyramid is not an equally important market for all types of multinationals. For example, multinational which provides clean drinking water has better market than one which provides tourism or entertainment services.

Poor as producers and suppliers and co-owners Shree renuka sugars: Indian s largest sugar manufacturing and refining firm started by Indian entrepreneur Mr. Narender Murkumbi While setting up his first sugar mill, he borrowed some money from bank and for rest, he persuaded the farmers (who were eventually suppliers of sugarcane to Renuka sugars) also to invest some sheer thousand rupees of capital in his firm

Those days farmers had to travel long distances to sell their sugarcane produce. Many times their was overproduction and price of crop kept fluctuating creating uncertainty in their income Thus, given constant price and convenience of sales it was not very difficult to convince them

Eventually farmers were convinced to buy atleast 500 shares of firm of Rs. 10 each and seven years later when IPO of Renuka Sugars was launched worth of share increased to Rs. 5 lakhs.

With this money some farmers invested in education of their children, some purchased more land for cultivation, while some of them purchased cars. (Businessworld dated Sep 2 2006)

Sree Renuka sugars was benefited in terms saving on expensive interest on debt (though they had taken debt as well and only a part of financing came through cooperatives) and more importantly in terms if efficient and easy procurement as middle men in supply chain are now removed

Renuka Sugars was able to do away with supply uncertainty and uninterrupted supply of raw and refined sugar has definitely helped Renuka sugars for aggressive expansion and hence more revenues

Poor people as entrepreneurs generating employment Shri Mahila Griha Udyog is a cooperative organization which manufactures Papad It started with modest loan of Rs. 80 in 1959 It was started by seven women and now has base of 42,000 women workers. Its annual turnover is Rs. 300 crore with approximately 10 crores coming from export. The entire papad making process is manual one and does not use any technology anywhere in the entire manufacturing process.

Women earn daily wage of Rs. 60 and bonus of Rs. 4000 on annual basis. This provides employment to women without any kind of exploitation. This cooperative earns its profits to sustain itself

Poor people as employees of MNCs: raising status Employee stock ownership plans (ESOPs) are generally reserved for white collar workers in industries Handful of cases have been noticed where lower middle level workers have retired as millionaires. Firms like Carris Reels, mobile tool international have been practicing ESOPs for blue collar workers since late 1990s

Benefit for corporate ESOPs are known to enhance worker s productivity as a result of which sales per employee and overall efficiency of firms can increase Thus, again multinationals can generate positive value both for themselves as well as for poor employees.

Poor people as customers Prahalad mainly talks about how market choices available should be enhanced and business model especially distribution model should be adapted such that it generates employment for local people Example of HLL and shakti ammas has been cited heavily

Shakti Ammas earn revenue of Rs. 3000 if they can achieve sales turnover of Rs. 30,000. However, they find selling of goods worth Rs. 10,000 to be difficult for them So how much profit is HLL making out of poor people and how much employment is it generating and hence how much poverty is it reducing?

Bottom of pyramid is not a market to be sought after by all types of MNCs. Certain private players can make better profits from base of pyramid compared to others depending upon what kind of products and services they are providing to poor people. Broadly there are four ways of treating them as customers

Reducing poverty premium The poverty premium refers to the higher prices which the poor families pay for basic necessities like gas, electricity and banking compared to what an average customer would pay In developed economies like UK The poverty premium was estimated to amount to of 1,170 a year

This premium exists as people who do not have bank accounts do not get advantages of discounts that average consumer gets if he or she pays electricity and utility bill through debit or credit cards. Thus, though there is no element of exploitation but by virtue of being devoid of certain additional facilities which average consumer has, poor people end up paying 10-15% more for same services

Poverty premium is slums of India

Thus, first thing that MNCs could do is to reduce poverty premium by providing them with services and products of socially important sectors like health, nutrition, credit at market rate so that premium hence cost structure of poor people is reduced and corporate are also able to generate profits.

Certain examples are The term Microfinance could be defined as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and improve living standards (NABARD 99).

Microfinance is not a new concept. Earlier savings and credit groups did existed for example chit funds in India and susus in Ghana. Cheetu in case of Sri Lanka and Pasanaku in Bolivia To begin with theme of microfinance was built in not for loss and not for profit business

According to Yunus founder of Grameen Bank in Bangladesh microfinance institutions should be "social businesses" driven by social missions However, recently trend has changed. As pointed by Prahald also that doing business with people at bottom of pyramid need not to be corporate social responsibility, certain microfinance institutions like SKS in India and Compartamos in Mexico have gone public indicating the commercial angle of running microfinance institutes

Highlighting the effectiveness of his company's strategy, Akula (founder of SKS microfinance)states, "In twelve years, we've reached 7.5 million clients," with most coming in the last few years when SKS switched from a non-profit to a for-profit(i.e. in 2005), whereas "the Grameen Bank today reaches 8 million clients, but it took the Grameen bank thirty-five years to do that

Have they been effective to eradicate poverty? However, Micro-Finance Institutions (MFIs) have been charged with exploiting the poor with usurious interest rates' and intimidating the borrowers by `forced loan recovery' practices While others argue that there is little evidence to show that microfinance eliminates poverty, "If that had been the case, Bangladesh should have declared itself poverty-free."

P&G s PuR affordability trap Ignoring the difference between PPP exchange rate and foreign exchange rate, MNCs like P&G and HLL calculate purchasing power at PPP rate however, they price the product at foreign exchange rate which distorts affordability income

For example, in case of PuR product consumed 5% of daily income of poor person when calculated at PPP rate. However, at foreign exchange rate it consumed 15% of daily wages, thus making product unaffordable for poor people.

Danone s Shotki doi Adaptability trap Shoktidoi a nutritional fortified yoghurt manufactured by Danone in co-ordination with Grameen bank in Bangladesh was focused on eradicating mal-nutrition amongst children in Bangladesh It was priced at 6 takas for 80 grams Making youghurt which meets 30% of the nutritional need of child and costs less than 10 cents was really a challenge for Danone

distribution and storage of shoktidoi requires cold storage, which was not possible given the lack of infrastructure and power in Bangladesh. Availability of product was made through skokti ladies, however they did not find great employment opportunities as they were able to sell enough yoghurt. Moreover, unsold products were not taken back by the company so they had to bear the loss of not selling

Project started in 2007 could not survive much and to assure its viability, Danone had to turn to middle and upper middle class segment consequently 80% of sales for shokitdoi comes from urban and upper class income and just 20% from bottom of pyramid

Though Danone claims proper training of Shokit ladies regarding health benefits of shotkidoi, preference of women to consume homemade curd clearly indicates that message was not passed on well. Secondly cold storage problem also made acceptability of product little bit difficult.

Essilor: Coming out of affordability and Adaptability trap One of the largest ophthalmic and organic lens manufacturers decided to cater to eyeglass and lens need of poor people in 2005 and hence operated its own mobile vans in rural and other slum areas of India

Optemetrician and technician use to take eye sight test to decide on the power of glass and then use to sell custom made glasses to individual customer at the price of dollar 4 However, perceived value for money was lower in this case and hence essilor was forced to further lower the cost of the glasses

Now essilor conducted some preliminary tests for eye sights like looking at needle or television and based on simpler tests approximate power was determined and hence glasses were sold

they adapted the business process to bottom of pyramid consumers and also were able to reduce the cost by doing away with the equipment cost and technician cost and hence made the model both affordable and adaptable to poor people

Making unavailable Utilitarian goods of high prices as affordable and available Besides reducing premium, firms can make those products and services available to poor people which are of economic utility to them but cannot be afforded by them because of high prices. All kind of electronic goods, automobiles and other appliances comes under this category

To make these products affordable and available firms can do two things. Invest in product and process innovation so that cost drastically comes down or lend credit to poor people

Mobile services: Thanks to hyper competition in telecom sector that players are being forced to tap rural and related markets. To make this feasible, only option available to firms is to lower cost Bharti Mittal, outsoured some of the critical functions of telecom business like network management and made the process of communication more cost effective

Chotukool refrigerator is yet another example of product innovation providing low cost options Godrej and Boyce created a small refrigerator which looked like 43 liter box and had no compressor. Given electricity problem in rural and village areas, it was heavily insulated so that cooling effect remains for long during power cuts

All this costs 35% less than what a normal refrigerator would cost. To make enhance its affordability further, company has tied up with microfinance institutes to make credit available to poor families at decent interest rate

Though when poor people were interviewed, they denied the need of refrigerator as they did not had anything to store. Their purchase is on daily basis However, Boyce and Godrej realized that daily purchase of vegetables overall increases their cost structure as they could get discounts from vegetable vendors if they buy in bulk.

Since storage problems could be solved with chotukool refrigerator, company went ahead with the idea and manufactured refrigerator in collaboration with village women who would actually use refrigerator

When cost cannot be dealt with, then other possible option is to give credit to poor people Casa Bahia is one of the retailers, which gives installment payment option to poor customers after thorough credit check. Thus a person could buy washing machine, television or any other branded appliance on credit and then make can economic use out of it.

However, interest rate charged by such retailers is a debatable issue. Though they make product available to poor customers, charging of above market interest rate has been questioned as exploitation of poor people (Davidson, 2009)

Substituting high cost goods and services with low cost goods and services Family members often need to send money home Some can afford courier services, some can use postal services at the expensive of longer delivery time. Some of them can afford to go home and give money neglecting transportation and loss of pay cost but for poor customer all these are expensive options

M-PESA, a joint effort of safaricom and Vodafone in Kenya is one such service, which charge 40 cents to transfer money home electronically . More than $600 billion has been transferred through the service, which has garnered revenues of about $100 million

HP s e-inclusion initiative http://h20247.www2.hp.com/PublicSector/do wnloads/MobilePhotoStudio.pdf

Further multinationals can enhance choice of already available products by bringing branded products to poor people market Depending upon cost quality trade off poor person can decide whether he or she would like to purchase low quality and cheaper product or branded but little bit expensive product

Sachet revolution has been said to make branded products affordable for poor people. However, recent study by AC Neislon shows that except for shampoos and razor, for all other product category like coffee, milk powder etc. bigger size packages are preferable over small size package questioning the success of sachet revolution

Similarly, Shakti Ammas of HLL earn revenue of Rs. 3000 if they can achieve sales turnover of Rs. 30,000. However, they find selling of goods worth Rs. 10,000 to be difficult for them. http://www.ids.ac.uk/files/dmfile/Wp336.pdf

Nirma detergent is probably one such rare product where quality won over cost to attract poor people as customers Detergents have better cleaning power as compared to soaps. Prior to launch of Nirma, village people used to wash clothes with soap. When marginally high cost but better quality detergent was made available they quickly shifted to Nirma.

Not only poverty driven people but some middle class people also shifted to Nirma from high end detergents. (Nirma was priced at Rs. 9 per kg compared to Rs. 23 per kg of Surf) This shook the market share of HLL and hence it decided to launch operation STING i.e. strategy to inhibit Nirma s growth.

As a part of this operation it came up with low cost detergent wheel, which was better in terms of quality compared to Nirma. . Gross margin for both Nirma and wheel remained the same i.e. 18% . But this time better quality did not won over less price and Nirma remained market leader with its sales being higher than that of wheel.

Annapurna salt which was rich in iodine and was positioned mainly for poor people, sales were not up to the expectation mainly because of its high price. One kg of Annapurna costs Rs. 17-20 cents per kg compared to 5 cents of local brand. Ultimately it got most of its sales from urban and middle and upper middle income class society. (Jaiswal, 2008, working paper).