Fortune at bottom of pyramid

• According to this proposition there is market at bottom of pyramid and that MNCs can serve it profitably i.e. without doing any CSR and also not exploiting the poor

• This is achieved by way of value innovation• 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)

• 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

• 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

• 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).

• As pointed by Prahald 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."

• 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).

• 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

• 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?

• Nirma detergent is probably one such example in Prahalads’ book where profits were made solely commercially

• 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.

• 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

• 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.

• 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.

• Those goods and services are successful which either reduce their cost structure or enhance earning potential

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

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 at market rate or even lower than that.

• To make products affordable and available firms can do two things. Invest in product and process innovation so that cost drastically comes down and alliances with NGOs and Microfinance

• Examples include:• Husk Power Systems HPs e-inclusion• M-PESA Mobile services• ChotuKool refrigerator Oorja gas stove

• 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

• A part of interest premium was taken as a commission by microfinance from manufacturers

• 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)

M-PESA

• 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

• 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.

Some assumptions made by Prahalad about BOP

• They are value conscious: They make cost – quality trade off

• Firms must understand this trade off• (But actually they make only cost alternative

analysis)• Their aspirations can be shaped. (Actually not)• Market potential of $ 13 trillion at PPP exists

at bottom of pyramid (In terms of exchange rate it is $ 3 trillion only)

• Even in case of socially important sectors like Healthcare low cost purifiers - Tata Swach and Pureit are not successful

• boiled water or unclean water is cheaper option for them

• Interestingly in survey when asked about need of clean water – 90% of respondents claimed they need such purifiers

• Lot many campaigns have been launched but apart from after sales service, they feel boiling is better option as it is cheaper, which makes purifier unsuccessful at Bottom of Pyramid

• Middle class citizen would make value – cost/ cost quality trade off

• For him reference would be Eureka Forbes water purifier and not boiled water

• For him it would be value innovation • So such principles do not work at bottom of

pyramid