1CMOST

The Fortune At The Bottom Of The Economic Pyramid – A Review

byProf C C Hang

Director, CMOST

Outline

1. The Market At the Bottom (or Base) Of The Economic Pyramid (BOP)

2. Products & Services For The BOP3. BOP: A Global Opportunity4. Relevance Of Disruptive Innovation To BOP

Markets5. Implications

2CMOST

C K Prahalad

– Author of “The Fortune At The Bottom Of ThePyramid” in 2004.

– Professor of Strategy At Michigan Business School

– Co-author of “Competing For The Future” in 1994around the notion of Core Competence

Creating the future despite enormous resourcehandicaps

Competing for Opportunity Share rather thanMarket Share

3CMOST

The Economic Pyramid

1. The Market At the BOP

1

2 - 3

4

5

Purchasing Power Parity (PPP) in US$

> $20, 000

$1,500 - $20,000

$1,500

< $1,500

Population in Millions

75 - 100

1,500 – 1,750

(BOP)4,000

• The poor represent a “latent market” for goods and services.• BOP provides a new growth opportunity for the private sector and a forum for innovation.

4CMOST

• But progress has been hindered by “The DominantLogic of MNCs as It Relates to BOP”

We can’t assign our best people to work on market development in BOP markets.

Intellectual excitement is in developed countries; it is difficult to recruit managers for BOP markets

BOP market is at best an attractive distraction.

The BOP market is not critical for the long-term growth of MNCs.

BOP will not pay for tech innovations; it can’t be a source of innovations.

Only developed countries appreciate and pay for technological innovations.

e.g. the poor might need sanitation, but can’t afford detergents.

The poor do not have use for products sold in developed countries

Our cost structure is a given cannot serve the BOP market.

The poor are not our customers.ImplicationAssumption

5CMOST

The “Real” Nature of the BOP Market

• There is Money at the BOPe.g The GDP per capita in China is US$1,000 → US$1.2Trillion economy (1.2 Billion People). But its PurchasingPower Parity is US$5 Trillion, making it the second largesteconomy globally.

• Due to local monopolies, inadequate access, poordistribution, and strong traditional intermediaries, the poor pays 5 to 25 times what the rich pays in the same economy potential of “unlocking the latentpurchasing power! ”

6CMOST

• Access to BOP Markets

- Rural markets are inaccessible to audio and television signals, i.e. “Media Dark” the rural poor do not know what products/services are available and how to use them.

- One solution : HLL Ltd (a subsidiary of Unilever) in India trained entrepreneurial women to becomedistributors; they earn US$60-150 per month and become a new class of consumers themselves.

7CMOST

• The BOP Markets Are Brand-Conscious

– They are indeed brand-conscious and value-conscious by necessity; they expect good qualityat the prices they can afford.

• BOP Consumers Accept Advanced TechnologyReadily

– Evidenced by the rapid spread of wireless devices,PC kiosks, etc.

8CMOST

Market Development Imperative

• Create the Capacity to Consume

– Cash-poor and with a low level of income, the BOPconsumer has to be accessed differently.

– Make unit packages (single-serves) that are small andmuch more affordable.

Toothpaste, cosmetics, cooking oil0.10Detergent, soap, coffee, spreads0.04Salt, biscuits, ketchup0.02Shampoo, confectionary, tea0.01Typical ProductsUS$

(e.g. Measured in tons, the size of the Indian shampoo market is as large as the US market!)

9CMOST

– Creating the capacity to consume is based on 3 principles:

• Affordability (without sacrificing quality)

• Access ( e.g. the poor may start their shopping after 7.00 pm)

• Availability

• The Need for New Goods and Services

– The involvement at the BOP can provide opportunitiesfor developing new goods and services.

e.g. access to good quality housing, clean energy fromsolar and wind power, good quality furniture. (from anIKEA for the middle class to an IKEA for the developingworld!)

10CMOST

• Trust Is a Prerequisite

– When the poor are converted into consumers, they alsoacquire the dignity of attention and choices previously reserved for the middle-class and rich.

– “Switching costs” for single-serve goods are negligiblefor the BOP consumers; hence firms must continue toupgrade their products to keep their customers.

• Dignity and Choice

– Firms must focus on building trust between themselvesand the consumers.

– The default rate among the poor is actually lower thanthe rich: they pay on-time, e.g. default rate at the ICICI Bank in India is lesser than 1.5% among its 2.5Mcustomers.

11CMOST

2. Products & Services For The BOP

1) Focus on price performance – quantum jumps in price performance are required.e.g. When Reliance introduced its “Monsoon Hungama”multimedia mobile phone, it only charged an upfront payment of US$10 and monthly payment of $9.25; result : it received 1 million applications in 10 days.

2) Innovation requires hybrid solutions – avoid watered-down version of traditional technology solutions.e.g. HLL (a subsidiary of Unilever) applied molecular encapsulation of iodine in salt (protecting it from harsh conditions of Indian spices and cooking methods) to solve the iodine deficiency disorder problem of 70 million Indian children.

Prahalad has identified 12 Principles of Innovation for BOP markets.

12CMOST

3) Solutions must be scalable and transportable across countries, cultures and languages -Given a stringent price-performance equation and low margins per unit, the basis for returns on investments is Volume;

4) Innovations should be eco-friendly: conserving resources as a principle in product development -e.g. Adapting New Water for the BOP; toilet flushing with minimal use of water.

13CMOST

5) Product development must start from a deep understanding of functionality (as marginal changes to products developed for the first world will not do) – e.g. designing artificial limb for India (such as Jaipur Foot) must take into account of consumer needs in squatting, walking on uneven grounds, etc.

6) Process innovations are just as critical as product innovations — the presence of a reliable logistics infrastructure may not exist; hence one needs to redefine the process to suit the infrastructure;– e.g. Amul, the largest diary in India implemented a decentralised milk collection system (from 50,00 villages and 500,000 families); after quality and volume checks, the villagers are paid every day; refrigerated vans will transport the milk collected to the main processing facilities; etc.

14CMOST

7) Work must be deskilled - Design of products must take into account the skill levels, poor infrastructure, and difficulty of access for service in remote areas.

8) Education of customers on product usage is a key - Given the poor infrastructure for customer access, innovation in the educational process is vital.

9) Products must work in hostile environments - noise, dust, abuse of products, etc.- low quality of infrastructure such as electricity.

15CMOST

10) The design of the interfaces must be carefully thought through – most of the customers are first time users and the learning curve can be long or arduous.

11) Designing methods for accessing the poor at low cost is critical – innovations in distributions are as critical as product and process innovations.

12) As feature and function evolution in BOP markets can be very rapid, product developers must focus on the “platform” so that new features can be easily incorporated.

16CMOST

3. BOP – A Global Opportunity

1) Some BOP markets are large and attractive as stand-alone entities.

2) Many local innovations can be leveraged across other BOP markets.

3) Some BOP innovations will find applications in developed markets.

4) Lessons for the BOP markets can influence the management practices of global firms.

Prahalad has identified 4 distinct sources of opportunity for firms to understand and cater to the BOP markets:

17CMOST

Local Growth Opportunities

– In China and India, a large emerging “middle-class” consumers (earning less than US$1,500 per capita) could create growth of 50 to 100% per year (as experienced by Samsung, LG, Reliance, Tata).

– China has already become World’s No.1 in the number of cell phone subscribers.

– Establishing a foothold at the BOP (or even the middle of the pyramid) will give the company lots of headroom (billions of new customers) to grow its business.

18CMOST

Local Innovations → Global

– The micro encapsulation of iodine in salt to preserve iodine in harsh conditions in India has found market opportunities in Africa and other developing markets.

– Product ideas (Jaipur Foot, Microfinance, Single-serve detergent, etc) can indeed be conceived in one BOP market and then offered to other BOP markets globally.

19CMOST

BOP Solutions for Developed Markets

– The Voxiva system was first developed for Peru to do remote, real-time health monitoring/surveillance; it has to be robust , based on any communication device (such as a telephone line), easy to operate by even illiterate, older folks.

– Similar problems confront the US. The Centre for Disease Control and FDA have to prepare to remotely monitor outbreaks of diseases caused by terrorists or problems in food quality that must be traced rapidly. They are now Voxiva’s customers.

20CMOST

Lessons for MNCs from BOP markets

BOP forces MNCs to focus on all aspects of cost reduction to achieve extraordinary price performance. MNCs have found that they need to change their management systems to cut costs.

Capital Intensity

– HLL, a subsidiary of Unilever, focuses on a judicious mix of outsourcing to dedicated suppliers, hence significantly reducing its capital intensity. A senior management focus on logistics and distribution further reduces its capital needs.

21CMOST

Innovations

– Innovations must become “value-oriented” from the consumer’s perspective. The BOP focuses attention on both the objective and subjective performances of the product or services.

– The 30 to 100 times improvements in price performances create a tremendous challenge →source of innovations.

22CMOST

Case Study: Hindustan Lever

2. Versatile distribution capabilities – Distribution reach of 6.3 mn retail outlets– Build parterships with emerging modern trade

3. Corporate responsibility in the development of rural India– Shakti initiative to train underprivileged rural women as entrepreneurs– Hygiene compaign to encourage soap usage to combat diarrheoa

1. Deep local understanding & innovation in formulation and packaging– Delivery of tailored products to each segment

Family-size bottles

Mini bottlesCost: 5 rupees

Single-use sachetsCost: ½ rupee

Surf ExcelStain removal

RinSpotlessly white

WheelBest clean for less effort

Haircare: Laundry:

Pioneer in serving BOP markets with key leadership positions in FMCG

Factors contributing the HLL’s success:

23CMOST

Case Study: Wahaha

1) Customized products based on local preferences• Started in 1989 with a niche product and novel marketing plan• Later used brand as platform for moving into mainstream product markets

Product: Drinkable yogurtMarketing: Nutritious and helps children eat more

“In China, a lot of families only have one child. You always worry that the child won’t eat enough and get enough nutrition”Z. John Zhang, ass. Prof of marketing at University of Pennsylvania

Product offering: Purified water, soft drinks, fruit juices, tea, cup noodles etc.

“..strategy for developing the countryside and eventually encircling the city. In five years, all the countryside may turninto the cities and Wahaha would have a loyal customer base”Z. John Zhang, ass. Prof of marketing at University of Pennsylvania

Chinese company that successfully disrupted F&B incumbents in China

2) Building market access through “attacking city from country-side”•Used lower costs to profitably serve low-income BOP peasants in the countryside surrounding the city•Used the countryside as a base to branch into the emerging middle class of the cities and disrupt the incumbent F&B companies

Factors contributing the Wahaha’s success:

24CMOST

Case Study: Simputer

Why the Simputer failed•Poor product design and development: Initial poor design results in failure to meet initial targeted price point of US$200 per unit •Poor market knowledge: Could not differentiate product from competition eg. Palmtops, low end desktops, MIT’s $100 PC•Poor market access: Lack financial backing which made marketing of product difficult

Background•PicoPeta’s Simputer is a low cost computer designed for rural Indian villages. •SEEDS company Encore Pte Ltd was a partner company and developer•As of 2006, less than 4000 units had been sold.

“Our projects often don't have the financial backing for the long haul. The market in this country is small, and unless we immediately look at marketing on a global level (which needs tremendous marketing muscle), we're out of the picture."Dr. Arun Mehta, Founder, PicoPeta

Why computer product designed for rural BOP markets in India failed to take off

25CMOST

Disruptive Technologies (Performance Overshoot)

Perf

orm

ance

Time

Performance that customers

can utilize or absorb

Pace of

Technological

Progress

Sustaining innovations

Disruptive technologies

Incumbents nearly always win

Entrants have advantages (low-end and/or new markets)

(inferior; other unique features)

4. Relevance of Disruptive Innovation To BOP

26CMOST

Questions To Ask :

Low-end disruption• Are there customers at the low end of the market who would be happy

to purchase a product with less (but good enough) performance if theycould get it at a lower price (but still with a reasonable margin for us)?

New-market disruption• Is there a large population of people who historically have not had themoney, equipment, or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them?

Both types of disruption• Does our product or service help our targeted customers get a jobdone that they have always been trying to get done – but have not yetbeen able to do in simple, convenient way? (i.e. Job-to-be-done market analysis)

Targetting “non-consumption”

27CMOST

Non-consumers are the ideal initial targetPe

rfor

man

ce

Time

Pocket radios

Portable TVs

Disruptive technology: transistors vs. vacuum tubes

Hearing Aids

Major Established Electronics Markets:

Tabletop radios, floor-standing televisions, computers,

telecomm.equipment, etc.

Path taken byestablished

vacuum tubemanufacturers

28CMOST

Case : Solar vs Electrical Energy

In advanced economies, electrical power transmitted from central generating stations are widely available - no impact so far from solar energy (with ? $billions of

R&D) although clean and cheap energy is desirable.

Successful solar applications, however, may be pioneered by entrepreneurs who target the 2 billion people in South Asia and Africa who have no access to conventionally generated electricity - The demand is also modest as their homes are not filled with power-hungry appliances !

[Capturing BOP opportunity with DI]

29CMOST

New-Market disruption enables less-skilled people to do more sophisticated things

Disruptive innovations could enable a larger population of less-skilled, ordinary people to do things in a more convenient, lower-cost setting, which traditionally could only be done by specialists. Disruption has been one of the fundamental causal mechanisms through which our lives have improved.

• Personal Computers• Mobile Phones

Almost always, disruptive innovations such as these have been ignored or opposed by the leading institutions in their industries.[They also missed capturing the BOP opportunity with DI!]

30CMOST

Disruption is facilitated by “Good Enough”technology that makes things more idiot-proof

Simple

TIME

Complex

Tech

nolo

gy&

Eas

e of

Use

OK for techies

Pattern Recognition& 80-20 Rule

Simple, Rules-Based& more idiot-proof

[ With much improved price/performance, DI could capture the BOP opportunity ]

31CMOST

UTStarcom

• In mid 90s, modified the NTT-DoCoMo’s PHS wirelesssystem to create PAS/Little-Smart to provide a limited city-wide mobile phone in China.

• Introduced in 1999, its much lower cost-of-use attractedcustomers who could not afford GSM mobile phone services,much to the surprise of market watchers.

• In 2004, PAS subscribers hit 65 million, creating 2004 revenues of more than US$2 billion and over US$1 billion forUTStarcom and ZTE (which entered the market in 2001),respectively.

[ Succeeded in reaching the BOP market in China ]

32CMOST

Galanz Enterprise

• In 1992, developed a new microwave oven for the tinyChinese kitchens ( instead of using its low-cost labour to build a low-end product for export to the developed countries ).

• After winning the Chinese low-end market, movedupmarket to serve both local and global markets.

• In 2005, holds 75% of Chinese market and nearly 50%of global market in microwave ovens. (> 500 patents)

• Since 2000, has started to repeat the same strategy bydeveloping air-conditioners for tiny Chinese homes. Within 4 years, became No. 2 Chinese air-conditioner

exporter.

[ succeeded in the BOP market in China before moving up-market ]

33CMOST

Grameen Telecom

• Brought wireless telecom service to Bangladesh.

• It loaned US$175 each to women who became known as “wireless women of Grameen”. The loan covered the mobile phone’s cost, training, and a small solar recharging unit. Thewomen then sold phone usage on a per-call basis at anaffordable price to other villagers.

• The service allowed farmers to get vital information such ascrop prices without traveling great distance. They could placeorders with distributors….

• Created a very profitable US$100M/year business for Grameenand the future up-market potential could be tapped for manyyears to come !

34CMOST

• US$100 Laptop

– innovations needed to reduce the cost andimprove certain performance

– new business model

– [opportunity: how would an entrepreneurexploit such a low-cost PC for other“intelligent” products?]

– [opportunity: how would an entrepreneurexploit such a low-cost PC to create otherproducts/services for the BOP markets?]

Innovation Opportunity From Projects Targetted at the 3rd World

35CMOST

36CMOST

5. Implications

• Some MNCs (e.g. Unilever, P&G, Citibank) and local companies (e.g. Reliance, Tata and ICIC Bank in India; Haier and UTStarcom in China) have started to pay serious attention to BOP markets and more will follow suit.

• BOP can be an important source of innovations for both the global BOP markets and also for the developed worlds.

37CMOST

• Need to remember that one should not impose a first-world business organisation to one addressing the BOP opportunity (e.g. it needs patience, needs to start small, needs to innovate in cost structure to enable profits to be earned at low price points, needs to be build new processes and capabilities, etc)

• Unique opportunities for creating products/services in BOP — e.g. cell phones could be used as electronic wallets linked to mobile accounts for Filipinos who do not have a bank account or credit card.

38CMOST

• Should take note that the price/performancecould be a very challenging task for the R&D team, the marketing team, or both.

• Disruptive innovations could capitalize on the BOP markets for their initial growth.

• Singapore could position itself to be a suitable venue for R&D for the BOP markets.

39CMOST

• Developing disruptive technologies to create products/ services for the BOP markets “on purpose” could be a challenging mission for universities/research institutes (to fulfill their new “entrepreneurial” role of spinning off new companies or transferring technologies to SMEs).

• As R&D to create such disruptive technologies is mostly beyond the reach of local SMEs, a special national effort (including funds) could provide S’porewith a new competitive advantage for innovation.

[Note: As in most developed nations, the R&D efforts in Universities and RIs in S’pore are geared mostly for Radical Innovation.]

Fortune at bottom of pyramidRev 25 Apr 07