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Face value
Profits and poverty
Aug 19th 2004
From The Economist print edition
C.K. Prahalad thinks there can be a win-win relationship between business and the poor
“IF WE stop thinking of the poor as victims or as a burden and start recognising them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up.” That “simple proposition” begins a controversial new management book that seems destined to be read not just in boardrooms but also in government offices. “The Fortune at the Bottom of the Pyramid. Eradicating Poverty Through Profits” (Wharton School Publishing), is essentially a rallying cry for big business to put serving the world's 5 billion or so poorest people at the heart of their profit-making strategies. It has already been praised by everyone from Bill Gates—“a blueprint for fighting poverty”—to a former American secretary of state, Madeleine Albright—“if you are looking for fresh thinking about emerging markets, your search is ended.”
Its author, C.K. Prahalad, is accustomed to rave reviews. (The C is for Coimbatore, the Indian town of his birth, the K for Krishnarao, his father's name.) After becoming a management professor at the University of Michigan via a job at Union Carbide and study at the Indian Institute of Management and Harvard, he wrote “Competing for the Future” (Harvard Business School Press) with Gary Hamel in 1994. This tome was regarded as perhaps the best business book of the 1990s—an accolade that, admittedly, may be less than it sounds, given the amount of rubbish published by the business-book trade.
As the two gurus searched for their next hit, Mr Hamel stumbled across Enron, a then-thriving energy conglomerate that he eulogised in “Leading the Revolution” (Harvard Business School Press). Mr Prahalad, by contrast, “after searching for a couple of years, saw that the big idea was creating wealth at the bottom of the pyramid”. He has been evolving his ideas about how firms should focus on the bottom of the pyramid—a phrase he shortens to BOP, to contrast with those wealthy folk at the TOP—since 1997, despite a spell running Praja, a business-activity-monitoring software firm that later had to be sold when it could not raise the capital it needed in the aftermath of the tech bubble. “Badly timed, but taught me a lot,” claims Mr Prahalad.
He is a fierce critic of traditional top-down thinking on aid, by governments and non-governmental organisations alike. They tend to see the poor as victims to be helped, he says, not as people who can be part of the solution—and so their help often creates dependency. Nor does he pin much hope on the “corporate social responsibility” (CSR) programmes of many large companies. If you want serious commitment from a firm, he says, its involvement with the poor “can't be based on philanthropy or CSR”. The involvement of big business is crucial to eradicating poverty, he believes, but BOP markets must “become integral to the success of the firm in order to command senior management attention and sustained resource allocation.”
Mr Prahalad reckons that there are huge potential profits to be made from serving the 4 billion-5 billion people on under $2 a day—an economic opportunity he values globally at $13 trillion a year. The win for the poor of being served by big business includes, he says, being empowered by choice and being freed from having to pay the currently widespread “poverty penalty”. In shanty towns near Mumbai, for example, the poor pay a premium on everything from rice to credit—often five to 25 times what the rich pay for the same services. Driving down these premiums can make serving the BOP more profitable than serving the top, he argues, and points to a growing number of leading firms—from Unilever in India to Cemex in Mexico and Casas Bahia in Brazil—that are profiting by doing precisely that.
BOP till you drop
But to be profitable, firms cannot simply edge down market fine-tuning the products they already sell to rich customers. Instead, they must thoroughly re-engineer products to reflect the very different economics of BOP: small unit packages, low margin per unit, high volume. Big business needs to swap its usual incremental approach for an entrepreneurial mindset, because BOP markets need to be built not simply entered. Products will have to be made available in affordable units—most sales of shampoo in India, for example, are of single sachets. Distribution networks may need to be rethought, not least to involve entrepreneurs from among the poor. Customers may need to be educated in how to consume, and even why—about credit, say, or even about the benefits of washed hands. The corruption now widespread in poor countries must be tackled (about which Mr Prahalad has penned a particularly useful chapter).
There are plenty of sceptics. Are the opportunities for profitable product re-engineering really as common as Mr Prahalad thinks? How much can private firms accomplish given inept or corrupt governments in many poor countries? “There is much less scepticism now than when I first started talking about the BOP,” retorts Mr Prahalad. What the leading firms are grappling with now, he says, is not whether there are profits to be made, but how to serve the BOP on a big enough scale, and how to transfer what works from one part of the world to another.
Another challenge will be to persuade development experts to support a profit-driven strategy. Mr Prahalad worries that firms may be deterred from BOP strategies by fear of attracting criticism from activists. If a large international bank were to start lending to the poor at interest rates, reflecting higher risks and start-up costs, of say 20% (compared with around 10% in rich countries), “the whole anti-globalisation lobby would probably be against it. Yet the alternative is for the poor to borrow at 500% from a money lender. Whose side are the activists on?” If you are on the side of the poor, he says, “surely you need to help get rates down from 500% to 20%. After that, you can work on getting them from 20% to 10% like in the rich world.