Eradicating Poverty Through Profits Part 2

Leave a Comment / Poverty / By

THE FORTUNE AT THE BOTTOM OF THE PYRAMID

ERADICATING POVERTY THROUGH PROFITS

C.K. PRAHALAD

REVISED AND UPDATED 5TH ANNIVERSARY EDITION

WHARTON SCHOOL PUBLISHING                  2004/2010

PART II

 

PART I: PRIVATE SECTOR AND POVERTY

PROGRESS DURING 2004-2009

 

New Introduction: Private Sector and Poverty: Progress During 2004-2009

Five years is not a long time to evaluate the diffusion of an idea; much less its impact on the ground. It has been less than five years since the book The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits was published. The first article on the subject appeared in 2002. At the time, the proposition that the private sector had a critical role to play in alleviating global poverty was generally met with skepticism. The idea that they could have the greatest impact through profitable business serving 5 billion people who represented the “invisible, unserved market” was even more radical. I am profoundly grateful; for the people in government, nongovernmental organizations, and large corporations who were willing to listen and experiment. The poor, of course, have long been hungry for change. Their enthusiasm and insights have been a huge inspiration to me.

We are a long way from solving the problem of global poverty. But I find reason to be optimistic that the conditions for creating significant and sustainable change are emerging rapidly. First, the idea that the private sector can and should be involved in creating market-based solutions for the world’s poorest consumers is gaining credibility. The market success of some multinationals that have taken up the challenge has created momentum. Respected business leaders such as Bill Gates championing the cause of creative capitalism has also contributed to a shift in perception.

Second, actively engaging with consumers in Bottom of the Pyramid markets has resonated with consumers in developed markets as well. The attitudes of the general public have begun to shift away from direct aid to an exchange of ideas and capital. For as little as $25, anyone can evaluate business plans and extend micro loans to Bottom of the Pyramid entrepreneurs through Kiva.org. A few clicks on Novica.com grants access to a network of traditional crafts and artisans, and purchases are accompanied with a note from the artist. Cell phones are a part of the lives of the rich and poor alike. Today, citizens are engaging with each other in ways that would have been difficult to imagine even a few years ago. As a result, awareness of the conditions and nuances of the Bottom of the Pyramid is increasing. This has translated for the push for companies to help in uplifting the Bottom of the Pyramid from civil society, governments, and nongovernmental organizations.

  • There is evidence today that the innovations in the BOP can have produced profitable business, and consumers in these markets have shown that they are as savvy and demanding as those anywhere else.

There are five major themes I talk about explicitly:

  1. How has the role of the private sector evolved in poverty alleviation?
  2. What have large firms, including multinationals, learned as they actively pursue nontraditional opportunities in the Bottom of the Pyramid markets?
  3. What are the key lessons for developing these market opportunities?
  4. Are these markets forcing a “new social compact” for business?
  5. What are the emerging “rules of engagement” that should inform our approach to BOP markets?

 

The Role of the Private Sector

  • The UNDP is now fully engaged with the idea of the private sector’s contribution to poverty alleviation.
  • Similarly, organizations such as the World Economic Forum have focused private sector groups in developing solutions to poverty.
  • There is growing recognition that marrying the local knowledge of the nongovernmental organization with the global reach of the multinational firm can create unique and sustainable solutions.
  • The private sector cannot solve all problems but can bring technical and financial resources, the disciplines of organization, accountability, and entrepreneurial drive to bear on the problems.

 

Who and What Is the Bottom of the Pyramid?

What Have We Learned?

  • The extensive study by World Resources Institute/International Finance Corporation has given granularity to the composition of the next 4 billion by country and by income level.
  • It has also shown that BOP consumers account for $5 trillion in Purchasing Power Parity terms.
  • A recent study by the Economist concluded that half the world can be classified as the emerging middle class; defined as a population living on $2 – $13 at 2005 Purchasing Power Parity prices.
  • They have discretionary income and spend on education, health, energy, transportation, and personal care.
  • This market includes 2.6 billion people in 2005 and is rising fast.
  • Asia alone is expected to have approximately 60% of the global middle class.

We can draw multiple lessons from the heated debates about what constitutes the BOP during the last five years:

  1. There is a clear recognition that 4 billion micro consumers and micro producers constitute a significant market and represent an engine of innovation, vitality, and growth.
  2. The 4 billion people who constitute the BOP are not a monolith. There is no single universal definition of the BOP that can be useful.
  3. We can choose to serve any segment of the 4 billion. No institution – a firm or nongovernmental organization – needs to serve all of the BOP. They can pick and choose. Serving the “next billion” is as legitimate as serving “the bottom billion.”
  4. There is a segment of the 4 billion who are so destitute, so deprived, and so consumed by war and disease that they need other forms of help. Government subsidies, multilateral aid, and philanthropy are all legitimate tools to deal with this segment. Even here, our goal should be to build capacity for people to escape poverty and deprivation through self-sustaining market-based systems.
  5. Active engagement at the BOP markets requires a new and an innovative approach to business. Retrofitting business models from the developed markets will not work.

 

BOP as a Business Opportunity

  • By 2011, more than 4 billion cell phones will be in use. Most of this growth is in BOP markets.
  • India alone added 11 million new subscribers in January 2009.
  • The cell phone revolution has demonstrated beyond doubt that there is a market for world-class goods and services if they can be made available at affordable prices.
  • The cell phone is the device of choice for not only communications but also some computing, entertainment, and the delivery of a wide variety of services such as medical care (as described in the Voxiva case in this book and reconfirmed in the update.)
  • It has transformed the lives of the poor. We can “do well and do good” simultaneously.
  • The cell phone has broken several long-held beliefs: There is no market at the BOP; they won’t pay, they will not accept or do not need advanced technologies; the BOP cannot be a source of innovation; and multinationals do not need them.
  • Being a multinational or a large domestic firm does not guarantee  success; the capacity to adapt and innovate at the BOP does.

 

Key Lessons from Experiments

Even at this early stage of experimentation at the BOP, multinational firms are learning valuable lessons. Although the market is large and potentially lucrative, this potential cannot be realized unless managers are willing to experiment and innovate. They have to selectively “forget” traditional developed market approaches to business. The dominant lessons follow:

  1. The innovation sandbox (embraces constraints): The primary task of the private sector is often converting the BOP consumers from unorganized, inefficient local monopolies to an organized and efficient private sector. Awareness, Access, Affordability, and Availability are the key ingredients.
  2. Build an ecosystem: It is impossible to enlarge the market for cell phones without building a large network of micro entrepreneurs who will sell prepaid cards. There are more than 1 million such entrepreneurs. No amount of investment is a substitute for the skills and knowledge that an ecosystem can provide. The message is “don’t go it alone.”
  3. Co-create solutions: BOP markets demand that managers acquire “local knowledge and local trust” before they develop markets.
  4. A new concept of scale: Amul in India, the largest processor of raw milk in the world, originates the milk in 10,000 villages covering more than 2.2 million farmers. By paying farmers for quality and by sophisticated logistics from collection centers to world-class processing units, Amul totally avoided the problems of managing large herds centrally. Decentralized origination, centralized processing, and marketing seem to be the key.
  5. Use technology: Advanced technology is critical for ensuring the quality of product or service delivered.
  6. Sustainability will emerge as a source of innovation at the BOP: The planet is under stress – be it access to water, deforestation, pollution, or green house gas emissions. What if we add an additional 3 to 4 billion to the current 2 billion? Sustainability will become a major impediment. The pressure to serve an additional 3 to 4 billion and at the same time protect the environment will focus attention on sustainability as never before.
  7. The challenge is market development: The goal is to build new markets, organize the “unorganized markets,” build new ecosystems, and create new business models. The challenge is about innovating the management processes within the firm that allows managers in the field to defy received wisdom and build a model that works.
  8. BOP markets are evolving rapidly:

 

Business and the New Social Compact

  • Business leaders who have engaged themselves actively with the BOP have started to reexamine the role of business in society. Many CEOs have come to look at business with a new lens – the BOP lens.

The views of Mr. Patrick Cescau, the retired CEO of Unilever, reflect the growing appreciation of the role of the private sector in protecting the planet and at the same time serving the poor.

“For one, there is a growing recognition that the social and environmental challenges facing us in the 21st century are so complex and so multi-dimensional that they cannot be solved by governments alone. Industry has to be part of the solution. But perhaps the biggest catalyst for change has been the increasing awareness within business itself that many of the big social and environmental challenges of our age, once seen as obstacles to progress, have become opportunities for innovation and business development. We have come to a point now where the agenda of sustainability and corporate responsibility is not only central to business strategy but has become a critical driver of business growth.”

Democratizing Commerce:

The Challenge for the 21st Century

  • I would like to define “democratizing commerce” as bringing the benefits of globalization to all micro consumers, micro producers, micro innovators, micro investors, and micro entrepreneurs.
  • Everyone must have the right to the benefits of globalization. All must be treated with dignity and self-esteem – as micro consumers.
  • They must be able to exercise choice and have access to world-class goods and services.
  • We have to start with respect for individuals irrespective of their current condition.
  • Those of us who have the pleasure to see firsthand the extraordinary intelligence of the “uneducated” and how they “make do with what they have” are convinced that capability building for personal choice is a critical component of democratization of commerce.

The organizing idea that illuminates this new social compact must be:

v  Respect for the rights of the individual

v  The use of transparent transactions or a focus on market-based solutions

v  Scalability to solutions

v  Reducing the rural-urban, rich-poor divide through information technology and organization

v  Focus on entrepreneurship and innovation

v  Focus on ecologically sustainable solutions

PART II: THE ORIGINAL TEXT OF THE BOOK

Chapter 1: The Market at the Bottom of the Pyramid

Chapter 2: Products and Services for the BOP

Chapter 3: BOP: A Global Opportunity

Chapter 4: The Ecosystem for Wealth Creation

Chapter 5: Reducing Corruption: Transaction Governance Capacity

Chapter 6: Development as Social Transformation

 

PART III: CEO REACTIONS TO THE CONCEPT AND THE BOOK

 

PART IV: CASE STUDIES AND CEO COMMENTS

 

PART V: VIDEO CLIPS

Leave a Comment