Chat with us, powered by LiveChat The attachments explain it all. The other attachment is “Serving the World’s Poor, Profitably” Rea | Max paper
  

The attachments explain it all. 

The other attachment is “Serving the World’s Poor, Profitably”

Read “Serving the World’s Poor, Profitably”. Write a two to three-page paper in APA format describing the opportunities and challenges for businesses to “invest in the world’s poorest markets.” You may want to access other resources as well to get a balanced approach to the challenges.

Improving the Uves of the billions of peopie at the bottom

of the economic pyramid is a nobie endeavor

It can aiso be a lucrative one.

Serving the World’s Poor,
Profitably

by C.K. Prahalad and Allen Hammond

C
ONSIDER THIS BLEAK VISION

of tbe world 15 years from now:
The global economy recovers

from its current stagnation but growth
remains anemic. Deflation continues to
threaten, the gap between rich and poor
keeps widening, and incidents of eco-
nomic chaos, governmental collapse,
and civil war plague developing regions.
Terrorism remains a constant threat,
diverting significant public and private
resources to security concerns. Opposi-
tion to the global market system inten-
sifies. Multinational companies find it
difficult to expand, and many become
risk averse, slowing investment and puli-
ing back from emerging markets.

Now consider this much brighter sce-
nario: Driven by private investment and
widespread entrepreneurial activity, the
economies of developing regions grow
vigorously, creating jobs and wealth and
bringing hundreds of millions of new

48

consumers into the global marketplace
every year. China, India, Brazil, and,
gradually. South Africa become new en-
gines of global economic growth, pro-
moting prosperity around the world.
The resulting decrease in poverty pro-
duces a range of social benefits, helping
to stabilize many developing regions
and reduce civil and cross-border con-
flicts. The threat of terrorism and war re-
cedes. Multinational companies expand
rapidly in an era of intense innovation
and competition.

Both of these scenarios are possible.
Which one comes to pass vdll be deter-
mined primarily by one factor: the will-
ingness of big, multinational companies
to enter and invest in the world’s poor-
est markets. By stimulating commerce
and development at the bottom of the
economic pyramid, MNCs could radi-
cally improve the lives of billions of peo-
ple and help bring into being a more

stable, less dangerous world. Achieving
this goal does not require multination-
als to spearhead global social develop-
ment initiatives for charitable purposes.
They need only act in their own self-
interest, for there are enormous busi-
ness benefits to be gained by entering
developing markets. In fact, many in-
novative companies – entrepreneurial
outfits and large, established enterprises
alike – are already serving the world’s
poor in ways that generate strong rev-
enues, lead to greater operating efficien-
cies, and uncover new sources of inntv
vation. For these companies-and those
that follow their lead – building busi-
nesses aimed at the bottom of the pyr-
amid promises to provide important
competitive advantages as the twenty-
first century unfolds.

Big companies are not going to solve
the economic ills of developing coun-
tries by themselves, of course. It will also

HARVARD BUSINESS REVIEW

B I G P I C T U R E

take targeted financial aid from the de-
veloped world and improvements in the
governance of the developing nations
themselves. But it’s clear to us that pros-
perity can come to the poorest regions
only through the direct and sustained
involvement of multinational compa-
nies. And it’s equally clear that the multi-
nationals can enhance their own pros-
perity in the process.

Untapped Potential
Everyone knows that the world’s poor
are distressingly plentiful. Fully 65% of
the world’s population earns less than
$2,000 each per year-that’s 4 billion
people. But despite the vastness of this
market, it remains largely untapped by
multinational companies. The reluc-
tance to invest is easy to understand.
Companies assume that people with
such low incomes have little to spend on
goods and services and that what they

do spend goes to basic needs like food
and shelter. They also assume that vari-
ous barriers to commerce – corruption,
illiteracy, inadequate infrastructure,
currency fluctuations, bureaucratic red
tape – make it impossible to do business
profitably in these regions.

But such assumptions refiect a nar-
row and largely outdated view of the
developing world. The fact is, many
multinationals already successfully do
business in developing countries (al-
though most currently focus on sell-
ing to the small upper-middle-class seg-
ments of these markets), and their
experience shows that the barriers to
commerce – although real – are much
lower than is typically thought. More-
over, several positive trends in develop-
ing countries -from political reform,
to a growing openness to investment, to
the development of low-cost wireless
communication networks-are reducing

the barriers further while also providing
businesses with greater access to even
the poorest city slums and rural areas.
Indeed, once the misperceptions are
wiped away, the enormous economic
potential that ties at the bottom of the
pyramid becomes clear.

Take the assumption that the poor
have no money. It sounds obvious on
the surface, but it’s wrong. While indi-
vidual incomes may be low, the aggre-
gate buying power of poor communi-
ties is actually quite large. The average
per capita income of villagers in rural
Bangladesh, for instance, is less than
$200 per year, but as a group they are
avid consumers of telecommunications
services. Grameen Telecom’s village
phones, which are owned by a single en-
trepreneur but used by the entire com-
munity, generate an average revenue of
roughly $90 a month-and as much as
$1,000 a month in some large villages.

SEPTEMBER 2002 49

BIC PICTURE • Serving the World’s Poor, Profitably

Customers of these village phones, who
pay cash for each use, spend an average
of 7% of their income on phone ser-
vices-a far higher percentage than con-
sumers in traditional markets do.

It’s also incorrect to assume that the
ptx)r are too concerned with fulfilling
their basic needs to “waste” money on
nonessentlal goods. In fact, the poor
often do buy “luxury” items. In the
Mumbai shantytown of Dharavi, for
example, 85% of households own a tele-
vision set, 75% own a pressure cooker
and a mixer, 56% own a gas stove, and
21% have telephones. That’s because
buying a house in Mumbai, for most
people at the bottom of the pyramid, is
not a realistic option. Neither is getting
access to running water. They accept
that reality, and rather than saving for
a rainy day, they spend their income on
things they can get now that improve
the quality of their lives.

Another big misperception about
developing markets is that the goods
sold there are incredibly cheap and,
hence, there’s no room for a new com-
petitor to come in and turn a profit. In
reality, consumers at the bottom of the
pyramid pay much higher prices for
most things than middle-class consum-
ers do, which means that there’s a real
opportunity for companies, particularly
big corporations with economies of
scale and efficient supply chains, to cap-
ture market share by offering higher
quality goods at lower prices wbile
maintaining attractive margins, in fact,
throughout the developing world, ur-
ban slum dwellers pay, for instance, be-
tween four and 100 times as much for
drinking water as middle- and upper-
class families. Food also costs 20% to
30% more in the poorest communities
since there is no access to bulk discount
stores. On the service side of the econ-
omy, local moneylenders charge interest
of 10% to 15% per day, with annual rates
running as higb as 2,000%. Even the
lucky small-scale entrepreneurs who

get loans from nonprofit microfinance
institutions pay between 40% and 70%
interest per year-rates that are illegal in
most developed countries. (For a closer
look at how the prices of goods compare
in rich and poor areas, see the exhibit
“The High-Cost Economy of the Poor.”)

It can also be surprisingly cheap to
market and deliver products and ser-
vices to the world’s poor. That’s because
many of them live in cities that are
densely populated today and will be

Markets at the bottom

of the economic pyramid

are fundamentally

new sources of growth

for multinationals. And

because these markets are

in the earliest stages, growth

can be extremely rapid.

even more so in the years to come. Fig-
ures from the UN and the World Re-
sources Institute indicate that by 2015,
in Africa, 225 cities will each have pop-
ulations of more than i million; in Latin
America, another 225; and in Asia, 903.
The population of at least 27 cities will
reach or exceed 8 million. Collectively,
the 1,300 largest cities will account for
some 1.5 billion to 2 billion people,
roughly half of whom will be bottom-
of-the-pyramid (BOP) consumers now
served primarily by informal economies.
Companies that operate in these areas
will have access to millions of potential
new customers, who together have bil-
lions of dollars to spend. The poor in
Rio de Janeiro, for instance, have a total
purchasing power of $1.2 billion ($600
per person). Shantytowns in Johannes-
burg or Mumbai are no different.

The slums of these cities already have
distinct ecosystems, with retail shops.

CK. Prahalad is the Harvey C Fruehauf Professor of Business Administration at the Uni-
versity of Michigan Business School in Ann Arbor and the chairman ofPraja, a software
company in San Diego. Allen Hammond is the CIO, senior scientist, and director of the
Digital Dividend project at the World Resources Institute in Washiiïgton, DC.

small businesses, schools, clinics, and
moneylenders. Although there are few
reliable estimates of the value of com-
mercial transactions in slums, business
activity appears to be thriving. Dhar-
avi-covering an area of just 435 acres-
boasts scores of businesses ranging
from leather, textiles, plastic recycling,
and surgical sutures to gold jewelry, il-
licit liquor, detergents, and groceries.
The scale of the businesses varies from
one-person operations to bigger, well-
recognized producers of brand-name
products. Dharavi generates an esti-
mated $450 million in manufacturing
revenues, or about $i million per acre
of land. Established shantytowns in Sao
Paulo, Rio, and Mexico City are equally
productive.The seeds of a vibrant com-
mercial sector have been sown.

While the rural poor are naturally
harder to reach than the urban poor,
they also represent a large untapped op-
portunity for companies. Indeed, 60% of
India’s GDP is generated in rural areas.
The critical barrier to doing business in
rural regions is distribution access, not
a lack of buying power. But new infor-
mation technology and communica-
tions infrastructures – especially wire-
less-promise to become an inexpensive
way to establish marketing and distri-
bution channels in these communities.

Conventional wisdom says that peo-
ple in BOP markets cannot use such ad-
vanced technologies, but that’s just an-
other misconception. Poor rural women
in Bangladesh have had no difficulty
using GSM cell phones, despite never
before using phones of any type. In
Kenya, teenagers from slums are being
successfully trained as Web page de-
signers. Poor farmers in El Salvador use
teiecenters to negotiate the sale of their
crops over tbe Internet. And women in
Indian coastal villages have in less than
a week learned to use PCs to interpret
real-time satellite images showing con-
centrations of schools offish in the Ara-
bian Sea so they can direct their hus-
bands to the best fishing areas. Clearly,
poor communities are ready to adopt
new technologies that improve their
economic opportunities or their quality
of life. The lesson for multinationals;

50 HARVARD BUSINESS REVIEW

Serving the World’s Poor, Profitably • BIG PICTURE

Don’t hesitate to deploy advanced tech-
nologies at the bottom of the pyramid
while, or even before, deploying them
in advanced countries.

A final misperception concerns the
highly charged issue of exploitation of
the pcxïr by MNCs. The informal econo-
mies that now serve poor communities
are full of inefficiencies and exploitive
intermediaries. So if a microfinance in-
stitution charges 50% annual interest
when the alternative is either i,ooo%
interest or no loan at all, is that exploit-
ing or helping the poor? If a large finan-
cial company such as Citigroup were to
use its scale to offer microloans at 20%,
is that exploiting or helping the poor?
The issue is not just cost but also qual-
ity-quality in the range and fairness of
financial services, quality of food, qual-
ity of water. We argue that when MNCs
provide basic goods and services that re-
duce costs to the poor and help improve
their standard of living-while generat-
ing an acceptable return on invest-
ment-the results benefit everyone.

The Business Case

The business opportunities at the bot-
tom of the pyramid have not gone un-
noticed. Over the last five years, we have
seen nongovernmental organizations
(NGOs), entrepreneurial start-ups, and
a handful of forward-thinking multi-
nationals conduct vigorous commercial
experiments in poor communities. Their
experience is a proof of concept: Busi-
nesses can gain three important advan-
tages by serving the poor-a new source
of revenue growth, greater efficiency,
and access to innovation. Let’s look at
examples of each.

Top-Line Growth. Growth is an im-
portant challenge for every company,
but today it is especially critical for very
large companies, many of which appear
to have nearly saturated their existing
markets. That’s why BOP markets rep-
resent such an opportunity for MNCs:
They are fundamentally new sources of
growth. And because these markets are
in the earliest stages of economic devel-
opment, growth can be extremely rapid.

Latent demand for low-priced, high-
quality goods is enormous. Consider

the reaction when Hindustan Lever, the
Indian subsidiary of Unilever, recently
introduced what was for it a new prod-
uct category-candy-aimed at the bot-
tom of the pyramid. A high-quality con-
fection made with real sugar and fruit,
the candy sells for only about a penny a
serving. At such a price, it may seem like
a marginal business opportunity, but in
just six months it became the fastest-
growing category in the company’s port-
folio. Not only is it profitable, but the
company estimates it has the potential
to generate revenues of $200 million

to English proficiency to vocational
skills. The products are expected to be
the largest single revenue generator
for the company and its franchisees over
the next several years.’ Credit and fi-
nancial services are also in high demand
among the pi>or. Citibank’s ATM-based
banking experiment in India, called Su-
vidha, for instance, which requires a
minimum deposit of just $25, enlisted
150,000 customers in one year in the
city of Bangalore alone.

Small-business services are also pop-
ular in BOP markets. Centers run in

The World Pyramid

Most companies target consumers at the upper tiers of the economic pyramid,

completeiy overlooking the business potential at its base. But though they may

each be earning the equivalent of less than $2,000 a year, the people at the

bottom of the pyramid make up a colossal market-4 billion strong-the vast

majority of the world’s population.

purchasing power parity
(in U.S. dollars)

>$20,000 100

$2,000-20,000 2,000

<$2,000

population (in millions)

per year in India and comparable mar-
kets in five years. Hindustan Lever has
had similar successes in India with low-
priced detergent and iodized salt. Be-
yond generating new sales, the company
is establishing its business and its brand
in a vast new market

There is equally strong demand for
aiïordable services. TARAhaat, a start-up
focused on rural India, has introduced
a range of computer-enabled education
services ranging from basic IT training

Uganda by the Women’s Information
Resource Electronic Service (WIRES)
provide female entrepreneurs with in-
ft>rmation on markets and prices, as well
as credit and trade support services,
packaged in simple, ready-to-use for-
mats in local languages. The centers are
planning to offer other small-business
services such as printing, faxing, and
copying, along with access to account-
ing, spreadsheet, and other software. In
Bolivia, a start-up has partnered with

SEPTEMBER 2002 51

BIG PICTURE • Serving the World’s Poor, Profitably

the Bolivian Association of Ecological
Producers Organizations to oifer busi-
ness information and communications
services to more than 25,000 small pro-
ducers of ecoagricultural products.

It’s true that some services simply can-
not be offered at a low-enough cost to
be profitable, at least not with tradi-
tional technologies or business models.
Most mobile telecommunications pro-
viders, for example, cannot yet prof-
itably operate their networks at afford-
able prices in the developing world. One
answer is to find alternative technology.
A microfinance organization in Bolivia
named PRODEM, for example, uses
multilingual smart-card ATMs to sub-
stantially reduce its marginal cost per
customer. Smart cards store a custom-
er’s personal details, account numbers,
transaction records, and a fingerprint,
allowing cash dispensers to operate
without permanent network connec-
tions – which is key in remote areas.
What’s more, the machines offer voice
commands in Spanish and several local
dialects and are equipped with touch
screens so that PRODEM’s customer
base can be extended to illiterate and
semiliterate people.

Another answer is to aggregate de-
mand, making the community-not the
indivldual-the network customer. Gyan-
doot, a start-up in the Dhar district of
central India, where 60% of the popula-
tion falls below the poverty level, illus-
trates the benefits of a shared access
model. The company has a network of
39 Internet-enabled kiosks that provide
local entrepreneurs with Internet and
telecommunications access, as well as
with governmental, educational, and
other services. Each kiosk serves 25 to 30
surrounding villages; the entire network
reaches more than 600 villages and over
half a million people.

Networks like these can be useful
channels for marketing and distributing
many kinds of low-cost products and
services. Aptech’s Computer Education
division, for example, has built Its own
network of 1,000 learning centers in
india to market and distribute Vidya, a
computer-training course specially de-
signed for BOP consumers and available

52

in seven Indian languages. Pioneer Hi-
Bred, a DuPont company, uses Internet
kiosks in Latin America to deliver agri-
cultural information and to interact
with customers. Earmers can report dif-
ferent crop diseases or weather condi-
tions, receive advice over the wire, and
order seeds, fertilizers, and pesticides.
This network strategy increases both
sales and customer loyalty.

Reduced Costs. No less important
than top-line growth are cost-saving op-
portunities. Outsourcing operations to
low-cost labor markets has, of course,
long been a popular way to contain
costs, and it has led to the increasing
prominence of China in manufacturing
and India in sofrware. Now, thanks to
the rapid expansion of high-speed digi-
tal networks, companies are realizing
even greater savings by locating such
labor-intensive service functions as call
centers, marketing services, and back-
office transaction processing in devel-
oping areas. For example, the nearly 20
companies that use OrphanlT.com’s
affiliate-marketing services, provided
via its telecenters in India and the Phil-
ippines, pay one-tenth the going rate

for similar services in the United States
or Australia. Venture capitalist Vinod
Khosla describes the remote-services
opportunity this way: “1 suspect that by
2010, we will be talking about [remote
services] as the fastest-growing part of
the world economy, with many tril-
lions of dollars of new markets created.”
Besides keeping costs down, outsourc-
ing jobs to BOP markets can enhance
growth, since job creation ultimately
increases local consumers’ purchasing
power.

But tapping into cheap labor pools is
not the only way MNCs can enhance
their efficiency by operating in devel-
oping regions. The competitive neces-
sity of maintaining a low cost structure
in these areas can push companies to
discover creative ways to configure their
products, finances, and supply chains to
enhance productivity. And these discov-
eries can often be incorporated back
into their existing operations in devel-
oped markets.

For instance, companies targeting the
BOP market are finding that the shared
access model, which disaggregates access
from ownership, not only widens their

The High-Cost Economy of the Poor

When we compare the costs of essentials in Dharavi.a shantytown of more than

1 million people in the heart of Mumbai, India, with those of Warden Road, an

upper-class community in a nice Mumbai suburb, a disturbing picture emerges.

Clearly, costs could be dramatically reduced if the poor could benefit from the

scope, scale, and supply-chain efficiencies of large enterprises, as their middle-

class counterparts do. This pattern is common around the world, even in de-

veloped countries. For instance, a similar, if less exaggerated, disparity exists

between the inner-city poor and the suburban rich in the United States.

Cost Dharavi Warden
Road

Poverty
premium

credit
(annual interest)

municipal-grade
water (per cubic meter)

phone call (per minute)

diarrhea medication

rice (per kilogram)

600%-! ,000%

$1.12

$0.04-$0.05

$20

$0,28

12%-,8%

$0.03

$0,025

$2

$0.24

53X

37X

1.8X

10X

1.2X

HARVARD BUSINESS REVIEW

customer base but increases asset pro-
ductivity as well. Poor people, rather
than buyingtheirown computers, inter-
net connections, cell phones, refrigera-
tors, and even cars, can use such equip-
ment on a pay-per-use basis. Typically,
the providers of such services get con-
siderably more revenue per dollar of in-
vestment in the underlying assets. One
shared Internet line, for example, can
serve as many as 50 peopie, generating
more revenue per day than if it were
dedicated to a single customer at a flat
fee. Shared access creates the opf>ortu-
nity to gain far greater returns from all
sorts of infrastructure investments.

In terms of finances, to operate suc-
cessfully in BOP markets, managers
must also rethink their business met-
rics – specifically, the traditional focus
on high gross margins. In developing
markets, the profit margin on individual
units will always be low. What really
counts is capital efficiency-getting the
highest possible returns on capital em-
ployed (ROCE). Hindustan Ixver, for in-
stance, operates a $2.6 billion business
portfolio with zero working capital.The
key is constant efforts to reduce capital
investments by extensively outsourc-
ing manufacturing, streamlining supply
chains, actively managing receivables,
and paying close attention to distrib-
utors’ performance. Very low capital
needs, focused distribution and tech-
nology investments, and very large vol-
umes at low margins lead to very high
ROCE businesses, creating great eco-
nomic value for shareholders. It’s a
model that can be equally attractive in
developed and developing markets.

Streamlining supply chains often in-
volves replacing assets with informa-
tion. Consider, for example, the expe-
rience of ITC, one of India’s largest
companies. Its agribusiness division has
deployed a total of 970 kiosks serving
600,000 farmers who supply it with soy,
coffee, shrimp, and wheat from 5,000
villages spread across India. This kiosk
program, called e-Choupal, helps in-
crease the fanners’ productivity by dis-
seminating the latest information on
weather and best practices in farming,
and by supporting other services like

soil and water testing, thus facilitating
the supply of quality inputs to both the
fanners and iTC. The kiosks also serve
as an e-procurement system, helping
farmers eam higher prices by minimiz-
ing transaction costs involved in mar-
keting farm produce. The head of (TC’s
agribusiness reports that the company’s
procurement costs have fallen since
e-Choupal was implemented. And that’s
despite paying higher prices to its farm-
ers: The program has enabled the com-
pany to eliminate multiple transpor-
tation, bagging, and handling steps –
from farm to local market, from market
to broker, from broker to processor –
that did not add value in the chain.

Innovation. BOP markets are hot-
beds of commercial and technological
experimentation. The Swedish wireless
company Ericsson, for instance, has de-
veloped a small cellular telephone sys-
tem, called a MiniGSM,that local oper-
ators in BOP markets can use to offer
cell phone service to a small area at a
radically lower cost than conventional
equipment entails. Packaged for easy
shipment and deployment, it provides
stand-alone or networked voice and data
communications for up to 5,000 users
within a 35-kiIometer radius. Capital
costs to the operator can be as low as $4
per user, assuming a shared-use model
with individual phones operated by local
entrepreneurs. The MIT Media Lab, in
collaboration with the indian govern-
ment, is developing low-cost devices
that allow people to use voice com-
mands to communicate – without key-
boards – with various Internet sites in
multiple languages. These new access de-
vices promise to be far less complex than
traditional computers but would per-
form many of the same basic functions.^

As we have seen, connectivity is a big
issue for BOP consumers. Companies
that can find ways to dramatically lower
connection costs, therefore, will have
a very strong market position. And that
is exactly what the Indian company
n-Logue is trying to do. It connects hun-
dreds of franchised village kiosks con-
taining both a computer and a phone
with centralized nodes that are, in turn,
connected to the national phone net-

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BIG PICTURE • Serving the World’s Poor, Profitably

work and the Internet Each node, also
a fr^anchise, can serve between 30,000
and 50,000 customers, providing phone,
e-mail, Internet services, and relevant
local information at affordable prices
to villagers in rural India. Capital costs
for the n-Logue system are now about
$400 per wireless “line” and are prt>
jected to decline to $ i o o – a t least ten
times lower than conventional telecom
costs. On a per-customer basis, the cost
may amount to as little as $i.̂ This ap-
pears to be a powerful model for ending
rural isolation and linking untapped
rural markets to the global economy.

New wireless technologies
are likely to spur further
business model innovations
and lower costs even more.
Ultrawideband, for exam-
ple, is currently licensed in
the United States only for
limited, very low-power ap-
plications, in part because
it spreads a signal across
already-crowded portions
of the broadcast spectrum.
In many developing coun-
tries, however, the spec-
trum is less congested. In
fact, the U.S.-based Dandin Group is al-
ready building an ultrawideband com-
munications system for the Kingdom
of Tonga, whose population of about
100,000 is spread over dozens of is-
lands, making it a test bed for a next-
generation technology that could trans-
form the economics of Internet access.

E-commerce systems that run over
the phone or the Internet are enor-
mously important in BOP markets be-
cause they eliminate the need for layers
of intermediaries. Consider how the U.S.
start-up Voxiva has changed the way
information is shared and business is
transacted in Peru. The company part-
ners with Telefónica, the dominant local
carrier, to offer automated business ap-
plications over the phone. The inexpen-
sive services include voice mail, data
entry, and order placement; customers
can check account balances, monitor de-
livery status, and access prerecorded in-
formation directories. According to the
Boston Consulting Group, the Peruvian

Ministry of Health uses Voxiva to dis-
seminate information,take pharmaceu-
tical orders, and link health care workers
spread across 6,000 offices and clinics.
Microfinance institutions use Voxiva to
process loan applications and commu-
nicate with borrowers. Voxiva offers
Web-based services, tot), but far more of
its …

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