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Seeking Fortune at the Bottom of the Pyramid
Reprinted From Knowledge@Wharton(http://knowledge.wharton.upenn.edu)
In a new book from Wharton School Publishing,
author CK Prahalad argues for a more
inclusive capitalism.
To experienced marketing
managers in the world's
largest multinational companies, it is
perfectly obvious who their target market
audiences are: The developed world
and upper and middle class residents
of the developing world. The rationale
is simple: these are the customers who
demand and can afford costly products
and services, who appreciate advances
in technology and who provide intellectual
excitement to managers trying to
capture their business. The world's poor?
They are better served by governments
and non-profit organizations. Selling to
them just isn't worth the effort.
Or is it?
C. K. Prahalad, professor of corporate
strategy at the University of
Michigan Business School, has an
entirely different perspective. In his
book, The Fortune at the Bottom of the
Pyramid: Eradicating Poverty through
Profits, Prahalad argues that multinational
companies not only can make
money selling to the world's poorest,
but also that they must undertake such
efforts as a way to close the growing
gap between rich and poor countries.
The book, scheduled for publication
this summer, is one of the first volumes
to be offered by Wharton School
Publishing, a new imprint resulting
from the collaboration of the Wharton
School with Pearson Education.
At the core of Prahalad's argument
for targeting the world's poorest as a
potential market is the sheer size of that
market—an estimated 4 billion people
constituting two-thirds of the world's
population. More importantly, the market
will grow to an estimated 6 billion
people within 40 years because the bulk
of the world's population growth is occurring among the poor.
Despite the fact that these people
subsist on annual per capita incomes
of less than $1,500, this "bottom of
the pyramid" represents a multi-trillion-dollar
market. Taken together,
nine developing nations—China, India,
Brazil, Mexico, Russia, Indonesia,
Turkey, South Africa and Thailand—have a combined GDP that is larger,
in purchasing power parity, than the
combined GDPs of Japan, Germany,
France, the UK and Italy. The bottom
of the pyramid, Prahalad says, is "the
biggest potential market opportunity in
the history of commerce."
Prahalad first became interested in
this issue in 1995. He wondered, for
example, how business can be so good
at developing technological resources
at the same time that the world has
so many people who are so poor. His
own experience traveling around the
globe and consulting with multinationals
prompted him to begin looking for evidence that large companies
can make a significant impact on
developing nations.
A central point in The Fortune at
the Bottom of the Pyramid is that the
effort to help the poorest people can
be successful across different countries
and different industries ranging from
health care and finance to fast-moving
consumer goods and energy. The exceptions,
Prahalad notes, are countries
that are essentially lawless, like Somalia
and the Congo, and industries that
are among the most basic, particularly
some of the purely extractive industries
that employ many people but have little
incentive or ability to empower them.
Otherwise, Prahalad says, his approach
"can work 90% of the time."
He expects this book to resonate
with a wide audience, including executives
at large companies, business school
professors, students, and government
and development agencies. "This is the
first time that someone has put together
a coherent point of view on why the
private sector can be an integral part
of development and social transformation,"
he says. He notes, too, that
he has served on a United Nations
Commission under U. N. Secretary-General Kofi Annan to examine
private sector developing. The commission
is scheduled to issue its report
soon. Already, he says, "this kind of
thinking is having an impact."
Profits are not the only reason
Prahalad urges multinational companies
to devise strategies, products and
services for the bottom of the pyramid.
Citing U.N. figures, Prahalad points
out that the richest 20% of the world
accounted for about 70% of total
income in 1960. In 2000, the richest had
85% of total income while
the fraction of income flowing to the
poorest 20% of the world fell from
2.3% to 1.1%. Strategies aimed at
the bottom of the pyramid will, by
necessity, create jobs and improve
incomes among those people, helping
slow and possibly even reverse
the widening income gap. Certainly
such strategies can help avert social
decay, political chaos, terrorism and
environmental degradation.
One of the biggest reasons that multinationals
have avoided the bottom of
the pyramid is that marketing to the
poorest isn't easy. They usually lack
regular cash flow, have little access to
credit and live in rural villages or urban
slums that make traditional methods of
advertising and distribution difficult, if
not impossible. Most of the people at
the bottom of the pyramid are part of
an informal economy in which they do
not hold legal title or deed to their assets.
Thus, effective strategies for reaching
these people will require remarkably
different approaches, several of which
are described in case studies in the book
and summarized below.
Salt, Soap and Hindustan
Lever Ltd.
Hindustan Lever Ltd., one of Unilever's
largest subsidiaries, has been among
the most effective consumer brand
companies in reaching the poorest of
the poor in India and other developing
countries.
CEMEX: Credit and Concrete
Commercial credit historically has been
unavailable to the very poor. Yet economists
maintain that commercial credit
is a central component of any market
economy.
Connecting to the Poor
Technological advances, particularly in
computing and communicating, seem
to be taking place almost entirely in the
developed world. Granted, India and
some of the Caribbean islands are providing
the staffing for sophisticated call
centers and India notably has a thriving
software development industry. But
the employees of those enterprises are
mostly well-educated and come from
the middle-class or affluent segments of
their populations.
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