In a new book from Wharton School Publishing, author CK Prahalad argues for a more inclusive capitalism.
Reprinted from Knowledge@Wharton; http://knowledge.wharton.upenn.edu
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. It is India’s largest exporter of branded consumer products and Forbes Global has named it the “best consumer households company worldwide.” The company’s experience marketing two of the most basic consumer staples – salt and soap – illustrates some of the innovative approaches necessary to sell successfully to the bottom of the pyramid.
In the mid-1990s, HLL’s Popular Foods division recognized the growing potential for branded staples in India and launched its Annapurna Salt brand in a test market in Andhra Pradesh. Positioned as “pure salt,” Annapurna ’s test had only limited success since consumers considered most salt to be pure. Additionally, Annapurna was up against a strong competitor, Tata Salt, which had already established the purity claim.
Two years later, however, the Indian government began a concerted effort to combat an insidious health problem called Iodine Deficiency Disorder, one of the world’s leading causes of mental disorders, including retardation and lowered IQ. In India an estimated 70 million people were afflicted while another 200 million were at risk. Since virtually everyone, even the poor, eat salt regularly, iodized salt was widely recognized as the best means of providing sufficient iodine. In 1997, the Indian government banned the sale of non-iodized salt. The problem, however, was that standard methods of iodizing salt tended to be ineffective because the iodine leached out over time, especially in India’s primitive storage and transportation conditions.
Hindustan Lever Research Center, one of Unilever’s five major global research facilities, began investigating ways to keep the iodine content of salt intact in India ’s difficult conditions. Rather than chemically encapsulating iodine with a protective coating around both it and the salt particle, researchers developed a method of protecting the iodine at the molecular level which kept it intact until released in the very acidic environment of the human stomach.
With the technological problem solved, HLL turned its attention to the marketing of the reformulated Annapurna. The target audience among the poor included mothers between 25 and 40 years of age who are responsible for household cooking and making purchase decisions. The message was that the “stable iodine” in Annapurna salt “doesn’t get lost” and would help keep their families healthy.
Although Tata Salt remains the dominant brand with 19% of the market, HLL is now a close second with 14% of the market and is the dominant brand in South India.
HLL used a somewhat similar strategy of finding and marketing a health benefit to increase its sales of soap in India. While AIDS and SARS have gotten much of the press ink in recent years, diarrhea, which ranks third among global killers, has gotten little attention. Ironically, while it is exceedingly difficult to prevent and cure respiratory infections and AIDS, most cases of diarrhea can be prevented simply by washing hands with soap. In India, which contributes 30% of all diarrhea deaths in the world, surveys indicate that even though 95% of Indian households own soap, only 30% use soap daily.
HLL had long advanced health claims for the century-old Lifebuoy brand soap in India. The soap as originally formulated had a strong carbolic smell associated with cleanliness. But the health advantage waned over time as competitors came up with their own health claims while adding a beautifying element to their sales pitch, most notably through more floral fragrances. To maintain its dominance of the soap market, HLL reformulated Lifebuoy, giving it a floral scent and switching from manufacturing a “hard” bar to milled soap. The change made a bar last longer and produce more lather. The company also added the antibacterial Triclosan to the formula, and found a price point that poor consumers could afford by adopting a different approach to pricing than the routine “cost plus” formula.
With its new formulation in hand, HLL had to figure out how to sell the product to its mostly rural customers. The company faced two hurdles. First, it had to change the behavior of its potential customers, who associated soap with the removal of visible dirt. If their hands didn’t appear dirty, then there was no need to use soap. The potential presence of millions of invisible infectious organisms was not part of their hand washing calculus. The second hurdle was that most of the potential customers lived in villages without access to such mass media as radio and television
The solution HLL hit upon was to hire two-person “facilitator” teams to go into village schools and initially teach youngsters between the ages of 5 and 13 about the problems that can be caused by invisible germs and how they can be largely eliminated by washing hands with soap. Parents and village elders are then approached with similar messages.
Based on initial data, HLL’s soap sales are growing not only in areas in which the company initiated its team marketing approach but also in other parts of India. Managers are convinced that providing their soap to the poor achieves product differentiation and taps into an opportunity for growth through increased soap usage.
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. Access to credit in the United States has allowed even people of modest means to make major purchases, including houses, cars and educations.
CEMEX, Mexico ’s largest cement manufacturer and the third-largest cement company in the world, is a technologically sophisticated firm with a competitive advantage derived from a distribution infrastructure that monitors the movement of every truck in real time to insure on-time delivery of cement. The company sells cement to two distinct markets: the construction industry and the “do-it-yourself” customer. During the Mexican economic crisis in 1994 and 1995, CEMEX found its sales to the construction industry tumbled as much as 50% while sales to the do-it-yourself market fell between 10% and 20%. It decided then to reduce its reliance on the cyclical construction industry by placing more emphasis on the do-it-yourself market. The company realized the key difference between the two markets was the average revenue per customer. Small but steady sales to individuals earning less than $5 a day could produce very impressive revenues.
Market research showed that most of the cement sales to the do-it-yourself market were for the construction of one room, either an addition to an existing structure or the start of what would eventually become a family’s house. It was obvious that if potential do-it-yourself customers had access to credit, they could undertake construction sooner and more often than if they had to amass the entire purchase price of the cement at one time. In 1998 CEMEX launched an experimental program called Patrimonio Hoy – Savings/Property Today – intended to enable very poor people to pay for building materials and services to upgrade their homes.
The program initially targeted neighborhoods in which the average daily family income was about $5 to $15. Managers were sent into the neighborhood to enroll women – traditionally responsible for saving and purchasing within a Mexican household – in groups of three to form a “socio group.” The three members of each group agree to take turns collecting small payments from each of the members that will be saved toward making cement purchases. Once the socio is formed, they are visited by a technical advisor or architect who, for a small fee, helps the members decide what will be the next room, how it will be laid out and how much material will be needed.
At the end of five weeks Patrimonio Hoy makes its first delivery of raw materials, valued at ten weeks worth of collections. Thus the program extends five weeks of credit to the socio members, further building credibility within the neighborhood. If the socio members remain committed to the program, the credit they are extended in the form of as-yet-unpaid-for raw materials increases. In the second 10-week period, for example, the raw material is delivered after the second week, in effect granting eight weeks of credit.
Margins to CEMEX distributors participating in the Patrimonio Hoy program typically are smaller – 12% in some cases – than the 15% that is the average in the business. But distributors are nevertheless enthusiastic because those smaller margins are more than offset by the steady demand for cement and other raw materials like sand and gravel. And while conducting business on a credit basis with a low-income population with no regular stream of paychecks may appear riskier than traditional lending models, Patrimonio Hoy managers contend that the risks are in reality very low. The default rate so far has been less than one half of one percent, a consequence in part of the group commitment of socio members. After three years of operation, Patrimonio Hoy had 36,000 customers and over $10 million in extended credit. The customer base is reported to be growing at the rate of 1,500 to 1,600 per month.
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. The inhabitants of urban slums and rural villages have not been targeted as a market for technologically sophisticated products or services.
Yet when technology has been made available to them, Prahalad has found residents of the bottom of the pyramid to be readily accepting of technology. In Bangladesh, women entrepreneurs with cell phones do a brisk business renting out the phone by the minute to other villagers. Indeed, Prahalad finds in the spread of wireless devices proof of the size and viability of the market at the bottom of the pyramid. By the end of 2003, for example, China had an installed base of 250 million cell phones. The market for wireless devices in India stood at about 30 million installations and was growing at the rate of 1.5 million handsets per month.
Where connectivity exists it is resulting in major efficiencies in traditional occupations. Within three months of the installation of personal computers in some Indian villages the farmers there were making decisions about planting based on futures prices being quoted on the Chicago Board of Trade. In Kerala, India, satellite-based images of fish shoals are downloaded on village PCs and read and interpreted by women who then direct their husbands where to fish. The husbands, after a day of fishing, use their cell phones to check prices at various ports along the coast to obtain the highest bid for their catch.
To Prahalad, all these examples are evidence that there are market solutions to the problem of poverty. The task that he sets out for multinational corporations is to break out of the dominant logic that views the world’s poor as a distraction to be aided by governments and non-profit organizations. Involvement in markets at the bottom of the pyramid will challenge many of the assumptions that managers of large companies have developed over the years, ranging from packaging and pricing to marketing and distribution. The result of such efforts will not only be profitable, both for the large companies as well as the consumers, but it might also contribute solutions to the serious political and environmental problems confronting the developed world.