Bottom of pyramid: thoughts 2007

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Bottom of Pyramid

The First Five Years


Flow

• Bottom of Pyramid 2002• Prahalad & Hart’s initial concept• Criticism on Prahalad & Hart’s concept• Karnani’s Base of Pyramid• Prahalad’s response to Karnani• Advancing the debate: reaching middle ground• What happens next?


Bottom of Pyramid 2002

• Prahalad & Hart faced several rejections before their paper was first published in 2002.

• The Fortune at the Bottom of Pyramid was published as a book in 2004• In the last five years, thanks to open information access enabled by the Internet,

there are dedicated blogs, websites, research centres focusing on Bottom of Pyramid strategies and concepts

• Open information exchange has also enabled active debates, the most high profile one being Prahalad vs Karnani


Bottom of Pyramid: Prahalad 2004

• 4-5 billion people live for <2$ (PPP rates) per day, and they constitute the Bottom of the Pyramid and bear the “Poverty Penalty”

• Private Public Partnership focussed at the BoP will lead towards economic development and poverty alleviation

• The BoP potential market is 13 trillion dollars at PPP terms• It is possible for corporations to find innovative ways to tap into this BoP market

to increase their profits while simultaneously eradicating world poverty• There are 12 principles for innovation which are necessary to operate within BoP


Criticism on Prahalad’s concept

• Size of the market: The figures vary from 13 trillion $ (Prahalad) to 0.3 trillion $ (Karnani)

• Are MNCs suited for BoP markets? (Prahalad’s most successful examples are not for profit organisations & some SMEs

• Does simply selling to the poor reduce poverty?• Prahalad & Hart’s BoP opportunity sees the poor as consumers only• Assumption fallacy: MNCs can determine what BoP consumers want, they just

have to figure out a profitable way of providing it


Amidst all of this, in 2006, a subtle shift occurred:

BoP moved from Bottom of Pyramid to Base of Pyramid

Enterprise for a Sustainable World, 2006, launched the Base of Pyramid Protocolthat advocated “deep listening & mutual dialogue” with the BoP consumers to findout what best suits their need

As per Webster,Bottom is the underside, the lowest part or placeBase is something that is a starting point, it supports that which is on top


Karnani’s views on BoP

• Aneel Karnani, professor at the Ross School of Business, University of Michigan published “ Fortune at the Bottom of Pyramid: A Mirage” in April 2007 here

• Questions case studies quoted by Prahalad:• HLL shampoo sachet: was not a BoP strategy by design, but a counter attack to reverse

Cavinkare’s gains• Aravind eye hospitals: Not for profit group, serviced by highly motivated team working at

much lesser salaries by choice, cross subsidises the BoP customers• Annapurna salt: Sells at a premium of 275%, not targeted at BoP• A poor sweeper woman “has a choice and feels empowered” because she uses Fair &

Lovely sachet.

• Questions Prahalad’s estimate of BoP market and revises it to 0.3 trillion $ at PPP terms

• Will selling to the poor alleviate poverty?



• The only way to alleviate poverty is to raise the real income of the poor by :• Lowering the prices of the goods that the poor buy• Raise the income that the poor earn

• How do you lower/reduce prices of goods?• Reduce profits• Reduce costs without lowering quality• Reduce costs by reducing quality• Shared access of products/services

• At current levels of efficiency, business process redesign will not lead to dramatic cost reductions without impacting quality

• Technology shifts are the only way to significantly reduce costs, but these are limited to consumer durables and communications field, where the poor spend only a fraction of their income

• 80% of the poor’s income is spent on food, clothing and fuel- products which have not seen fundamental technology shift leading to huge cost reductions



• Prahalad argues that the poor cannot be given low quality low cost products, simply because they are poor

• What is low quality? Is it the same as poor quality?• Can cost reduction be achieved by making the same product as low quality

product? Yes:Nirma was launched by an entreprenuer as a cheap (low quality) alternative to market leader Surf. Nirma contained no active detergent, perfume or softener & was harsh to skin, but sold at one third the price of Surf. It soon overtook Surf as the leading detergent

• Quality is a relative concept. The “Pay less get less” thought works on low quality options as well

• Karnani advocates the need to view the poor primarily as producers, echoing Amartya Sen’s view on improving the capacities of the poor

• If you buy from the poor rather than sell to them, income of the poor will be raised: Amul & ITC e-choupal


Prahalad’s Response to Karnani

• Prahalad wrote an open letter to Karnani here highlighting:• The purpose of the BoP paper was never to accurately estimate the BoP market size• BoP looks at both consumption and production• Annapurna example is about difficulty of educating the poor on health benefits• Consumption can and does increase income.• If Aravind Hospital cures one person of blindness even by not for profit objectives, the

process releases one additional person to start working, as he was earlier confined to taking care of the blind person. Does this lead to income generation?

Creating the capacity to consume is different from serving an existing market. Creating the capacity to consume can increase disposable income (no different from income generation).

The debate is not about how many are really poor. It is about how to bring the benefits of global standards at affordable prices and increase access


Advancing the debate: Reaching Middle Ground

• Instead of treating poor as primarily consumers or primarily producers, treat them as primary producers and selective consumers

• What is selective consumption?• Unethical inclusion: selling tobacco to the poor because the tobacco company sees the

BoP market as a profitable market. Misplaced priorities in scarce resource allocation (money) may lead to long term problems like lack of education, health care

• Unfortunate exclusion: Not offering medicines to a BoP customer because of the inability of the customer to pay the price. Can you serve a BoP TB patient a sachet serving of medicine because he cannot afford the entire medicine course?

Source: Fortune at the Bottom of the Pyramid: An alternate perspective, IIM Ahmedabad working paper by AK Jaiswal


What Happens Next?

• How does a corporation decide whether its participation in BoP market will be appropriate and successful?

• Does the product serve basic needs such as health, nutrition, education etc?• Whether the marketing communication creates platform for progressive ideas or just

complicates the priority allocation of scarce resource like disposable income• Whether the product enhances the customer’s well being?• Whether the product is developed keeping in mind the special needs of BoP

customers?• Whether the product/sector creates additional jobs?

Documents

Bottom of pyramid: thoughts 2007