Opportunity in ‘poverty’

EMBA - BA 804

Ram Mudambi

Temple University

© Ram Mudambi, Temple University, 2002 2

The population-income pyramidPurchasing Power Parity

US $World Population

millions

Adapted from Prahalad and Hart, ‘Strategies for the bottom of the pyramid’.

> $20,000 75 - 100High

Middle$1,500 – 20,000 1,500 – 1,750

LOW<$1,500 4,000

© Ram Mudambi, Temple University, 2002 3

Opportunity in ‘poverty’

• A counterintuitive new opportunity for MNCs in the new millennium

• A transforming challenge – as powerful as the Internet and e-business

• Pursuing the “mass market” forces us to rethink our conventional wisdom about:– Technology and business models– Scale and profitability– Price-performance relationships– Productivity and capital efficiency– Sustainable development

© Ram Mudambi, Temple University, 2002 4

Example: Hindustan Lever in India

• Traditional MNC focus: upper income• A local firm (Nirma) challenged HL in its

detergent business, with a new formulation, process, packaging, distribution and pricing focused on the masses, who are very poor

• As Nirma grew rapidly, HL realized its vulnerability

• HL responded with its own offering targeted at the same mass population segment

Adapted from Prahalad and Hart, ‘Strategies for the bottom of the pyramid’.

© Ram Mudambi, Temple University, 2002 5

Nirma – Key aspects

• Soap Formulations– lower fat to water ratio– indigenous oils– novel processing

• Local Company– research with local talent– local employment and awareness– commitment to the bottom of the income

distribution

© Ram Mudambi, Temple University, 2002 6

Results: Nirma vs. Hindustan Lever

NirmaHL

Wheel

HL

High End

Sales

(US$ million)150 100 180

Gross Margin (%)

18 18 25

ROCE (%) 121 93 22

Adapted from Prahalad and Hart, ‘Strategies for the bottom of the pyramid’.

© Ram Mudambi, Temple University, 2002 7

The bottom line• Today, Nirma is the largest branded detergent

maker in the world• Experience in serving the masses at the low end of

the income scale has allowed HL to radically change its business model

• During the past 5 years, HL has grown:– revenues by 20% per year– profits by 25% per year– market capitalization by 40% per year

• HL’s parent MNC, Unilever plc has adopted its mass market business model as a strategic priority at the corporate level

© Ram Mudambi, Temple University, 2002 8

The masses – who are they?

• 3-4 billion with per capita income less than $1,500 (PPP) per year

• Could swell to 6-8 billion due to rapid population growth

• Most live in rural villages or urban slums and shanty towns

• Education levels are low to non-existent• Markets are hard to reach, unorganized, and

local in character

© Ram Mudambi, Temple University, 2002 9

Grasping the opportunity in ‘poverty’

OpportunityMarket Development – Locally integrated product development

PRODUCTION

Creating Purchasing Power

– Access to credit– Income generation

DEMAND

Providing Market Access

– Distribution– Communication

SUPPLY

Molding Aspirations– Consumer education– Cultural sensitivity

DREAMS

© Ram Mudambi, Temple University, 2002 10

A pro-active role for MNCs• Resources. Few local entrepreneurs, NGOs, or

governments have the managerial or technological resources to launch this business model.

• Leverage. MNCs can tap into their global knowledge network.

• Bridging. MNCs have the credibility to bring together a wide range of actors.– Reverse Transfers. Innovations designed to overcome

problems in resource-poor environments can be adapted to reduce the resource- and energy intensity in the developed world

© Ram Mudambi, Temple University, 2002 11

MNC managers who commit to serving the masses can

ameliorate the effects of the ‘clash of civilizations’ by

demonstrating the win-win nature of globalization