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markets can reverse the flow of concepts, ideas, and methods. Therefore, for an MNC that aims to stay ahead of the curve, experimenting in BOP markets is increasingly critical. It is no longer an option.
5. BOP A Global opportunity
We will be talking about the process by which large firms can create products and services that are ideally suited for the BOP markets. It is natural to ask whether the managerial energy required for these innovations is justified. Although there are opportunities for growth in BOP markets, are these opportunities attractive enough for large firms (including MNCs) to go through the changes that are required in their internal systems and processes? To challenge their dominant logic?
Similarly, will the social and developmental benefits of such business growth be substantial enough for NGOs and community organizations to give priority to market-based approaches?
I believe the answer is an unambiguous yes. Based on emerging evidence, we can identify four distinct sources of opportunity for a large firm that invests the time and energy to understand and cater to the BOP market
1. Some BOP markets are large and attractive as stand-alone entities.
2. Many local innovations can be leveraged across other BOP markets, creating a global opportunity for local innovations.
3. Some innovations from the BOP markets will find applications in developed markets.
4. Lessons from the BOP markets can influence the management practices of global firms.
The benefits of operating at the BOP, therefore, do not just accrue in local markets. We describe each one of these opportunities next.
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Engaging the BOP
There are two ways in which large firms tend to engage the BOP markets. The traditional approach of many MNCs is to start from the business models honed in the developed markets—the top of the pyramid and their zone of comfort. This approach to the BOP market inevitably results in fine-tuning current products and services and management practices. There is growing evidence that this approach is a recipe for failure. MNCs and large firms must start from a deep understanding of the nature and the requirements of the BOP, and then architect the business models and the management processes around these requirements. This approach to the BOP market will not only allow large firms to succeed in local markets but will also provide the
knowledge base to challenge the way they manage the developed markets. Let us consider some examples.
BOP consumers in Latin America are careful in their use of diapers. They use one or two changes per day compared to the five or six changes per day common among the top of the pyramid consumers. Because they can afford only one or two changes, they expect a higher level of
absorbency in the diapers and an improved construction of the diaper that will accommodate additional load. This means that the firms have to technically upgrade the quality of their diapers for the BOP consumers compared to the products they currently sell to the rich in those markets.
Needless to say, the new product built for the BOP market is higher in quality and provides a better price-performance proposition. Similarly, detergent soap, when used by BOP consumers in India washing their wares in running water, becomes mushy. About 20 to 25 percent of the detergent soap can be lost in the process. Therefore, HLL developed a soap with a coating on five sides, which makes it waterproof. The coated soap saves 20 percent wastage even in a hostile user environment.
The innovation is of interest to the rich as well. Access to clean water is a major concern at the BOP.
Polluted water (particulate, bacterial, and viral pollutants) is common. Boiling water is the only current alternative to eliminating the bacterial and viral pollutants. A focus on solving this problem has to start with a cost target that is no more than the cost of boiled water. Further, the system has to
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create a quality level that is better than boiled water (removing sediments). The process is of interest to the rich as well. The quality, efficacy, potency, and usability of solutions developed for the BOP markets are very attractive for the top of the pyramid. The traditional MNC approach and the approach suggested here—top of the pyramid to BOP and from the BOP to the top of the pyramid—are shown in Figure-5.
Figure-5 (Learning from the BOP)
Source : Fortune at the bottom of Pyramid, C.K. Prahalad
BOP can be a source of innovations for not only products and processes, but business models as well. Let us start with the growth opportunities in local, stand-alone BOP markets first
Local Growth Opportunities
Some of the local BOP markets are very large. A large population base is one indicator of the size of the market opportunity at the BOP, not necessarily the per-capita income. For example, China, India, Indonesia, Brazil, Mexico, Russia, South Africa, and Nigeria can potentially be large emerging BOP markets. If an industry or a firm finds the sweet spot—meaning the right business model and the right combination of products and services—these markets could have explosive growth. Consider growth opportunities in China, the world‘s largest producer of steel. The growth of the appliances, building, and auto markets has created an insatiable appetite for steel. China‘s
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steel capacity is estimated at 220 million tons compared to 110 million tons in Japan and 90 million tons in the United States. China has also an installed base of more than 250 million cell phones.
That is larger than the installed base of the United States. China is also one of the largest markets for televisions, appliances, and autos. The growth spurt in China is without parallel. Similarly, India is at the early stages of a growth spurt in a wide variety of businesses such as two-wheelers (4.8 million during the fiscal year 2002–03), housing loans, and wireless. The housing loan business went from a low of Rs. 19,723 crores during fiscal 1999–2000 ($4.4 billion) to Rs. 51,672 crores ($11.5 billion) in 2002–2003 . During the latter part of 2003, India was adding about 1.5 million telephone subscribers/month.
Needless to say, this growth was not all derived from the poor. There are a lot of emerging middle-class customers here, but most of them earn less than $1,500 per capita ($6,000 per family of four). This growth is not funneled by the top of the pyramid. What is it that MNCs learn in these markets? The lessons for Samsung and LG (South Korean suppliers of cell phones to India), not just for Reliance and Tatas (Indian providers of service), is that they have to adjust to rapid growth, not 2 to 5 percent per year, but perhaps 50 to 100 percent per year.
Learning to Grow
BOP markets can collapse the time frames taken for products, technologies, and concepts to diffuse in the system. Many of the drivers of change and market growth—deregulation, involvement of the private sector in BOP markets, digitization, ubiquitous connectivity, and the attendant change in the aspirations of people, favorable demographics (a young population), and access to credit—are simultaneously present in BOP markets. These drivers interact. The result is the challenge to the S curve that is the model for the diffusion of new products and services in the developed world. The changes that played out over 15 years in the developed markets are being collapsed into a short period of just three to five years in many BOP markets. M.S. Banga, CEO of HLL, suggests that the real challenge in BOP markets is that managers have to cope with the I curve. The entire
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management process in most large firms is geared for slow growth, if at all. The I curve challenges the status quo. The S and the I curves, the two approaches to diffusion of innovations (products and services), can be conceptualized, as shown in figure-6.
Figure-6 (Traditional & BOP growth patterns)
Source : MS Banga, CEO, HLL
This is good news and bad news. A cell phone today is a telephone, a camera, a watch, a computer, and a partial radio and TV. Why would you need a traditional watch (other than as an ornament) if you had a cell phone? The I curve can rapidly propel some innovations and can equally rapidly destroy some traditional markets. Rapid growth can also make new demands on firms. For example, HLL wants to build a network of 1 million direct distributors. This means the recruitment and training of about 30,000 to 40,000 people every month. Evaluating applicants; identifying those who could make good HLL distributors; training them in products, business models, and the values of the company; and inducting such a large number into the system create new demands on the process of management. Few firms around the world have experience in inducting this many new recruits (independent distributors) per month.
Local Innovations and Global Opportunity
The micro encapsulation of iodine in salt to preserve the iodine in the harsh conditions of
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transportation, storage, and cooking in India has found market opportunities in Africa, especially in Ivory Coast, Kenya, and Tanzania. Iodine Deficiency Disorder (IDD) is common across the
developing world, and the solution found in India has been transported across other similar markets with IDD by Unilever. Similarly, during the late 1980s, in response to the growing success of Nirma, a local entrepreneurial startup in the detergent business that created a new category, focused on the BOP markets, HLL launched Wheel, intended for the same market segment. Wheel today is one of the largest brands in the HLL portfolio in India ($150 million). The BOP market has grown rapidly. BOP markets in India account for a total of 1.0 million tons of detergents, compared with 300,000 tons for the top of the pyramid. More important, the lessons learned in India were not lost on Unilever. It wanted to protect BOP markets in countries such as Brazil, Indonesia, and China. It took the lessons from developing Wheel in India—from the formulation, manufacturing process, packaging, pricing, distribution, and advertising and promotion—to Brazil. It introduced a similar product oriented toward the BOP called Ala. The product was a runaway success. The product was available in 2,000 small neighborhood stores in less than three months. The detergent team that developed the new business model for the BOP in India also went to Brazil and China to help build the distribution systems that were critical for the success of the business. Today, India is seen as a laboratory for similar India-like markets within Unilever. Product ideas and concepts are tried out in India with a global BOP market in mind. Similarly, the idea of single-serve units has become a global phenomenon in the BOP markets. The growth in fast-moving consumer goods businesses in Bangladesh, Nepal, Pakistan, and China has been fueled by similar requirements.
The success of Grameen Bank in developing microfinance in Bangladesh as a successful commercial operation has led to global interest in the process. Grameen Bank was totally focused on BOP customers. The average loan size was less than $20 when it started. There are more than 17,000 microfinance operations that are variants of the Grameen concept around the world, including in the United States. The microfinance revolution now has its own global conference
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every year. The success of Jaipur Foot is now exported to a wide variety of countries with similar requirements. The primary demand in all these countries for prosthetics is from BOP customers.
They have been available in 19 countries, from Afghanistan to Vietnam. The Aravind Eye Hospital, in a similar vein, is training doctors to establish a lowcost, world-class delivery system for eye care in South Africa, Cambodia, and Vietnam. In an interesting twist of the traditional view of capabilities, the cost and quality advantages of cardiac care in India are allowing it to negotiate terms for the possibility of moving a portion of the patients from the National Health System in the United Kingdom to India. The total cost of the trip for the patient and an accompanying family member, the stays in India, and the cost of patient care will be less than the cost in the United Kingdom. More important, the quality of care is equally good or better. There are no delays in accessing care. The Indian pharmaceutical industry had to learn to serve the BOP market. Prices were regulated by the government. Further, affordability of the public health system forced very low prices. It also forced them to develop methods for reverse engineering. Controversial as it is, the Indian pharmaceutical industry can deliver drugs coming off patents in the United States at a fraction of the cost charged by the established drug companies. However, the focus on the BOP has allowed these firms to invent cost-effective ways to manufacture, test, and distribute.
BOP Solutions for Developed Markets
In the rural areas of countries such as Peru, providing high-quality health care is difficult. More difficult is the surveillance of outbreaks of infectious diseases. These remote regions must be kept under constant surveillance to avoid the spread of disease, be it cholera or SARS. However, these locations are not well connected for constant communications. PCs are rare, and telephone lines are a luxury. The question for public health professionals in such a situation is simple:
How do we connect remote areas to a real-time surveillance system so that the spread of infectious diseases can be monitored using devices that are currently available on location (often simple telephones)? This implies that the system must be simple and device-agnostic. Remote locations
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must be connected to a central node so that planners and policymakers are fully informed. Such a system, originally developed for Peru, is finding successes in the United States. The system, originally created by Voxiva, was based on three premises:
1. The system, to be robust, must be based on any device that is available: telephone (landline or wireless) or PC. The local community must know how to use the device. The telephone is the most widely used device for communications.
2. The remote populations were either illiterate or just moderately literate. The system had to deskill diagnosis at the point of patient contact. The chances of having a trained and experienced doctor in remote regions in the Andes are low. However, the quality of the diagnosis must be world-class.
3. The system must be reliable and available in real time so that senior members of the health care system can react immediately to emerging problems of infectious diseases. Early detection of health problems and rapid response (reaction time) are critical components of the system. The system was first deployed in the remote regions of Peru and was a success.
Similar problems confront the United States. The CDC and the FDA have to prepare to remotely monitor outbreaks of diseases caused by terrorists or problems in food quality that must be traced rapidly. Blood banks have to be monitored for stock and quality. When the FDA and CDC were looking for a system to help them with remote, real-time surveillance, they found the Voxiva system to be the best. Both of them are now Voxiva customers.
Further, as the U.S. Department of Defense was inoculating soldiers with smallpox vaccine as a preventive measure, it needed a system for monitoring soldiers for possible adverse reactions to the vaccine. Voxiva, with its capabilities, was the obvious choice. Voxiva has moved on to sell its platforms for the detection of SARS, HIV, and other public health problems. The underlying platform is lowcost, robust, and simple, needs few skills, and can be grafted onto an existing telecom network.
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Lessons for MNCs from BOP Markets
The most interesting lesson for MNCs from operating in the BOP market is about costs—for innovation, distribution, manufacturing, and general costs of organization. Because the BOP forces an extraordinary emphasis on price performance, firms must focus on all elements of cost.
Shortage and the cost of capital force firms in BOP markets to be very focused on the efficiency of capital use. MNCs tend to impose their management systems and practices on BOP markets and find that it is hard to make a profit. The choices are simple: Change the management systems to cut costs or lose significant amounts of money. The lessons learned from BOP markets by MNCs are covered in the following sections.
Capital Intensity
The judicious use of capital is a critical element of success in BOP markets. For example, HLL works with negative working capital. It focuses on reducing capital intensity in plants and equipment. By focusing on a judicious mix of outsourcing to dedicated suppliers, it not only reduces its capital intensity but also creates several small-and medium-size enterprises that can conform to the norms and standards set by HLL. HLL, as the only customer to these suppliers, can and does influence their operations. Second, a senior management focus on logistics and distribution is critical for reducing the capital needs of the business. HLL serves 850,000 retail outlets in one of the most difficult distribution terrains. The sales data from every retail outlet is collected and processed in a central processing facility. All the retail outlets are serviced frequently.
Finally, a focus on revenue management allows for reducing the capital tied up in receivables. HLL can collect revenues in real time as the goods leave the warehouses of their suppliers. The suppliers might provide credit to the dealers and retailers. HLL as a manufacturer can reduce its capital intensity. The results can be compelling. For example, the system for focusing on capital first initiated with the introduction of the detergent Wheel to the BOP provided evidence of how many
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more opportunities for value creation can be unearthed by serving the needs of the BOP. A comparison of the financial performance of Nirma (the local competitor), HLL in the top of the pyramid market with Surf, and HLL in the BOP market with Wheel is shown in below table -4 Table-4 (Economic Value Creation at the BOP)
Nirma HLL(Wheel) HLL(Surf)
Sales 150 100 180
Gross margin (%) 18 18 25
Return on Capital employed(%) 121 93 22
A similar situation exists at the Aravind Eye Hospital, ITC eChoupal & other cases in this report.
Sustainable Development
BOP markets are a great source for experimentation in sustainable development. First, resources such as water, energy, and transportation are scarce and expensive. Automotive and two-wheeler manufacturers are learning that the BOP customers are attuned to the total cost of ownership and not just the cost of purchase. The miles per gallon—the efficiency of energy use—is a significant determinant of market success. Similar demands are imposed on water use. BOP markets can also represent an emerging problem. Single-serve packaging is advantageous to create the capacity to consume at the BOP but can also lead to a major environmental problem. More than 13 billion single-serve packages are sold annually in India, and this trend is growing rapidly. Although plastic bags appear attractive, they are not biodegradable. MNCs involved in the BOP markets have the capability and the motivation to find solutions to the problem of packaging in emerging markets.
BOP markets are a great source for experimentation in sustainable development. First, resources such as water, energy, and transportation are scarce and expensive. Automotive and two-wheeler manufacturers are learning that the BOP customers are attuned to the total cost of ownership and not just the cost of purchase. The miles per gallon—the efficiency of energy use—is a significant determinant of market success. Similar demands are imposed on water use. BOP markets can also represent an emerging problem. Single-serve packaging is advantageous to create the capacity to consume at the BOP but can also lead to a major environmental problem. More than 13 billion single-serve packages are sold annually in India, and this trend is growing rapidly. Although plastic bags appear attractive, they are not biodegradable. MNCs involved in the BOP markets have the capability and the motivation to find solutions to the problem of packaging in emerging markets.