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We have identified the immediate benefits of treating the poor as consumers as well as the poverty alleviation process that will result as businesses focus on the BOP. It is clear that the consumers (the poor) benefit, but do the private-sector businesses benefit as well? The BOP market potential is huge: 4 to 5 billion underserved people and an economy of more than $13 trillion PPP. The needs of the poor are many. The case for growth opportunity in the BOP markets is easy to make. However, to participate in these markets, the private sector must learn to innovate. Traditional products, services, and management processes will not work.
2. BOP Success Stories
While the cases in this report are intended to illustrate that there are viable business opportunities at the Bottom of the Pyramid, there was a lot of skepticism. Over the years, there is accumulating evidence that this segment represents a viable business. Consider for example, the growth of the cell phone. By 2011, more than 4 billion cell phones will be in use. Most of this growth is in the Bottom of the Pyramid markets. From sub-Saharan Africa, China, Southeast Asia, India, and Latin America and Eastern Europe, there is not a single country where the poor have not taken to the cell phone. India alone added approximately 11 million new subscribers in January 2009. Many
successful firms have emerged out of this opportunity. Many are new firms, and many are new businesses in older firms. Mobile Telephone Networks from South Africa, CelTel in Sub Saharan Africa, a dozen competitors in India led by Bharati Airtel, and Globe in the Philippines are some examples. The market capitalization of the three of the top five (two are not listed) leading players in wireless in India is approximately $57 billion as of June 2008. In January 2009, in a depressed market, it was $38 billion. The cell phone revolution has demonstrated beyond doubt that there is a market for world-class goods and services if they can be made available at affordable prices. For example, a cell phone minute costs less than $ 0.01 in India, probably the lowest rate per minute anywhere. The industry had to create its own ecosystem of mini entrepreneurs who sold prepaid
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cards and also charged the cell phones. The Bottom of the Pyramid business is quite critical for both the infrastructure players, such as LM Ericsson, and device makers, such as Nokia and Motorola.
The spread of the cell phone has made this the device of choice for not only communications but also some computing, entertainment, and the delivery of a wide variety of services such as medical care (as described in the Voxiva case in this report and reconfirmed in the update). Financial service organizations are also rapidly developing systems to use the cell phone for financial
transactions (see the ICICI case update). Remittances are routinely handled through the cell phone.
The cell phone, we can say, has shown that the Bottom of the Pyramid is not just a market but also a source of innovations in business models and applications. It has transformed the lives of the poor.
We can do well and do good simultaneously. Most important, the rate of diffusion among the Bottom of the Pyramid around the world has shown how willing and capable the poor are to accept and benefit from advanced technology. The cell phone has broken several long-held beliefs: There is no market at the Bottom of the Pyramid; they won‘t pay, they will not accept or do not need advanced technologies; the Bottom of the Pyramid cannot be a source of innovation; and
multinationals do not need them. Maybe some multinational firms can ignore this market. Not if you are Nokia, Motorola, Nestle, Unilever, or Microsoft. However, being a multinational or a large domestic firm does not guarantee success; the capacity to adapt and innovate at the Bottom of the Pyramid does.
A large number of firms have benefited from a focus on the Bottom of the Pyramid markets. They span multiple geographies and industries. For example, the success of the following local firms is common knowledge. The goal here is not to give an exhaustive list but an indicative list.
Brazil Casas Bahia (retail)
Habibs (fast food)
Bradesco (banking)
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Mexico Elecktra (retail, banking)
Groupo Bimbo (food)
Patrimonio Hoy (housing)
Philippines Globe (telecom, water)
Bangladesh Grammen (micro finance, telecom, food)
India Amul (dairy)
Aravind Eye Hospital, Jaipur Foot,
Narayana Hrudayalaya (health care)
ITC e-Choupal (agriculture)
SKS Finance (micro finance)
Airtel (telecom)
South Africa Pick and Pay (retail)
Mobile Telephone Networks (telecom)
Chile Savory, by Nestlé (ice cream)
Brestler, by Unilever (ice cream)
Note : About Elevan cases of success stories has been attached in the Annexure of this report.
More importantly, we see a large number of multinational firms either start new initiatives in Bottom of the Pyramid markets or reinforce their existing presence in the Bottom of the Pyramid.
Some notable new entrants are such well-known firms as Microsoft (software), DSM (food supplements), Royal Philips (health care), Thomson Reuters (information), GlaxoSmithKline (pharmaceuticals), Intel (computing), Vodafone (telecom), ING (microfinance), and Monsanto (agriculture).
The large private sector is learning rapidly that there is a significant market at the Bottom of the Pyramid. In some industries the size and attractiveness of the Bottom of the Pyramid markets are well established. Retailing, fast-moving consumer goods, micro finance, telecom, and
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agri-business, belong to this category. Computing, health and wellness oriented food, health care, education, pharmaceuticals, and energy are emerging as major opportunities. Affordable and modern housing, water, and transportation are still elusive at the Bottom of the Pyramid. Firms are also learning that this market cannot be approached with the mindset of their traditional markets.
There is a need for experimentation and innovation. We certainly will witness more efforts in this direction. We need to ask: Why can‘t we create markets in every sector that we have created in telecom through wireless? Why not apply the same level of innovation, eco system development, and focus on affordability as we did in cell phones? This question is asked more and more in corporate boardrooms.
3. BOP a Fallacy
Widespread poverty is an economic, social, political and moral problem. Eradicating, or at least alleviating, poverty is an urgent challenge. For many decades, various institutions have tried to address this challenge: local governments, developed country governments, international organizations (such as the World Bank and the United Nations), aid foundations and
non-governmental organizations. The intellectual discourse has been largely in the fields of public policy and development economics. More recently, large companies, business schools and
management experts have entered this arena. CK Prahalad, a well-known business guru, is one of the pioneers of this move, and certainly the most visible and prolific writer in this field. He has been instrumental in developing a set of ideas often referred to as the ‗bottom of the pyramid‘ (BOP) initiative. It is argued that selling to the poor can simultaneously be profitable and eradicate poverty.
There is both glory and fortune at the bottom of the pyramid. This is, of course, a very appealing proposition and has drawn much attention. Prahalad‘s (2004) book has achieved much visibility.
The world‘s top CEOs have discussed this topic at recent sessions of the World Economic Forum.
There have been many conferences targeted at this topic, such as the conference titled ‗Eradicating
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Poverty through Profit‘ in December 2004 organized by the World Resource Institute. Various MNCs such as Unilever, Hewlett Packard, and SC Johnson have undertaken BOP initiatives.
Several business schools (such as IESE Barcelona, North Carolina, Cornell, and University of Michigan) have set up BOP centers and offer MBA courses in this area.
The BOP proposition is indeed too good to be true. It is seductively appealing, but it is riddled with fallacies. There is neither glory nor fortune at the bottom of the pyramid – it
is all a mirage. This section mainly views by Anees Karnani, will argue that the BOP proposition is both logically & empirically flawed. This has serious implications for both firm strategies and public policy. We will propose an alternative perspective on how the private sector can help alleviate poverty. Rather than focusing on the poor as consumers, we need to view the poor as producers. The only way to alleviate poverty is to raise the real income of the poor.
Poverty Line
Poverty is, of course, a matter of degrees and involves subjective judgments. It is not surprising that there are intense debates about where to draw the poverty line (Ravallion, 2003; Sala-I-Martin, forthcoming). Richer countries draw the poverty line at higher consumption levels than poorer countries. Since 1990, the World Bank has measured poverty by the standards commonly used in low-income countries, which generated the widely accepted ‗dollar a day‘ poverty line. This poverty line is then converted to local currency using the latest Purchasing Power Parity (PPP) exchange rates, and the local consumer price indices are then used to adjust for inflation. This work was updated recently (Chen and Ravallion, 2001) resulting in a poverty line of $1.08 per day in 1993 prices, still often referred to as ‗$1 per day‘ poverty line. In most countries the government determines its own national poverty line; for example, in India the national poverty line is $1.48 in 1999 prices, at PPP exchange rate of Rs. 8.17 (Virmani, 2006). People below the ‗extreme poverty‘
line of ‗$1 per day‘ cannot meet basic needs for survival: nutrition, health care, safe drinking water, sanitation, education for children, adequate shelter and clothing (Sachs, 2005). This definition of
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‗extreme poverty‘ is probably too conservative. Another commonly used standard, more
representative of middle-income countries, is ‗$2 per day‘. At this level of ‗moderate poverty,‘ the basic needs of survival are met, but just barely. Both these measures of poverty are widely used in development economics and public policy fields. For example, in 2002 all the 191 United Nations member states agreed to the Millennium Development Goals. The first goal of this declaration is to eradicate extreme poverty and hunger, and set the target: halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day (United Nations, 2005). The World Bank uses both $1/day and $2/day lines. Virtually all research on poverty uses a poverty line somewhere in between $1 to $2 per day. But in BOP, uses the $2 per day criterion. Most analysts define poverty in monetary terms; but, there is much debate about whether to use consumption or income measures. The World Bank and some researchers (for example, Ravallion 2004) use consumption measures; The United Nations (2000) and other researchers (for example, Sala-I-Martin,
forthcoming) use income measures. Ravallion (2004) argues that the consumption poverty measure should be doubled to reflect the items implicitly included in the income measure, which are
government expenditure and private investment. Therefore, the $1/day consumption poverty line is roughly equivalent to $2/day income line. The BOP argument is inconsistent in its definition of the poverty line, and often uses a level much higher than $2 per day. BOP started with a definition of the poor as per capita annual income (at purchasing power rates) of $1500 or less. It is difficult, and probably impossible, to prescribe solutions without first defining the nature and the scope of the problem. The BOP proposition emphasizes selling to the poor people. A household with a per capita consumption of $2000 per year probably would consider purchasing a motorcycle; a household with a per capita income of $1 per day certainly could not contemplate such a purchase. Whether there is a fortune at the bottom of the pyramid depends on how one defines the ‗bottom‘. Similarly, how to alleviate poverty too depends on the definition of poverty. People who consume less than $1 per day have very different needs and priorities than people who consume more than five times as much.
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How Many Poor People
BOP (2002) states that there are 4 billion people with per capita income below $1500 per year.
Prahalad and Hammond (2002) assert there are 4 billion people with per capita income below
$2000 per year. Prahalad (2004) states that there are more than 4 billion people with per capita income below $2 per day. So what are the true facts?
Measuring the number of poor people is surprisingly difficult. Even after agreeing on a poverty line, there are intense debates about the exact number of poor people. The World Bank measures
consumption poverty using data drawn from household surveys. Other researchers measure income poverty using data drawn from national accounts (The Economist, 2004a; Sala-I-Martin,
forthcoming). These two methods yield widely different results. An important controversy relates to the adjustment of individual consumption levels as derived from a survey, by the ratio of the per capita consumption from the National account statistics to the survey mean for the same item (Virmani, 2006). For example, the World Bank discontinued such an adjustment in 1993; the Government of India continues to believe that such an adjustment is necessary to get a true picture of the poverty rates. The World Bank estimates a poverty rate of 35.3% for India in 1999 based on
$1 a day; the Indian Government estimates a significantly lower poverty rate of 26% using its national poverty line of $1.48 in 1999. The World Bank estimates there were 1.1 billion people consuming less than $1 per day, and 2.7 billion people consuming less than $2 per day, in 2001.
Sala-I-Martin (forthcoming) estimates there were 322 million people with income below $1/day, and 600 million people with income below $2/day. In the controversies on the measurement
of poverty, the World Bank has the highest estimates, while Sala-I-Martin is essentially at the other extreme. So, the number of poor people in the world is somewhere between 322 million and 2.7 billion depending on the definition of poverty, source of data, assumptions made, and the method of analysis. Most researchers argue that the World Bank methodology over-estimates the number of poor people. Even if we take the most conservative approach, World Bank methodology and $2/day
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poverty line, there are 2.7 billion poor people in the world – not even close to the 4 billion number used by the BOP literature. These are big differences given the total population of the world is only 6.1 billion. If we use a lower poverty line or a lower estimate of the number of poor people, then the potential market at the BOP is even smaller, and the argument against the BOP proposition is even stronger.
Surprisingly, BOP (Prahalad) even claims that the poor as a market are 5 billion strong. This tendency to exaggerate seems to be contagious. Various newspaper and magazine articles in discussing the BOP proposition similarly exaggerate the number of poor people (for example, Washington Post, 2005). The Economist (2004) uncritically quotes Prahalad that there are 4
billion-5 billion people on under $2 a day, a number well above even the World Bank estimate. This in spite of the fact that a few months earlier The Economist (2004) argued that the true extent of poverty in the world is significantly less than that estimated by the World Bank! Even an article in the highly respected academic journal Administrative Science Quarterly incorrectly quotes the World Bank as saying four billion people in the world earn less than $2 per day (Walsh et al, 2005).
Pointing out the problems with the BOP argument in terms of definition of poverty and the number of poor people is not just quibbling about the details. Nor are we trying to minimize the problem of poverty. By any measure, poverty is a serious problem, and there is no need to exaggerate it in order to mobilize the will and the resources to solve it. These are important issues for defining the nature and scope of the problem, and the potential solutions.
Target Market
A central aspect of the BOP proposition is that there is a ‗fortune‘ at the bottom of the pyramid.
Surely this depends on the number of poor people and their per capita purchasing power. BOP (Prahalad), claims that the BOP potential market is $13 trillion at PPP. This grossly over-estimates the BOP market size. Let us use the most ‗favorable‘ numbers: the $2/day consumption poverty line and the World Bank estimates. In that case the average consumption of poor people is $1.25 per
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day and there are 2.7 billion poor people, which implies a BOP market size of $1.2 trillion, compared to the world‘s gross national income of $48.5 trillion at PPP in 2002 (The World bank, 2005). So, the bottom 44% of the world population accounts for only 2.5% of the total purchasing power. Even at $1.2 trillion the BOP market is still of a significant size. But, from the perspective of a MNC, that is an overestimate. To understand the problem of poverty and the consumption patterns of the poor, it is appropriate to convert local currencies into dollars at the PPP rates, as we have been doing above. But, from the perspective of a multi-national company from a rich country selling to customers in a poor country, profits will be repatriated at the financial exchange rates, not at PPP rates. The ratio of financial exchange rates to PPP rates for poor countries is in the range of 3 to 7 (World Bank, 2005); for China it is 4.5 and for India it is 5.3. Even at a conservative ratio of 4, the size of the BOP market, from the perspective of a MNC from a rich country, is only $0.3 trillion – compare this to the $11 trillion economy in the United States alone.
No Fortune
Not only is the BOP market quite small, it is unlikely to be very profitable, especially for a large company. The costs of serving the markets at the bottom of the pyramid are very high. The poor are often geographically dispersed and culturally heterogeneous. This increases distribution and
marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure
(transportation, communication, media, and legal) further increases cost of doing business. This may be somewhat less true for the urban poor (compared to the rural poor) who are often geographically concentrated into slums. Another factor leading to high costs is the small size of each transaction. Poor people are, of course, price sensitive. Companies assume that poor people spend only on basic needs like food and shelter. BOP disagree, but such assumptions reflect a narrow and largely outdated view of the developing world. In fact, the poor often do buy ‗luxury‘
items. Quite the contrary! Poor people who live on less than $2 per day and can barely meet their basic survival needs are unlikely to buy luxury items. Diverting expenditures from these basic needs
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to luxuries is probably not in their self-interest. The poor in fact do not spend much on luxuries – sensibly so, from our perspective. BOP urges companies to make a fortune by unlocking the latent purchasing power at the bottom of the pyramid. To do this, companies surely need to have an accurate understanding of the income and consumption patterns of the target market. Companies following the BOP proposition often fail because they overestimate the purchasing power of the poor people and try to market products/services at too high a price point. Virtually none of the examples cited by the BOP proposition support the recommendation that companies can make a fortune by selling to the poor. The BOP in defining the poverty line. Several of the examples that
to luxuries is probably not in their self-interest. The poor in fact do not spend much on luxuries – sensibly so, from our perspective. BOP urges companies to make a fortune by unlocking the latent purchasing power at the bottom of the pyramid. To do this, companies surely need to have an accurate understanding of the income and consumption patterns of the target market. Companies following the BOP proposition often fail because they overestimate the purchasing power of the poor people and try to market products/services at too high a price point. Virtually none of the examples cited by the BOP proposition support the recommendation that companies can make a fortune by selling to the poor. The BOP in defining the poverty line. Several of the examples that