金字塔的底層：能創造財富或者只是海市蜃樓？ - 政大學術集成

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(1)國立政治大學商學院國際經營管理英語碩士學位學程 International MBA Program College of Commerce National Chengchi University 碩士論文 Master‘s Thesis. 立. 政治大. ‧ 國. 學. 金字塔的底層：能創造財富或者只是海市蜃樓？. ‧. Bottom of Pyramid : Fortune or Mirage?. n. er. io. sit. y. Nat. al. Ch. engchi. i Un. v. Student: Manoj Tuteja Advisor: Professor Jack Wu. 中華民國一百年六月 June 2011.

(2) 金字塔的底層：能創造財富或者只是海市蜃樓？ Bottom of Pyramid : Fortune or Mirage?. 研究生：涂勉農. Student: Manoj Tuteja. 指導教授：吳文傑. Advisor: Jack Wu. 學. ‧ 國. 立. 政治大國立政治大學. 商學院國際經營管理英語碩士學位學程. ‧. 碩士論文. er. io. sit. y. Nat. A Thesis. Submitted to International MBA Program. n. al. iv. National n C Chengchi University. hengchi U. in partial fulfillment of the Requirements for the degree of Master in Business Administration. 中華民國一百年六月 June 2011. i.

(3) TABLE OF CONTENTS. 立. 政治大. 學. ‧. io. sit. y. Nat. n. er. 2 3 4 5 6 7 8 9 10 11 12 13. BOP Introduction…...………………………………………………..3 1.1 Why BOP is gaining traction…….……………………..………3 1.2 Objective of BOP research ...…………………………………..5 1.3 Power of Dominant Logic……………………………………...7 1.4 Nature of BOP markets…………………………………..……11 BOP Success Stories………………………………………………..24 BOP Fallacy……………………………..………………………….27 Products and Services for the BOP………………………………….42 BOP: A Global Opportunity………………………………………..46 The Ecosystem for Wealth Creation……………………………...58 Reducing Corruption : Transaction Governance Capacity………69 Development as Social Transformation………………………….77 CEO reaction to BOP concept……………………………………..88 Making it Happen………………………………………………..…88 Final Message to Managers……………………………………….107 Business Case – BOP Strategy for Mobile phones industry ……..108 Annexure -1 (Success Cases) 13.1 Jaipur Rugs 13.2 Casa Bahia 13.3 Cemex 13.4 Hindustan Lever –aLifebuoy Salt iv l C Salt n 13.5 Hindustan Lever – Iodized hengchi U 13.6 Jaipur Foot 13.7 Aravind Eye Care 13.8 ICICI Financial Services 13.9 ITC Echoupal 13.10 Voxiva 13.11 E+ Co. ‧ 國. 1. ii.

(4) 1. Introduction In economics, the bottom of the pyramid is the largest, but poorest socio-economic group. In global terms, this is the 4 billion people who live on less than $2.50 per day. The phrase bottom of the pyramid is used in particular by people developing new models of doing business that deliberately target that demographic, often using new technology. This field is also often referred to as the Base of the Pyramid or just the BOP. Several books and journal articles have been written on the potential market by members of business schools offering consultancy on the burgeoning market. They include The Fortune at the. 政治大 Crossroads by Stuart L. Hart of Cornell University and the first empirical article, Reinventing 立 Bottom of the Pyramid by C.K. Prahalad of the University of Michigan, Capitalism at the. ‧ 國. 學. strategies for emerging markets: Beyond the transnational model, by Ted London of the University of Michigan and Hart. London has also developed a working paper, commissioned by the United. ‧. Nations Development Programme, that explores the contributions of the BoP literature to the. sit. y. Nat. poverty alleviation domain.. n. al. er. io. Figure-1 (Bottom of Pyramid). Ch. engchi. i Un. v. 1.1 Why Gaining Traction Global poverty exists today at a startling scale; while the exact numbers are debated, some estimate that four billion people worldwide live on less than two dollars a day. According to C.K. Prahalad 1.

(5) and Stuart Hart, both Aspen Institute Faculty Pioneer Award recipients, companies should not ignore these traditionally overlooked people, collectively dubbed the Bottom of the Pyramid, because of their considerable combined purchasing power. Thus, if companies are innovative enough to create or tailor their products to the economic realities and life needs of these people, a significant profit can be won. At the same time, this group‘s entry into the market would hopefully better their quality of life and aid in regional economic development.. Three well-publicized examples will help illustrate the base-of-the-pyramid concept. First, Grameen Bank was started by Nobel Prize laureate Muhammed Yunus in Bangladesh to offer mini-loans to. 政治大. entrepreneurs who wouldn‘t qualify for traditional bank loans based on collateral. As of May 2007,. 立. over seven million people have borrowed from the Bank with incredibly high levels of repayment.. ‧ 國. 學. Second, PlayPumps is a water pump that runs on the energy created from children playing on a. ‧. merry-go-round. Advertising space on the pump‘s storage tank generates revenue that covers. sit. y. Nat. maintenance costs. Lastly, cell phone providers have developed means of selling relatively cheap. io. market before deciding to lug their product into town.. n. al. Ch. engchi. er. units to remote villages, allowing farmers, as just one example, to check grain prices at the nearest. i Un. v. Despite the concepts‘ critics, more business schools in 2007 are instructing Bottom of the Pyramid material in their classrooms than in 2005, according to the Aspen Institute‘s biennial Beyond Grey Pinstripes survey. This Closer Look attempts to give an overview of the pioneering coursework and teaching resources being used in this blossoming field of inquiry.. THE BOTTOM LINE: ■ The Bottom of the Pyramid concept is being introduced into MBA classes in a wide range of disciplines, including: Strategy; Marketing; Entrepreneurship; Economics; International Management; Business Ethics; and Production and Operations Management. 2.

(6) ■ Curricular integration of this theory is not just taking place in North American programs, but also in top business schools in Asia, Latin America, Europe, and South Africa. ■ Business schools are using innovative approaches to promote the Base of the Pyramid concept. The Project Pyramid Case Competition, for example, is a unique offering of Vanderbilt University‘s Owen Graduate School of Management.. 1.2 Objective of Thesis Research The objective of this report is to know the framework for poverty alleviation. Lets start with a simple proposition. If we stop thinking of the poor as victims or as a burden and start recognizing. 政治大. them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of. 立. opportunity will open up. Four billion poor can be the engine of the next round of global trade and. ‧ 國. 學. prosperity. It can be a source of innovations. Serving the BOP consumers will demand innovations. ‧. in technology, products and services, and business models. More importantly, it will require large. sit. y. Nat. firms to work collaboratively with civil society organizations and local governments. Market. io. er. development at the BOP will also create millions of new entrepreneurs at the grass roots level—from women working as distributors and entrepreneurs to village-level micro enterprises.. al. n. iv n C These micro enterprises will be an integral of the market-based ecosystem. It will require h epart ngchi U organizational and governance innovations as well.. The vision that is presented in the following pages is the co-creation of a solution to the problem of poverty. The opportunities at the BOP cannot be unlocked if large and small firms, governments, civil society organizations, development agencies, and the poor themselves do not work together with a shared agenda. Entrepreneurship on a massive scale is the key. This approach will challenge the prejudices about the role and value added of each group and its role in the economic development at the BOP.. 3.

(7) In these sections, we will find the opportunities for co-creation among the various players. More importantly, the poor themselves are willing to experiment, learn, and change. While we will focus on the role of the private sector, the importance of collaboration across the various groups will become obvious. The interconnectedness of the approach to economic development and social transformation as visualized below will become obvious. Figure-2 (Economic Development & Social Transformation). Sections in the report outlines how isolating principles from experiments involving the. 立. ecosystem.. ‧ 國. of. y. sit. n. al. er. io. studies – Success &. Most of the. Nat. experimentation are. entire private sector. ‧. successful. successful, large-scale. 政治大. 學. examples. that can be accomplished by. The bottom line is simple: It is. Ch. engchi. i Un. v. taken from the cases Failures in coming sections.. possible to do well by doing good.. Turn on your television and you will see calls for money to help the world‘s 4 billion poor—people who live on far less than $2 a day. In fact, the cry is so constant and the need so chronic that the tendency for many people is to tune out these images as well as the message. Even those who do hear and heed the cry are limited in what they can accomplish. For more than 50 years, the World Bank, donor nations,various aid agencies, national governments, and, lately, civil society organizations have all fought the good fight, but have not eradicated poverty. The adoption of the 4.

(8) Millennium Development Goals (MDG) by the United Nations only underscores that reality; as we enter the 21st century, poverty—and the disenfranchisement that accompanies it—remains one of the world‘s most daunting problems. The purpose of this report is to change that familiar image on TV. It is to illustrate that the typical pictures of poverty mask the fact that the very poor represent resilient entrepreneurs and value-conscious consumers. What is needed is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win–win scenarios where the poor are actively engaged and, at the same time, the companies providing products and services to them are profitable. This collaboration between the poor, civil society organizations, governments,. 政治大. and large firms can create the largest and fastest growing markets in the world. Large-scale and. 立. wide-spread entrepreneurship is at the heart of the solution to poverty. Such an approach exists and. ‧ 國. 學. has, in several instances, gone well past the idea stage as private enterprises, both large and small,. ‧. have begun to successfully build markets at the bottom of the pyramid (BOP) as a way of. sit. y. Nat. eradicating poverty. There are more than 4 billion constitute the BOP. These are the people who are. io. n. al. er. the subject matter of this report.. 1.3. Power of Dominant LogicC h. engchi. i Un. v. All of us are prisoners of our own socialization. The lenses through which we perceive the world are colored by our own ideology, experiences, and established management practices. Each one of the groups that is focusing on poverty alleviation—the World Bank, rich countries providing aid, charitable organizations, national governments, and the private sector—is conditioned by its own dominant logic. Let us, for example, examine the dominant logic of each group as it approaches the task of eradicating poverty. Consider, for instance, the politicians and bureaucrats in India, one of the largest countries with a significant portion of the world‘s poor. India is home to more than 400 million people who qualify as being very poor. The policies of the government for the first 45 years since independence from 5.

(9) Great Britain in 1947 were based on a set of basic assumptions. Independent India started with a deep suspicion of the private sector. The country‘s interaction with the East India Company and colonialism played a major part in creating this mindset. The experience with the indigenous private sector was not very positive, either. The private sector was deemed exploitative of the poor. This suspicion was coupled with an enormous confidence in the government machinery to do what is right and moral. For example, the government of India initiated a series of large industrial projects in the public sector (owned by the Indian government) in a wide variety of industries, from steel to food distribution and global trading in essential commodities. India‘s general suspicion of the private sector led to controls over its size and expansion. Some sectors of economic activity were. 政治大. reserved for small-scale industries. In textiles, for example, the hand loom sector dominated by. 立. small firms was given preference. There was no credible voice in public policy for nurturing. ‧ 國. 學. market-based ecosystems that included the large and the small in a symbiotic relationship. The. ‧. thinking was cleanly divided among the public sector (mostly large firms with significant capital. sit. y. Nat. outlay as in steel), the private sector with large firms strictly controlled by the government through. io. er. a system of licenses, and a small-scale sector. The focus of public policy was on distributive justice over wealth creation. Because of the disparities in wealth and the preponderance of the poor, the. al. n. iv n C government thought its first priority must that equalized wealth distribution. Taxation, h ebenpolicies gchi U limits on salaries of top managers, and other such measures were instituted to ensure distributive justice. The discussion further polarized around the somewhat contrived concepts of rural poor and urban rich. The assumption was that the rural population was primarily poor and the urban population was relatively rich. However, the data increasingly does not support this distinction. There are as many rural rich as there are urban poor. Poverty knows no such boundaries. In the developing world, more than one third of the urban population lives in shanty towns and slums. These traditional views reflect the philosophy behind actions taken by bureaucrats and politicians. During the last decade, a slow but discernable transition has been taking place from the traditional to a more market-based outlook. The changing perspectives are shown in Table-1 6.

(10) Table-1 (Changing Perspective of Dominant Logic) Assumption. Implication. The poor are not our target customers; they cannot afford our products or services.. Our cost structure is a given; with our cost structure, we cannot serve the BOP markets. The poor do not have use for products sold in developed countries.. We are committed to a form over functionality. The poor might need sanitation, but can‘t afford detergents in formats we offer. Therefore, there is no market in the BOP.. Only developed countries appreciate and pay for technological innovation. 政治大. 學. ‧ 國. 立. The BOP does not need advanced technology solutions; they will not pay for them. Therefore, the BOP cannot be a source of innovations. BOP markets are at best an attractive disttraction. Intellectual excitement is in developed markets; it is very hard to recruit. We cannot assign our best people to work on market development in BOP markets.. ‧. The BOP market is not critical for long-term growth and vitality of MNCs.. io. er. Adapted from C.K. Prahalad and Stuart Hart, The Fortune at the Bottom of the Pyramid.. sit. y. Nat. managers for BOP markets. al. iv n C h e nparties, is difficult to give up for individuals, political i Usections of the bureaucracy. This is the g c hand n. This much-needed and desirable transition is in its infancy. The dominant logic, built over 45 years,. reason why politicians and bureaucrats appear to be vacillating in their positions. Most thinking people know where they have to go, but letting go of their beliefs and abandoning their zones of comfort and familiarity are not easy. We also believe that it is equally difficult for a whole generation of BOP consumers to give up its dependence on governmental subsidies.. We have explicitly focused on ideology and policy and not on the quality of implementation of projects focused on the poor, be it building roads and dams or providing basic education and health care. The distinct role of corruption, which seems so endemic to developing countries in general, 7.

(11) deserves separate treatment. Private-sector businesses, especially MNCs (and large local firms that emulate their MNC competitors), also suffer from a deeply etched dominant logic of their own, which restricts their ability to see a vibrant market opportunity at the BOP. For example, it is common in MNCs to have the assumptions outlined in Table 1. These assumptions dictate decision and resource allocation processes for developing countries and BOP markets in particular. These and other implicit assumptions surface in every discussion of BOP markets with managers in MNCs and those in large domestic firms in developing countries that fashion their management practices after those at successful MNCs. These biases are hard to eradicate in large firms. Although the dominant logic and its implications are clear, it is our goal in this report to challenge and. 政治大. provide counterpoints. For example, BOP markets enable firms to challenge their perspectives on. 立. cost. We will show that a 10 to 200 times advantage (compared to the cost structures that are. ‧ 國. 學. oriented to the top of the pyramid markets) is possible if firms innovate from the BOP up and do not. ‧. follow the traditional practice of serving the BOP markets by making minor changes to the products. er. io. sit. y. Nat. created for the top of the pyramid.. Most charitable organizations also believe that the private sector is greedy and uncaring and that. al. n. iv n C corporations cannot be trusted with theh problems of poverty e n g c h i U alleviation. From this perspective,. profit motive and poverty alleviation do not mix easily or well. Aid agencies have come full circle in their own thinking. From aid focused on large infrastructure projects and public spending on education and health, they are also moving toward a belief that private-sector involvement is a crucial ingredient to poverty alleviation.. Historically, governments, aid agencies, nongovernmental organizations (NGOs), large firms, and the organized (formal and legal as opposed to extralegal) business sector all seem to have reached an implicit agreement: Market-based solutions cannot lead to poverty reduction and economic development. As shown in Figure 3, the dominant logic of each group restricts its ability to see the 8.

(12) market opportunities at the BOP. The dominant logic of each group is different, but the conclusions are similar. During the last decade, each group has been searching for ways out of this self-imposed intellectual trap. To eradicate poverty, we have to break this implicit compact through a BOP-oriented involvement of the private sector. Figure-3 (BOP Opportunity). 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. i Un. v. We have to change our long-held beliefs about the BOP—our genetic code, if you will. The barrier. engchi. that each group has to cross is different, but difficult nonetheless. However, once we cross the intellectual barrier, the opportunities become obvious. The BOP market also represents a major engine of growth and global trade, as we illustrate in our subsequent stories of MNCs and private firms from around the world.. 1.4 Nature of BOP market The nature of the BOP market has characteristics that are distinct. We outline some of the critical dimensions that define this market. These characteristics must be incorporated into our thinking as we approach the BOP. 9.

(13) There Is Money at the BOP The dominant assumption is that the poor have no purchasing power and therefore do not represent a viable market. Let us start with the aggregate purchasing power in developing countries where most of the BOP market exists. Developing countries offer tremendous growth opportunities. Within these markets, the BOP represents a major opportunity. Take China as an example. With a population of 1.2 billion and an average per capita gross domestic product (GDP) of US $1,000, China currently represents a $1.2 trillion economy. However, the U.S. dollar equivalent is not a good measure of the demand for. 政治大. goods and services produced and consumed in China. If we convert the GDP-based figure into its. 立. dollar purchasing power parity (PPP), China is already a $5.0 trillion economy, making it the. ‧ 國. 學. second largest economy behind the United States in PPP terms. Similarly, the Indian economy is. ‧. worth about $3.0 trillion in PPP terms. If we take nine countries—China, India, Brazil, Mexico,. sit. y. Nat. Russia, Indonesia, Turkey, South Africa, and Thailand—collectively they are home to about 3. io. er. billion people, representing 70 percent of the developing world population. In PPP terms, this group‘s GDP is $12.5 trillion, which represents 90 percent of the developing world. It is larger than. al. n. iv n C the GDP of Japan, Germany, France, the and Italy combined. This is not a market h United e n gKingdom, chi U to be ignored.. Now, consider the BOP within the broad developing country opportunity. The dominant assumption is that the poor do not have money to spend and, therefore, are not a viable market. Certainly, the buying power for those earning less than US $2 per day cannot be compared with the purchasing power of individuals in the developed nations. However, by virtue of their numbers, the poor represent a significant latent purchasing power that must be unlocked. For example, all too often, the poor tend to reside in high-cost ecosystems even within developing countries. In the shanty town of Dharavi, outside Mumbai, India, the poor pay a premium for everything from rice to credit. 10.

(14) Compare the cost of everyday items of consumption between Dharavi and Warden Road (now redesignated B. Desai Road), a higher income neighborhood in Mumbai. The poverty penalty in Dharavi can be as high as 5 to 25 times what the rich pay for the same services below Table-2. Research indicates that this poverty penalty is universal, although the magnitude differs by country. The poverty penalty is the result of local monopolies, inadequate access, poor distribution, and strong traditional intermediaries. Large-scale private-sector businesses can unlock this poverty penalty. For example, the poor in Dharavi pay 600 to 1,000 percent interest for credit from local moneylenders. A bank with access to this market can do well for itself by offering credit at 25 percent. Although 25 percent interest might look excessive to a casual observer, from the point of. 政治大. view of the BOP consumer, access to a bank decreases the cost of credit from 600 percent to 25. 立. percent. The BOP consumer is focused on the difference between the local moneylender rates and. ‧ 國. 學. the rates that a commercial bank would charge. The bank can make a reasonable profit after. ‧. adjusting for risk (10 percent over its traditional, top-of-the-pyramid customers). We argue later that. sit. y. Nat. the BOP consumers do not represent higher risk.. al. Dharvi. n. Credit (annual Interest). io. Item. Muncipal grade water (cubic meter). Ch. 600-1000%. e$1.12 ngchi. er. Table-2 (Poverty Penalty). Warden Road. iv 12-18% n U. Poverty Premium 53. $0.03. 37. Phone Call (per minute). $0.04-0.05. $0.025. 1.8. Diarrhea Medication. $20. $2. 10. Rice (per Kg). $0.28. $0.24. 1.2. Adapted from C.K. Prahalad and Stuart Hart, The Fortune at the Bottom of the Pyramid. These cost disparities between BOP consumers and the rich in the same economy can be explained only by the fact that the poverty penalty at the BOP is a result of inefficiencies in access to distribution and the role of the local intermediaries. These problems can easily be cured if the organized private sector decides to serve the BOP. The organized sector brings with it the scale,. 11.

(15) scope of operations, and management know-how that can lead to efficiencies for itself and its potential consumers.. The poor also spend their earnings in ways that reflect a different set of priorities. For example, they might not spend disposable income on sanitation, clean running water, and better homes, but will spend it on items traditionally considered luxuries. Without legal title to land, these residents are unlikely to invest in improving their living quarters, much less the public facilities surrounding their homes. For example, in Dharavi, 85 percent of the households own a television set, 75 percent own a pressure cooker and blender, 56 percent own a gas stove, and 21 percent have telephones. In. 政治大. Bangladesh, women entrepreneurs with cell phones, which they rent out by the minute to other. 立. villagers, do a brisk business. It is estimated that the poor in Bangladesh spend as much as 7 percent. ‧ 國. 學. of their income on connectivity.. ‧ sit. y. Nat. Access to BOP Markets. io. er. The dominant assumption is that distribution access to the BOP markets is very difficult and therefore represents a major impediment for the participation of large firms and MNCs.. n. al. Ch. engchi. i Un. v. Urban areas have become a magnet for the poor. By 2015 there will be more than 225 cities in Africa, 903 in Asia, and 225 in Latin America. More than 368 cities in the developing world will have more than 1 million people in each. There will be at least 23 cities with more than 10 million residents. Collectively, these cities will account for about 1.5 to 2.0 billion people. Over 35 to 40 percent of these urban concentrations will be comprised of BOP consumers. The density of these settlements—about 15,000 people per hectare—will allow for intense distribution opportunities.. The rural poor represent a different problem. Access to distribution in rural markets continues to be problematic. Most of the rural markets are also inaccessible to audio and television signals and are 12.

(16) often designated as media dark. Therefore, the rural poor are not only denied access to products and services, but also to knowledge about what is available and how to use it. The spread of wireless connectivity among the poor might help reduce this problem. The ability to download movie and audio clips on wireless devices might allow firms to access traditionally media dark areas and provide consumers in these locations with newfound access to information about products and services. However, this is still an evolving phenomenon restricted to a few countries. The BOP does not lend itself to a single distribution solution. Urban concentrations represent a problem distinct from that of the distribution access to dispersed rural communities. Worldwide, the cost of reach per consumer can vary significantly across countries. A wide variety of experiments. 政治大. are underway in these markets to find efficient methods of distributing goods and services. One. 立. such experiment, Project Shakti at Hindustan Lever Ltd. (HLL) in India, is a case in point. HLL. ‧ 國. 學. created a direct distribution network in hard-to-reach locales (markets without distribution coverage. ‧. through traditional distributors and dealers). HLL selected entrepreneurial women from these. sit. y. Nat. villages and trained them to become distributors, providing education, advice, and access to. io. er. products to their villages. These village women entrepreneurs, called Shakti Amma (empowered mother), have unique knowledge about what the village needs and which products are in demand.. al. n. iv n C They earn between Rs. 3,000 and 7,000hper month (U.S. $60–$150) and therefore create a new engchi U capacity to consume for themselves and their families. More important, these entrepreneurial. women are increasingly becoming the educators and access points for the rural BOP consumers in their communities. This approach is not new. Avon is one of the largest cosmetics operations in Brazil and has used a similar approach by leveraging more than 800,000 Avon ladies as distributors to reach even the most remote regions of Amazonia.. The BOP Markets Are Brand-Conscious The dominant assumption is that the poor are not brand-conscious. On the contrary, the poor are very brand-conscious. They are also extremely value conscious by necessity. 13.

(17) The experience of Casas Bahia in Brazil and Elektra in Mexico—two of the largest retailers of consumer durables, such as televisions, washing machines, radios, and other appliances—suggests that the BOP markets are very brand-conscious. Brand consciousness among the poor is universal. In a way, brand consciousness should not be a surprise. An aspiration to a new and different quality of life is the dream of everyone, including those at the BOP. Therefore, aspirational brands are critical for BOP consumers. However, BOP consumers are value buyers. They expect great quality at prices they can afford. The challenge to large firms is to make aspirational products affordable to BOP consumers. These consumers represent a new challenge for managers with increased pressure. 政治大. on costs of development, manufacturing, and distribution. As a result, BOP markets will force a. 立. new level of efficiency in the MNCs, as we demonstrate in next section.. ‧ 國. 學 ‧. The BOP Market Is Connected. io. er. rapidly exploiting the benefits of information networks.. sit. y. Nat. Contrary to the popular view, BOP consumers are getting connected and networked. They are. al. n. iv n C The spread of wireless devices among the is proof of a market at the BOP. For example, by the h epoor ngchi U end of 2010, China had an installed base of 800 million cell phones. India had an installed base of approximately 750 million. The Indian market is growing at about 0.5 million handsets per month. Both the current market size and the growth rates suggest that the BOP market is a critical factor in worldwide wireless growth. Telecommunications providers have made it easier for BOP consumers to purchase handsets and service through prepaid cards. The proliferation of wireless devices among the poor is universal, from Grameen Phone in Bangladesh to Telefonica in Brazil. Further, the availability of PCs in kiosks at a very low price per hour and the opportunity to videoconference using PCs are adding to the intensity of connectivity among those at the BOP. The net result is an unprecedented ability of BOP consumers to communicate with each other in several countries. The 14.

(18) technology of wireless and PC connectivity is allowing the BOP population to be actively engaged in a dialogue with each other, with the firms from which they wish to purchase goods and services, and with the politicians who represent them.. Connectivity also allows the BOP consumers to establish new patterns of communication away from their villages. With cell phones and TV, the BOP consumer has unprecedented access to information as well as opportunities to engage in a dialogue with the larger community. As a result, word of mouth among BOP consumers is becoming a very potent force for assessing product quality, prices, and options available to them. The spread of good bargains as well as bad news can. 政治大. be very rapid. For example, in India, it appears that some consumers found worms in chocolates. 立. sold by Cadbury, a large and very successful MNC. Ten years ago this would have been a nonevent,. ‧ 國. 學. but with access to multiple and fiercely competitive TV channels, wireless, and Internet, the news. ‧. spread so rapidly across India that not just managers within Cadbury but all managers involved in. al. BOP Consumers Accept Advanced Technology Readily. er. io. sit. y. Nat. the fast-moving consumer goods industry were surprised and worried.. n. iv n C Contrary to popular belief, the BOP consumers advanced technology readily. h e n gaccept chi U The spread of wireless devices, PC kiosks, and personal digital assistants (PDAs) at the BOP has surprised many a manager and researcher. For example, ITC, an Indian conglomerate, decided to connect Indian farmers with PCs in their villages. The ITC e-Choupal (literally, village meeting place) allowed the farmers to check prices not only in the local auction houses (called mandis), but also prices of soybean futures at the Chicago Board of Trade. The e-Choupal network allowed the farmers access to information that allowed them to make decisions about how much to sell and when, thus improving their margins. Similarly, women entrepreneurs in southern India, given a PC kiosk in their villages, have learned to videoconference among themselves, across villages on all 15.

(19) kinds of issues, from the cost of loans from various banks to the lives of their grandchildren in the United States. Chat rooms are full of activity that none of us could have imagined. Most interestingly, in Kerala, India, fishermen in traditional fishing boats, after a day of productive work, sell their catch to the highest bidders, using their cell phones to contact multiple possible landing sites along the Kerala coast. The simple boats, called catamarans, have not changed, but the entire process of pricing the catch and knowing how to sell based on reliable information has totally changed lives at the BOP. The BOP consumers are more willing to adopt new technologies because they have nothing to forget. Moving to wireless from nothing is easier than moving to wireless from a strong tradition of efficient and ubiquitous landlines.. 立. 政治大. The Market Development Imperative. ‧ 國. 學. The task of converting the poor into consumers is one of market development. Market development. ‧. involves both the consumer and the private-sector firm. We consider the risks and benefits to the. sit. y. Nat. private sector firm later. Here, we reflect on the incentives for the BOP consumer, who is so far. io. er. isolated from the benefits of access to regional and global markets, to participate. What are the benefits to the BOP consumer? Examples are drawn primarily from the stories that appear in the. n. al. report.. Ch. engchi. i Un. v. Create the Capacity to Consume To convert the BOP into a consumer market, we have to create the capacity to consume. Cash-poor and with a low level of income, the BOP consumer has to be accessed differently.. The traditional approach to creating the capacity to consume among the poor has been to provide the product or service free of charge. This has the feel of philanthropy. Charity might feel good, but it rarely solves the problem in a scalable and sustainable fashion.. 16.

(20) A rapidly evolving approach to encouraging consumption and choice at the BOP is to make unit packages that are small and, therefore, affordable. The logic is obvious. The rich use cash to inventory convenience. They can afford, for example, to buy a large bottle of shampoo to avoid multiple trips to the store. The poor have unpredictable income streams. Many subsist on daily wages and have to use cash conservatively. They tend to make purchases only when they have cash and buy only what they need for that day. Single-serve packaging—be it shampoo, ketchup, tea and coffee, or aspirin—is well suited to this population. A single-serve revolution is sweeping through the BOP markets. For example, in India, single-serve sachets have become the norm for a wide variety of products, as shown in below table-3.. 政治大. Table-3 (Single Serve Sachets prices at retail). 立. Rs. $. 0.5. 0.01. y. 1. 0.02. sit. 2. 0.04. 5. 0.1. ‧. ‧ 國. 學. Typical Products. Shampoo, Confectionary, matches, tea. Nat. Shampoo, Salt, Biscits, Ketchup, Fruit drink concentrate. Detergent, soup, mouth freshners, biscuits, jams, spreads, coffee, spices. io. n. al. er. Biscuits, toothpaste, color cosmetics, fragrances, bread, cooking oil, skin cream. Ch. engchi. i Un. v. The number of products sold in the single-serve format is rapidly increasing. The format is so popular that even firms producing high-end merchandise have to adopt it to remain viable long-term players in the growing markets. For example, in the shampoo business, the situation in the Indian market is shown in below Figure-4. Figure-4 (Shampoo Business Situation). 17.

(21) Source : Fortune at the bottom of Pyramid, C.K. Prahalad. 立. 政治大. Measured in tons, the size of the Indian shampoo market is as large as the U.S. market. Large. ‧ 國. 學. MNCs, such as Unilever and Procter & Gamble (P&G), are major participants in this market, as are large local firms. Because the poor are just as brand-conscious as the rich, it is possible to buy. ‧. Pantene, a high-end shampoo from P&G, in a single-serve sachet in India. The entrepreneurial. y. Nat. n. al. er. io. percent.. sit. private sector has created a large market at the BOP; the penetration of shampoo in India is about 90. Ch. engchi. i Un. v. A similar approach to creating capacity to consume is through innovative purchase schemes. More BOP consumers in Brazil are able to buy appliances through Casas Bahia because the firm provides credit even for consumers with low and unpredictable income streams. Through a very sophisticated credit rating system coupled with counseling, Casas Bahia is able to provide access to high-quality appliances to consumers who could not otherwise afford them. At the same time, the firm ensures that its consumers are not overstretched. The default rate is very low at 8.5 percent, compared to over 15 percent for competitor firms. Casas Bahia has also created a new pool of repeat customers. Cemex, one of the world‘s largest cement companies in Mexico, follows a similar. 18.

(22) approach in its do-it-yourself business focused on the BOP market. The idea is to help the consumers learn to save and invest. By creating a pool of three women who save as a group and discipline and pressure each other to stay with the scheme, Cemex facilitates the process of consumption by bundling savings and access to credit with the ability to add a bathroom or a kitchen to their homes.. Creating the capacity to consume is based on three simple principles best described as the Three As:. 1. Affordability. Whether it is a single-serve package or novel purchasing schemes, the key is. 政治大. affordability without sacrificing quality or efficacy.. 立. 2. Access. Distribution patterns for products and services must take into account where the. ‧ 國. 學. poor live as well as their work patterns. Most BOP consumers must work the full day before. ‧. they can have enough cash to purchase the necessities for that day. Stores that close at 5:00. sit. y. Nat. PM have no relevance to them, as their shopping begins after 7:00 PM. Further, BOP. io. er. consumers cannot travel great distances. Stores must be easy to reach, often within a short walk. This calls for geographical intensity of distribution.. al. n. iv n C Availability. Often, the decisionhto buy for BOP consumers is based on the cash they have engchi U. 3.. on hand at a given point in time. They cannot defer buying decisions. Availability (and therefore, distribution efficiency) is a critical factor in serving the BOP consumer. Of course, the ideal is to create the capacity to earn more so that the BOP consumers can afford to consume more. The ITC e-Choupal story illustrates how farmers with access to the Internet and thereby access to the prices of commodities around the world can increase their incomes by 5 to 10 percent. These farmers can decide when and how much to sell based on their understanding of the likely price movements for their products. Modern technology not only allows them to realize better prices, but also to improve their logistics. The aggregation of food grains allows for efficiencies for both the farmer and the buyer. 19.

(23) By focusing on the BOP consumers‘ capacity to consume, private-sector businesses can create a new market. The critical requirement is the ability to invent ways that take into account the variability in the cash flows of BOP consumers that makes it difficult for them to access the traditional market for goods and services oriented toward the top of the pyramid.. The Need for New Goods and Services The involvement of the private sector at the BOP can provide opportunities for the development of new products and services.. 政治大. Amul, a dairy cooperative in India, has introduced good quality ice cream at less than $0.05 per. 立. serving, affordable by all at the BOP. This product is not only a source of enjoyment; the milk in it. ‧ 國. 學. is also a source of nutrition for the poor. Now, Amul is planning to introduce a natural. ‧. laxative-laced ice cream called isabgol-enriched. It is too early to tell whether the product can be a. sit. y. Nat. success. However, the experimentation is what the game is about. Similarly, the popularization of. io. er. pizza by the same company allows the poor to obtain an adequate quantity of protein. PRODEM FFP, a Bolivian financial services company, has introduced smart automated teller machines. al. n. iv n C (ATMs) that recognize fingerprints, usehcolor-coded touchUscreens, and speak in three local engchi. languages. This technological innovation allows even illiterate BOP consumers to access, on a 24-hour basis, high-quality financial services.Cemex, as we saw earlier, provides access to good quality housing. Through Tecnosol, the BOP consumers in rural Nicaragua have access to clean energy from renewable sources—solar and wind power. Previously, these consumers did not have access to grid-based electricity and were dependent on more expensive sources, such as kerosene and batteries. Now they have energy that is affordable enough to run their households. Casas Bahia not only sells appliances, but has also introduced a line of good quality furniture oriented toward the BOP markets. Furniture has become one of the fastest growing businesses for the company as well as a source of pride and satisfaction to its consumers. 20.

(24) Dignity and Choice When the poor are converted into consumers, they get more than access to products and services. They acquire the dignity of attention and choices from the private sector that were previously reserved for the middle-class and rich. The farmers at an ITC e-Choupal were very clear. The traditional auctioning system at the government-mandated markets (mandis) did not offer them any choices. Once they went to a mandi, they had to sell their produce at the prices offered on that day. They could not wait for better prices or haul their produce back to their villages. More important, the local merchants who controlled the. 政治大. mandi were not very respectful of the farmers. One farmer remarked, They make rude comments. 立. about my produce. They also raise the prices in the auction by $0.02 per ton. It is as if they have. ‧ 國. 學. already determined the price you will get and they go through the motions of an auction. It used to. ‧. be very demeaning. Not any longer. Now, the same farmers can access information on the Web. sit. y. Nat. across all the mandis and can decide where, when, and at which prices they want to sell. Similarly,. io. er. women in self-help groups (SHGs) working with ICICI Bank in India also have had their dignity restored. As a group, they decide which borrowers and projects will receive loans. This involvement. al. n. iv n C of women in leadership development and about finances and bank operations has given h ein nlearning gchi U. them a new sense of personal worth. The single-serve revolution has created a revolutionary level of choice for consumers at the BOP. For example, the switching costs for the consumer are negligible because she can buy a sachet of shampoo or detergent or pickles; if she is not satisfied with her purchase she can switch brands the next day. Firms must continuously innovate and upgrade their products to keep customers interested in their brands, thereby improving quality and reducing costs.. Trust Is a Prerequisite. 21.

(25) Both sides—the large firms and the BOP consumers—have traditionally not trusted each other. The mistrust runs deep. However, private-sector firms approaching the BOP market must focus on building trust between themselves and the consumers. This is clearly evident when one visits a Casas Bahia store. BOP consumers here venerate the founder, Mr. Klein, for giving them the opportunity to possess appliances that they could not otherwise afford. Although the shanty towns of Sao Paulo or Rio de Janeiro can be dangerous to outsiders, Casas Bahia trucks move freely around without worry. The same is true for Bimbo, the provider of fresh bread and other bakery products to the BOP consumers in Mexico. Bimbo is the largest bakery in Mexico and its trucks have become symbols of trust between the BOP consumers. 政治大. and the firm. The truck drivers are so trusted that often the small store owners in the slums allow. 立. them to open their shops, stock them with bread, and collect cash from the cash boxes without. ‧ 國. 學. supervision. Both Casas Bahia and Bimbo believe that the truck drivers who deliver their products. ‧. to the BOP consumers are their ambassadors and neither company will outsource the delivery. sit. y. Nat. process. In fact, all managers at Bimbo must work as truck drivers for the company to become. io. er. better educated about their customers .. MNCs often assume that the default rate among the poor is likely to be higher than that of their rich. al. n. iv n C customers. The opposite is often true. The pay on time and default rates are very low. In the h epoor ngchi U. case of ICICI Bank, out of a customer base of 200,000, the default rate is less than 1 percent. The default rate at Grameen Bank, a microfinance pioneer in Bangladesh, is less than 1.5 percent among 2,500,000 customers. The lessons are clear. Through persistent effort and the provision of worldclass quality, private-sector businesses can create mutual trust and responsibility between their companies and BOP customers. Trust is difficult to build after 50 years of suspicion and prejudice based on little evidence and strong stereotyping.. Benefits to the Private Sector. 22.

(26) 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.. 政治大 While the cases in this report are intended to illustrate that there are viable business opportunities at 立 2. BOP Success Stories. ‧ 國. 學. 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. sit. y. Nat. Bottom of the Pyramid markets. From sub-Saharan Africa, China, Southeast Asia, India, and Latin. n. al. er. io. America and Eastern Europe, there is not a single country where the poor have not taken to the cell. i Un. v. phone. India alone added approximately 11 million new subscribers in January 2009. Many. Ch. engchi. 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 23.

(27) 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. 政治大. a source of innovations in business models and applications. It has transformed the lives of the poor.. 立. We can do well and do good simultaneously. Most important, the rate of diffusion among the. ‧ 國. 學. 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. sit. y. Nat. is no market at the Bottom of the Pyramid; they won‘t pay, they will not accept or do not need. io. er. 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. al. n. iv n C you are Nokia, Motorola, Nestle, Unilever, However, being a multinational or a large h eornMicrosoft. gchi U 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) 24.

(28)  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). 政治大.  SKS Finance (micro finance). 立. 學. ‧ 國.  Airtel (telecom).  South Africa Pick and Pay (retail). ‧.  Mobile Telephone Networks (telecom). y. Nat.  Chile Savory, by Nestlé (ice cream). er. io. al. sit.  Brestler, by Unilever (ice cream). n. Note : About Elevan cases of success stories has been attached in the Annexure of this report.. Ch. engchi. i Un. v. 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 25.

(29) 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.. 立. 政治大. ‧ 國. 學. 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. y. Nat. io. sit. address this challenge: local governments, developed country governments, international. n. al. er. organizations (such as the World Bank and the United Nations), aid foundations and. Ch. i Un. v. non-governmental organizations. The intellectual discourse has been largely in the fields of public. engchi. 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 26.

(30) 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. 政治大. alleviate poverty. Rather than focusing on the poor as consumers, we need to view the poor as. 立. producers. The only way to alleviate poverty is to raise the real income of the poor.. ‧. ‧ 國. 學. Poverty Line. sit. y. Nat. Poverty is, of course, a matter of degrees and involves subjective judgments. It is not surprising that. io. er. 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. al. n. iv n C countries. Since 1990, the World Bank h has measured poverty e n g c h i U 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 27.

(31) ‗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. 政治大. poverty in monetary terms; but, there is much debate about whether to use consumption or income. 立. measures. The World Bank and some researchers (for example, Ravallion 2004) use consumption. ‧ 國. 學. 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. sit. y. Nat. should be doubled to reflect the items implicitly included in the income measure, which are. io. er. 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. al. n. iv n C poverty line, and often uses a level much higher than $2 per day. BOP started with a definition of he ngchi U. 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. 28.

(32) 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. 政治大. poverty using data drawn from national accounts (The Economist, 2004a; Sala-I-Martin,. 立. forthcoming). These two methods yield widely different results. An important controversy relates to. ‧ 國. 學. 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. sit. y. Nat. (Virmani, 2006). For example, the World Bank discontinued such an adjustment in 1993; the. io. er. 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. al. n. iv n C $1 a day; the Indian Government estimates lower poverty rate of 26% using its h eansignificantly gchi U. 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 29.

(33) 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. 政治大. billion-5 billion people on under $2 a day, a number well above even the World Bank estimate. This. 立. in spite of the fact that a few months earlier The Economist (2004) argued that the true extent of. ‧ 國. 學. 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. sit. y. Nat. World Bank as saying four billion people in the world earn less than $2 per day (Walsh et al, 2005).. io. er. 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. al. n. iv n C poverty. By any measure, poverty is a serious and there is no need to exaggerate it in order h e nproblem, gchi U 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 30.

(34) 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. 政治大. 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,. 立. the size of the BOP market, from the perspective of a MNC from a rich country, is only $0.3 trillion. ‧ 國. 學. – compare this to the $11 trillion economy in the United States alone.. ‧ sit. y. Nat. No Fortune. io. er. 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. al. n. iv n C often geographically dispersed and culturally This increases distribution and h e nheterogeneous. gchi U 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 31.

(35) 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 apparently support the BOP proposition involve companies that are profitable by selling to people. 政治大. well above the poverty line, but who seem poor only in relative terms, especially to a Western. 立. researcher.. ‧ 國. 學. Casas Bahia. ‧. BOP cites the case of Casas Bahia which has become a large retailer in Brazil by converting the. sit. y. Nat. BOP into consumers. Casas Bahia carries and sells top-quality brands: Sony, Toshiba, JVC, and. io. er. Brastemp (Whirlpool). There is a misconception that because customers are poor they do not desire quality products. It is quite obvious that poor people desire quality products; the problem is that. al. n. iv n C they can not afford such products. People income is less than $2 per day and can barely meet h ewhose ngchi U their basic survival needs do not purchase top quality electronic appliances! This confusion arises because of inconsistency in defining the poverty line. Casas Bahia customers (individually or as a family) are much above the $2 per day poverty line. Casas Bahia is a big, profitable retailer but has little to do with the BOP proposition if we define the poverty line appropriately. This is the cause of the BOP fallacy that poor people buy top quality products. Iodized Salt Many people in developing countries suffer from iodine deficiency, leading to diseases such as goiter. Salt is an excellent carrier of iodine, and it is very inexpensive to add iodine to salt. A problem is that some of this iodine in salt is lost in the process of storage, transportation and 32.

(36) cooking. Hindustan Lever Limited (HLL), the Indian subsidiary of Unilever, has developed a proprietary micro-encapsulation technology to stabilize the iodine content in salt. BOP cites the case of Annapurna salt marketed to the bottom of the pyramid by HLL. However, the fact is that the penetration of Annapurna salt among the poor is miniscule at best. The branded salt market in India accounts for only 20-30% of the total market; the rest of the market is served by the unorganized sector (Sarvani, 2003). Annapurna is the second largest with a market share of 35% of the branded sector, which implies a share of 7-10% of the total market. Annapurna salt is priced at Rs. 7.5/kg, the same as the market leader Tata salt; whereas the small regional producers sell iodized salt at Rs. 2/kg. It is unlikely that many poor people are paying such a high premium for Annapurna salt. The. 政治大. BOP proposition is adamant about selling high quality products at a low price to the poor. Yet,. 立. Annapurna sells at a price premium of 250%! Not too many poor people see this as a bargain.. ‧ 國. 學. Annapurna may be a profitable business supporting the BOP proposition.. ‧. Coca-Cola. sit. y. Nat. Balakrishna and Sidharth (2004) applaud Coca Cola in India for launching in 2003 its low-price,. io. er. affordability strategy, which hinged on raising the overall consumer base by offering carbonated soft drinks in smaller pack sizes of 200 ml at Rs. 5, which is equivalent to $0.57 (at PPP). This is. al. n. iv n C ‗affordability‘ for the Indian poor?! Coca BOP initiative is certainly not helping the poor. h eCola‘s ngchi U. Nor is it helping Coca Cola. Facing complaints from its bottlers and retailers, the company reversed this low-price strategy and began to raise prices by August 2004. But analysts say this entire exercise cost the company in terms of its own profitability. Coca Cola‘s new global CEO, Neville Isdell is believed to be not very hot on Coke‘s rural focus in India, and has restructured the Indian operations under two new CEOs (Bhattacharya, 2005). Ice Cream Amul, a large Indian dairy cooperative, found an instant market in 2001 when it introduced ice cream, a luxury in tropical India, at affordable prices (2 cents per serving). Poor people want to buy their children ice cream every bit as much as middle-class families, but before Amul targeted the 33.

(37) poor as consumers, they lacked that option Actually the price of Amul ice cream is much higher. According to Amul‘s website, their cheapest ice cream sells for Rs. 5 – equivalent to $0.57 (at PPP) for a 50ml serving (a rather small serving). We doubt too many poor people living on less than $2 per day find this ice cream a bargain. Till Amul entered the Indian ice cream market in 2001, Hindustan Lever was the largest firm in this market. The reality is that Hindustan Lever instead of expanding to the bottom of the pyramid has actually retreated to the very top of the pyramid because of unknown reasons.. Single Serve Revolution: A Dud. 政治大. The most mentioned example in the BOP literature is shampoo sold in sachets to the poor. A. 立. single-serve revolution is sweeping through poor countries, as companies learn to sell small packets. ‧ 國. 學. of various products such as shampoo, ketchup, tea, coffee, choice at the BOP is to make unit. ‧. packages that are small and, therefore, affordable. This is a fallacy. The poor might prefer small. sit. y. Nat. packages because of convenience and managing cash flow. Companies might prefer to sell small. io. er. packages to encourage trial, brand sampling, and impulse purchases. But, small packages definitely do not increase affordability. A customer might be ‗fooled‘ into thinking a smaller package is more. al. n. iv n C affordable. But, the only way to increase is to reduce the per unit price. By the h real e naffordability gchi U. BOP logic, an easy way to solve the problems of hunger and malnutrition would be to sell food in smaller packages thus making it more affordable to the poor! In most cases, the packaging cost per unit is higher for small packages. Small packages often do sell at slightly lower unit prices; this is probably because of the greater competitive intensity and hence lower profit margins in this segment. Sometimes small packages sell at a higher or the same per unit price as large packages. Diarrhea is a major problem in India; ironically, most cases of diarrhea can be prevented simply by washing hands with soap. BOP reports surveys that indicate that only 30% of households use soap daily. Surely the poor would be better off increasing their consumption of soap at the expense of shampoo. 34.

(38) Financing schemes More BOP consumers in Brazil are able to buy appliances through Casas Bahia because the firm provides credit even for consumers with low and unpredictable income streams. Casas Bahia is able to provide access to high-quality appliances to consumers who could not otherwise afford them. The BOP proposition again falls prey to a fallacy: providing credit does not change the affordability of a product. The finance term for Casas Bahia ranges from four months to one year, with an average of six months. All that the financing scheme does is provide instant gratification at a price. A poor consumer could save money and buy the appliance later by paying cash, or buy now on. 政治大. credit. For the privilege of this instant gratification, he pays an interest rate of over 4% per month.. 立. People with low and unpredictable income would be well advised to save and pay in cash; this will. ‧ 國. 學. enable them to do a better job of comparison shopping too. It is not surprising that many of Casas. ‧. Bahia‘s customers do not understand well how to unbundle the purchase price and the interest cost. sit. y. Nat. and instead focus on the monthly installment payment.Whether it is a single-serve package or novel. io. er. purchasing schemes, the key is affordability without sacrificing quality or efficacy. The only way to make a product truly more affordable is to reduce the per unit price. Changing package size or. al. n. iv n C providing credit might provide other benefits – it definitely does not change h e ntogthec consumer hi U. affordability. This is analogous to the person with a new credit card believing that he can now afford to spend more money; a short-term credit line does not change one‘s income or purchasing power.. Lower Prices One way to alleviate poverty is to reduce the prices of the goods and services the poor buy (or would buy), thus increasing their effective income. To have a significant impact on the purchasing behavior of the poor, the BOP proposition calls for price reductions of over 90%. This is too ambitious a target and rarely achieved; we will settle for price reductions of at least, say, 50% 35.