Monday, April 14, 2008

Business in Bottom of Pyramid Countries?

Recently I read a paper of Prahalad and Hammond that was already published in the Harvard Business Review as early as 2002. Now in 2008, it still seems very interesting, actual and worthwhile pursuing. The title of the article “Serving the World’s Poor, Profitably.” The paper tells that large multinational companies can do good for the poorest people in the world. A free version of the paper can be downloaded from the World Resources Institute (http://pdf.wri.org/whatworks_serving_profitably.pdf). In this post I will briefly write the things that most attracted my attention.

Being poor is expensive. In the Indian city of Mumbai, prices of the same articles are consistently higher in poor areas than in upper-class areas. Articles include credits, water, phone calls, diarrhea medication and rice and prices range from 1.2x to 53x more expensive. The main reason is the lack of efficient distribution channels.

The world pyramid. 100M people have an average annual salary of more than 20.000$. 2 billion people earn between 2.000-20.000$, and 4 billion people earn less than 2.000$. Usually, multinational corporations serve the 100M rich people, assuming that the bottom of the period (BOP) cannot afford their services. The paper shows that this is not necessarily true (on the contrary) and that many poor people do want to spend some money on services and/or products. E.g., in the same town of Mumbai, 85% of the household own a TV set, while not having a proper house. The telco Grameen provides many BOP people with mobile access by having villagers in rural areas share one mobile line. Whereas each person maybe spends very little money on communication, a large village may spend as much as 1000$ per month.
The paper argues that one should not underestimate the improvements that for example communications infrastructure can provide to the poorest people. Globalization is often (rightly) associated with outsourcing part of the value chain to cheap (and thus poor) countries. But Prahalad and Hammond show that it can also be different.

The business interest is manifold. First, there is a huge opportunity for growth in terms of customers. Second, usually conditions of operating in BOP countries are very harsh, forcing companies to provide innovative solutions. Once those solutions work in the difficult environments, moving those solutions to more friendly markets may result more efficiency and in significant savings. Many large companies, therefore, setup an R&D centre in BOP countries focused on local opportunities. There exists a telecommunications operator that is only operating in poor countries that has an EBITDA as high as 65%

My conclusion is that while many of us rule out the possibility to do business in BOP countries because 1) we think there is no business, 2) conditions are very difficult (humanitarian, political, nature), 3) we want (or need) to be a social responsible corporation, and 4) the kind of managerial skills needed are totally different, it actually makes a lot of sense to consider BOP markets seriously.

The authors’ answer to the question “is it worth the effort?” “Big corporations should solve big problems.”

4 comments:

Roshnet said...

That is a really Interesting point.

Sometimes selling to those kind of markets can lead to quite innovative solutions.

Multinational cosmetic companies realized that poor people who earn daily wages in India (where I grew up) will buy shampoos, if they are sold in small packets, at affordable cost, so that they don't have to shell out their whole days earnings.

Recently I came across an Indian company that designed a no-frills mobile phone that has no screen, and able to sell at a very low price point. (http://www.tech2.com/india/news/value-mobile-phones/spice-corp-launches-$20-mobile-phone/28971/0)

Lured by the same customer segment, Tata motors, recently launched the world's cheapest car, called Nano. (http://driving.timesonline.co.uk/tol/life_and_style/driving/article3164205.ece)


This also reminds me of an article that I read in the International Herald Tribune some time ago on the same lines (http://www.iht.com/articles/2006/07/07/yourmoney/mthreat.php)

I guess there is tremendous space to play in the bottom of the pyramid, if only we (MNCs) could change the mindset and take a bit of risk. MNCs would prefer to "copy" the same solution that worked in one country to another, and this is where usually they falter. What worked well in one country may not fit well with the demographic and economic mix of another.

-Rosh

Richard Benjamins said...

Thanks for the comment.

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