It’s been five years since the publication of “The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits,” the seminal work by C.K. Prahalad, a professor of corporate strategy at the Ross School of Business of the University of Michigan.
The book combined a pragmatic framework with inspirational case studies to show companies how they could develop innovative business models and find new profits by serving the world’s five billion poorest people at the bottom of the economic pyramid (or BOP).
To commemorate the event, Wharton Publishing has issued a revised and updated anniversary edition that includes a new introduction by the author, as well as many new case studies.
I recently spoke with Professor Prahalad to discuss what these companies have learned as they’ve built profitable businesses in emerging markets while reducing poverty in the process. Excerpts from this discussion follow:
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Triple Pundit: What are the big lessons learned over the past five years since the book was first published?
C.K. Prahalad: First, the thesis of the book that the private sector is an integral part of the poverty alleviation process is well accepted by multilaterals, aid agencies, many NGOs and large private sector firms as well. Second there is now a growing belief that the bottom of the pyramid provides an opportunity for business to “do good and do well.” Third, we recognize that the BOP is more than micro-consumers. It also represents micro producers and micro investors who can be connected to national and global markets. And the BOP can also be the source of major innovations that affect us all. These ideas were in the original book but have been confirmed and amplified.
3P: Since the first publication of the book, you mention there has been an ongoing debate about how the BOP consumer is defined. Is this a useful debate? Why?
CKP: The original idea was to draw attention to five billion people who were “unserved and underserved.” Two dollars a day was a good metric to show who they are. The BOP can also be defined as those who live in the unorganized sector, meaning that they do not have access to the benefits of modern, organized and efficient industrial systems and are subject to local monopolies. This has spawned a debate and definitions like the “next four billion” or the “bottom one billion” etc. These definitions may serve a purpose, but to think that you can precisely measure income levels at the BOP is a futile effort. The incomes are volatile, seasonal and often do not include housing, small family farm income, remittances they receive, subsidies from the government (for example, Brazil) or guaranteed work, like the 100 days in India.
Secondly, no one lives alone. They live in a family of let us say five, which when you add the individual incomes together is $3,650 per family per year. That is approximately Rs. 160,000 in India. The local economic research organizations call them the “aspiring middle class.” They are fueling the domestic consumption of fast moving consumer goods, clothes, two wheelers, radios and TV in India. We need to be careful and not get caught up with simple numbers and extrapolate the buying power of two dollars per day in every country in the world.
3P: In the book, you say that when serving the BOP markets, finding “a new price-performance envelope” is critical? Can you expand on this point?
CKP: Lots of discussion about the BOP is about price. The discussion must shift to value. Value is the relationship between price and performance. Performance is measured both in objective and subjective terms. So a $30 cataract surgery of the same quality (measured in terms of outcomes which is objective performance, if not the ambiance of the hospital bedroom, which is more subjective) compares well with $3,000 for a similar procedure in the USA. Similarly, $30 DVD players, a penny-per-minute cell phone time, or a $2,000 car. These are fundamentally challenging the price-performance relationships we have gotten accustomed to.
3P: What’s been learned in the last five years about scaling businesses to serve the BOP markets? How do these business grow and become sustainable.
CKP: The BOP forces the concept of “virtual scale.” We need to deeply understand the value chain and know which parts of it can be decentralized and which needs to be centralized to ensure both quality and cost. This enables a lot of innovation in building of logistics and manufacturing systems.
3P: According to your book, the environmental impact of business has entered into the equation now. What types of innovations are you seeing here?
CKP: When four billion new people join the global economy, they will put new strains on an already fragile system. The only way we can provide them basic quality of life — clean water, sewage, health, energy, connectivity and education — is to innovate. We need new solutions. Seeking sustainability leads to innovation, not just compliance.
3P: Based on the feedback you’ve gotten over the past five years, what hasn’t worked or required refinement from the original framework?
CKP: I would certainly emphasize more the implications of the BOP as a laboratory for innovations and how these travel not only across the developing countries but also to the developed countries. Good examples of these innovations that were developed for BOP markets are: netbooks, battery operated networked EKGs, prepaid cards for cell phones, and mobile phone-based financial transactions.
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Check out the bonus content available at the Wharton Publishing website, which includes an interview with Professor Prahalad, an excerpt from the book and several video case studies.