1

CMOST
The Fortune At The Bottom Of The
Economic Pyramid A Review
by
Prof C C Hang
Director, CMOST
Outline
1. The Market At the Bottom (or Base) Of The
Economic Pyramid (BOP)
2. Products & Services For The BOP
3. BOP: A Global Opportunity
4. Relevance Of Disruptive Innovation To BOP
Markets
5. Implications
2
CMOST
C K Prahalad
Author of The Fortune At The Bottom Of The
Pyramid in 2004.
Professor of Strategy At Michigan Business School
Co-author of Competing For The Future in 1994
around the notion of Core Competence
Creating the future despite enormous resource
handicaps
Competing for Opportunity Share rather than
Market Share
3
CMOST
The Economic Pyramid
1. The Market At the BOP
1
2 - 3
4
5
Purchasing Power
Parity (PPP) in US$
> $20, 000
$1,500 - $20,000
$1,500
< $1,500
Population in Millions
75 - 100
1,500 1,750
(BOP)
4,000
The poor represent a latent market for goods and services.
BOP provides a new growth opportunity for the private sector
and a forum for innovation.
4
CMOST
But progress has been hindered by The Dominant
Logic of MNCs as It Relates to BOP
We cant assign our best people to
work on market development in
BOP markets.
Intellectual excitement is in
developed countries; it is difficult to
recruit managers for BOP markets
BOP market is at best an attractive
distraction.
The BOP market is not critical for
the long-term growth of MNCs.
BOP will not pay for tech
innovations; it cant be a source of
innovations.
Only developed countries
appreciate and pay for technological
innovations.
e.g. the poor might need sanitation,
but cant afford detergents.
The poor do not have use for
products sold in developed
countries
Our cost structure is a given
cannot serve the BOP market.
The poor are not our customers.
Implication Assumption
5
CMOST
The Real Nature of the BOP Market
There is Money at the BOP
e.g The GDP per capita in China is US$1,000 US$1.2
Trillion economy (1.2 Billion People). But its Purchasing
Power Parity is US$5 Trillion, making it the second largest
economy globally.
Due to local monopolies, inadequate access, poor
distribution, and strong traditional intermediaries, the
poor pays 5 to 25 times what the rich pays in the
same economy potential of unlocking the latent
purchasing power!
6
CMOST
Access to BOP Markets
- Rural markets are inaccessible to audio and
television signals, i.e. Media Dark the rural poor
do not know what products/services are available and
how to use them.
- One solution : HLL Ltd (a subsidiary of Unilever) in
India trained entrepreneurial women to become
distributors; they earn US$60-150 per month and
become a new class of consumers themselves.
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CMOST
The BOP Markets Are Brand-Conscious
They are indeed brand-conscious and value-
conscious by necessity; they expect good quality
at the prices they can afford.
BOP Consumers Accept Advanced Technology
Readily
Evidenced by the rapid spread of wireless devices,
PC kiosks, etc.
8
CMOST
Market Development Imperative
Create the Capacity to Consume
Cash-poor and with a low level of income, the BOP
consumer has to be accessed differently.
Make unit packages (single-serves) that are small and
much more affordable.
Toothpaste, cosmetics, cooking oil 0.10
Detergent, soap, coffee, spreads 0.04
Salt, biscuits, ketchup 0.02
Shampoo, confectionary, tea 0.01
Typical Products US$
(e.g. Measured in tons, the size of the Indian shampoo
market is as large as the US market!)
9
CMOST
Creating the capacity to consume is based
on 3 principles:
Affordability (without sacrificing quality)
Access ( e.g. the poor may start their shopping after 7.00 pm)
Availability
The Need for New Goods and Services
The involvement at the BOP can provide opportunities
for developing new goods and services.
e.g. access to good quality housing, clean energy from
solar and wind power, good quality furniture. (from an
IKEA for the middle class to an IKEA for the developing
world!)
10
CMOST
Trust Is a Prerequisite
When the poor are converted into consumers, they also
acquire the dignity of attention and choices previously
reserved for the middle-class and rich.
Switching costs for single-serve goods are negligible
for the BOP consumers; hence firms must continue to
upgrade their products to keep their customers.
Dignity and Choice
Firms must focus on building trust between themselves
and the consumers.
The default rate among the poor is actually lower than
the rich: they pay on-time, e.g. default rate at the
ICICI Bank in India is lesser than 1.5% among its 2.5M
customers.
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CMOST
2. Products & Services For The BOP
1) Focus on price performance quantum jumps in price
performance are required.
e.g. When Reliance introduced its Monsoon Hungama
multimedia mobile phone, it only charged an upfront payment
of US$10 and monthly payment of $9.25; result : it received 1
million applications in 10 days.
2) Innovation requires hybrid solutions avoid watered-down
version of traditional technology solutions.
e.g. HLL (a subsidiary of Unilever) applied molecular
encapsulation of iodine in salt (protecting it from harsh
conditions of Indian spices and cooking methods) to solve the
iodine deficiency disorder problem of 70 million Indian
children.
Prahalad has identified 12 Principles of Innovation for
BOP markets.
12
CMOST
3) Solutions must be scalable and transportable
across countries, cultures and languages -
Given a stringent price-performance equation and
low margins per unit, the basis for returns on
investments is Volume;
4) Innovations should be eco-friendly: conserving
resources as a principle in product development -
e.g. Adapting New Water for the BOP; toilet
flushing with minimal use of water.
13
CMOST
5) Product development must start from a deep understanding
of functionality (as marginal changes to products developed
for the first world will not do) e.g. designing artificial limb
for India (such as Jaipur Foot) must take into account of
consumer needs in squatting, walking on uneven grounds,
etc.
6) Process innovations are just as critical as product
innovations the presence of a reliable logistics
infrastructure may not exist; hence one needs to redefine
the process to suit the infrastructure;
e.g. Amul, the largest diary in India implemented a
decentralised milk collection system (from 50,00 villages
and 500,000 families); after quality and volume checks, the
villagers are paid every day; refrigerated vans will transport
the milk collected to the main processing facilities; etc.
14
CMOST
7) Work must be deskilled - Design of products must take
into account the skill levels, poor infrastructure, and
difficulty of access for service in remote areas.
8) Education of customers on product usage is a key
- Given the poor infrastructure for customer access,
innovation in the educational process is vital.
9) Products must work in hostile environments
- noise, dust, abuse of products, etc.
- low quality of infrastructure such as electricity.
15
CMOST
10) The design of the interfaces must be carefully thought
through most of the customers are first time users
and the learning curve can be long or arduous.
11) Designing methods for accessing the poor at low cost is
critical innovations in distributions are as critical as
product and process innovations.
12) As feature and function evolution in BOP markets can
be very rapid, product developers must focus on the
platform so that new features can be easily
incorporated.
16
CMOST
3. BOP A Global Opportunity
1) Some BOP markets are large and attractive as stand-alone
entities.
2) Many local innovations can be leveraged across other BOP
markets.
3) Some BOP innovations will find applications in developed
markets.
4) Lessons for the BOP markets can influence the management
practices of global firms.
Prahalad has identified 4 distinct sources of opportunity
for firms to understand and cater to the BOP markets:
17
CMOST
Local Growth Opportunities
In China and India, a large emerging
middle-class consumers (earning less than
US$1,500 per capita) could create growth of
50 to 100% per year (as experienced by
Samsung, LG, Reliance, Tata).
China has already become Worlds No.1 in
the number of cell phone subscribers.
Establishing a foothold at the BOP (or even
the middle of the pyramid) will give the
company lots of headroom (billions of new
customers) to grow its business.
18
CMOST
Local Innovations Global
The micro encapsulation of iodine in salt to
preserve iodine in harsh conditions in India has
found market opportunities in Africa and other
developing markets.
Product ideas (Jaipur Foot, Microfinance, Single-
serve detergent, etc) can indeed be conceived in
one BOP market and then offered to other BOP
markets globally.
19
CMOST
BOP Solutions for Developed Markets
The Voxiva system was first developed for Peru to
do remote, real-time health monitoring/surveillance;
it has to be robust , based on any communication
device (such as a telephone line), easy to operate
by even illiterate, older folks.
Similar problems confront the US. The Centre for
Disease Control and FDA have to prepare to
remotely monitor outbreaks of diseases caused by
terrorists or problems in food quality that must be
traced rapidly. They are now Voxivas customers.
20
CMOST
Lessons for MNCs from BOP markets
BOP forces MNCs to focus on all aspects of cost
reduction to achieve extraordinary price
performance. MNCs have found that they need to
change their management systems to cut costs.
Capital Intensity
HLL, a subsidiary of Unilever, focuses on a
judicious mix of outsourcing to dedicated suppliers,
hence significantly reducing its capital intensity. A
senior management focus on logistics and
distribution further reduces its capital needs.
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CMOST
Innovations
Innovations must become value-oriented from
the consumers perspective. The BOP focuses
attention on both the objective and subjective
performances of the product or services.
The 30 to 100 times improvements in price
performances create a tremendous challenge
source of innovations.
22
CMOST
Case Study: Hindustan Lever
2. Versatile distribution capabilities
Distribution reach of 6.3 mn retail outlets
Build parterships with emerging modern trade
3. Corporate responsibility in the development of rural India
Shakti initiative to train underprivileged rural women as entrepreneurs
Hygiene compaign to encourage soap usage to combat diarrheoa
1. Deep local understanding & innovation in formulation and packaging
Delivery of tailored products to each segment
Family-
size bottles
Mini bottles
Cost: 5 rupees
Single-use sachets
Cost: rupee
Surf Excel
Stain removal
Rin
Spotlessly white
Wheel
Best clean for less effort
Haircare: Laundry:
Pioneer in serving BOP markets with key leadership positions in FMCG
Factors contributing the HLLs success:
23
CMOST
Case Study: Wahaha
1) Customized products based on local preferences
Started in 1989 with a niche product and novel marketing plan
Later used brand as platform for moving into mainstream product markets
Product: Drinkable yogurt
Marketing: Nutritious and
helps children eat more
In China, a lot of families only have one child. You always
worry that the child wont eat enough and get enough nutrition
Z. John Zhang, ass. Prof of marketing at University of Pennsylvania
Product offering: Purified
water, soft drinks, fruit juices,
tea, cup noodles etc.
..strategy for developing the countryside and eventually
encircling the city. In five years, all the countryside may turn
into the cities and Wahaha would have a loyal customer base
Z. John Zhang, ass. Prof of marketing at University of Pennsylvania
Chinese company that successfully disrupted F&B incumbents in China
2) Building market access through attacking city from country-side
Used lower costs to profitably serve low-income BOP peasants in the countryside
surrounding the city
Used the countryside as a base to branch into the emerging middle class of the
cities and disrupt the incumbent F&B companies
Factors contributing the Wahahas success:
24
CMOST
Case Study: Simputer
Why the Simputer failed
Poor product design and development: Initial poor design results in
failure to meet initial targeted price point of US$200 per unit
Poor market knowledge: Could not differentiate product from
competition eg. Palmtops, low end desktops, MITs $100 PC
Poor market access: Lack financial backing which made marketing of
product difficult
Background
PicoPetas Simputer is a low cost computer designed for rural Indian villages.
SEEDS company Encore Pte Ltd was a partner company and developer
As of 2006, less than 4000 units had been sold.
Our projects often don't have the financial backing for the long haul. The
market in this country is small, and unless we immediately look at marketing
on a global level (which needs tremendous marketing muscle), we're out of
the picture."
Dr. Arun Mehta, Founder, PicoPeta
Why computer product designed for rural BOP markets in India failed to take off
25
CMOST
Disruptive Technologies
(Performance Overshoot)
P
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Performance that customers
can utilize or absorb
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Disruptive
technologies
Incumbents nearly always win
Entrants have advantages (low-end and/or
new markets)
(inferior; other unique features)
4. Relevance of Disruptive Innovation To
BOP
26
CMOST
Questions To Ask :
Low-end disruption
Are there customers at the low end of the market who would be happy
to purchase a product with less (but good enough) performance if they
could get it at a lower price (but still with a reasonable margin for us)?
New-market disruption
Is there a large population of people who historically have not had the
money, equipment, or skill to do this thing for themselves, and as a
result have gone without it altogether or have needed to pay someone with
more expertise to do it for them?
Both types of disruption
Does our product or service help our targeted customers get a job
done that they have always been trying to get done but have not yet
been able to do in simple, convenient way? (i.e. Job-to-be-done
market analysis)
Targetting non-consumption
27
CMOST
Non-consumers are the ideal initial target
P
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m
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Time
Pocket radios
Portable TVs
Disruptive technology: transistors vs. vacuum tubes
Hearing Aids
Major Established
Electronics Markets:
Tabletop radios, floor-standing
televisions, computers,
telecomm.equipment, etc.
Path taken by
established
vacuum tube
manufacturers
28
CMOST
Case : Solar vs Electrical Energy
In advanced economies, electrical power transmitted
from central generating stations are widely available
- no impact so far from solar energy (with ? $billions of
R&D) although clean and cheap energy is desirable.
Successful solar applications, however, may be
pioneered by entrepreneurs who target the 2 billion
people in South Asia and Africa who have no access to
conventionally generated electricity - The demand is
also modest as their homes are not filled with power-
hungry appliances !
[Capturing BOP opportunity with DI]
29
CMOST
New-Market disruption enables less-skilled
people to do more sophisticated things
Disruptive innovations could enable a larger population of
less-skilled, ordinary people to do things in a more
convenient, lower-cost setting, which traditionally could only
be done by specialists. Disruption has been one of the
fundamental causal mechanisms through which our lives
have improved.
Personal Computers
Mobile Phones
Almost always, disruptive innovations such as these have
been ignored or opposed by the leading institutions in their
industries.
[They also missed capturing the BOP opportunity with DI!]
30
CMOST
Disruption is facilitated by Good Enough
technology that makes things more idiot-proof
Simple
TIME
Complex
T
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n
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&

E
a
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U
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OK for techies
Pattern Recognition
& 80-20 Rule
Simple, Rules-Based
& more idiot-proof
[ With much improved price/performance, DI could
capture the BOP opportunity ]
31
CMOST
UTStarcom
In mid 90s, modified the NTT-DoCoMos PHS wireless
system to create PAS/Little-Smart to provide a limited city-
wide mobile phone in China.
Introduced in 1999, its much lower cost-of-use attracted
customers who could not afford GSM mobile phone services,
much to the surprise of market watchers.
In 2004, PAS subscribers hit 65 million, creating 2004
revenues of more than US$2 billion and over US$1 billion for
UTStarcom and ZTE (which entered the market in 2001),
respectively.
[ Succeeded in reaching the BOP market in China ]
32
CMOST
Galanz Enterprise
In 1992, developed a new microwave oven for the tiny
Chinese kitchens ( instead of using its low-cost labour to
build a low-end product for export to the developed countries ).
After winning the Chinese low-end market, moved
upmarket to serve both local and global markets.
In 2005, holds 75% of Chinese market and nearly 50%
of global market in microwave ovens. (> 500 patents)
Since 2000, has started to repeat the same strategy by
developing air-conditioners for tiny Chinese homes.
Within 4 years, became No. 2 Chinese air-conditioner
exporter.
[ succeeded in the BOP market in China before moving up-market ]
33
CMOST
Grameen Telecom
Brought wireless telecom service to Bangladesh.
It loaned US$175 each to women who became known as
wireless women of Grameen. The loan covered the mobile
phones cost, training, and a small solar recharging unit. The
women then sold phone usage on a per-call basis at an
affordable price to other villagers.
The service allowed farmers to get vital information such as
crop prices without traveling great distance. They could place
orders with distributors.
Created a very profitable US$100M/year business for Grameen
and the future up-market potential could be tapped for many
years to come !
34
CMOST
US$100 Laptop
innovations needed to reduce the cost and
improve certain performance
new business model
[opportunity: how would an entrepreneur
exploit such a low-cost PC for other
intelligent products?]
[opportunity: how would an entrepreneur
exploit such a low-cost PC to create other
products/services for the BOP markets?]
Innovation Opportunity From Projects
Targetted at the 3
rd
World
35
CMOST
36
CMOST
5. Implications
Some MNCs (e.g. Unilever, P&G, Citibank)
and local companies (e.g. Reliance, Tata
and ICIC Bank in India; Haier and
UTStarcom in China) have started to pay
serious attention to BOP markets and more
will follow suit.
BOP can be an important source of
innovations for both the global BOP markets
and also for the developed worlds.
37
CMOST
Need to remember that one should not impose a
first-world business organisation to one addressing
the BOP opportunity (e.g. it needs patience, needs
to start small, needs to innovate in cost structure to
enable profits to be earned at low price points,
needs to be build new processes and capabilities,
etc)
Unique opportunities for creating products/services
in BOP e.g. cell phones could be used as
electronic wallets linked to mobile accounts for
Filipinos who do not have a bank account or credit
card.
38
CMOST
Should take note that the price/performance
could be a very challenging task for the
R&D team, the marketing team, or both.
Disruptive innovations could capitalize on
the BOP markets for their initial growth.
Singapore could position itself to be a
suitable venue for R&D for the BOP
markets.
39
CMOST
Developing disruptive technologies to create products/
services for the BOP markets on purpose could be a
challenging mission for universities/research institutes
(to fulfill their new entrepreneurial role of spinning off
new companies or transferring technologies to SMEs).
As R&D to create such disruptive technologies is
mostly beyond the reach of local SMEs, a special
national effort (including funds) could provide Spore
with a new competitive advantage for innovation.
[Note: As in most developed nations, the R&D efforts
in Universities and RIs in Spore are geared mostly for
Radical Innovation.]
Fortune at bottom of pyramid
Rev 25 Apr 07