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Bottom of the Pyramid

Strategies:
Exploitation or a Win-Win
Solution?
March 14, 2007

Matt Evans
Wiam Hasanain
Lorin May
Melissa Ong
Overview

 Defining the ‘Bottom of the


Pyramid’
 The Great Debate

 Opportunities

 Risks & Challenges

 Guidelines and Leading Practices

 Conclusion

 Appendix
Defining the ‘Bottom of the
Pyramid’: A Visual
Representation

Source: Prahalad, C.K. and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,” strategy+business, Issue 26, first quarter 2002
Defining the ‘Bottom of the
Pyramid’: Changing Attitudes
Modern View Incorporates Both

}
Historic
View
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Source: Bonsall, Amy, et al., “Turning Poverty Into Opportunity As A Means for Prosperity”, DLN White Paper, November 2005
Overview

 Defining the ‘Bottom of the


Pyramid’
 The Great Debate

 Risks & Challenges

 Opportunities

 Guidelines and Leading Practices

 Conclusion

 Appendix
The Great Debate:
Win-Win or Misguided
Strategy?
Win-Win Misguide
 Latent market for  Poor d
lack income and
goods and services jobs; should produce
before consume
 Large growth
opportunity, due to  Vulnerable to poor
size of BOP purchasing decisions;
income should be spent
 Catalyst for on shelter not ice cream.
economic
development  Sale of MNC products
through providing does not clearly improve
affordable products social indicators
and services
 MNC profits flow abroad,
do not help local
Case Study: BOP Strategy
Gone Wrong at Nestle
 Project: In 1970’s, Nestle began marketing infant
formula to mothers in the developing world, with the
argument that bottled milk is “better” for infant
children.
 Assumptions: Sterile water and bottles, no dilution.
 Impact: Babies using Nestle’s product in developing
countries were 25X more likely to die of diarrhea,
and mothers developed an addiction to the product
after prolonged use stopped lactation.
Case Study: BOP Strategy
Gone Wrong at Nestle
 In addition to the incorrect assumption about
sterile water, Nestle used questionable marketing
tactics with BOP consumers:
 Health agencies condemned Nestle for
marketing instant infant formula in developing
countries.
 Nestle’s marketing implied that Western women
substituted mothers’ milk with formula.
 Promoting infants’ milk as a product that was
more beneficial to both mother and child than
natural breast milk.
 Clearly violated the WHO/UNICEF’s International
Code of Marketing Breast-Milk Substitutes.
The Great Debate:
Conclusion
 Merely selling to the BOP does not solve poverty, it
depends what you sell, how you sell it, and where it
was produced.
 BOP strategies have the potential to bring positive
benefits to companies and communities, but
improper application can have devastating
consequences.
 Understanding the local situation is crucial.
 The key to resolving the debate is a better
understanding of both the risks/challenges and
opportunities presented by the BOP market…
Overview

 Defining the ‘Bottom of the


Pyramid’
 The Great Debate

 Risks & Challenges

 Opportunities

 Guidelines and Leading Practices

 Conclusion

 Appendix
Risks & Challenges:
Operating Economics
Environment
 Exposure to new  Market size unclear:
political and economic
risks estimates range from
 Resources, capabilities $0.3 trillion to $13
and knowledge of the trillion.
complexities and  Prahalad uses purchasing power parity
and assumes 4 billion BOP spending
subtleties of sustainable $4/day to estimate $13 trillion.
development are  Aneel uses financial exchange rates
(that MNCs would use to expatriate
required. profits) and assumes 2.7 billion BOP
spending $1.25/day¹ to estimate $0.3
 Consumers can’t afford trillion.
differentiated products
 Competing with local
 Low margin; high fixed
business can threaten costs
the existing power  Distribution challenges
structure.
 High price sensitivity
and per unit
transaction costs
Overview

 Defining the ‘Bottom of the


Pyramid’
 The Great Debate

 Risks & Challenges

 Opportunities

 Guidelines and Leading Practices

 Conclusion

 Appendix
Opportunities
 BOP consumers suffer  At the same time,
a poverty penalty: BOP consumers:

 Lack of access to  Are brand-


competitively and conscious
efficiently-provided  Have well-
goods and services connected
 Higher prices for communities
some goods and (word-of-mouth)
services (i.e.  Readily accept
manufactured advanced
goods, credit) technology
 Poorer quality  Collectively have
goods and services purchasing power
 Are always trying
to upgrade from
their existing
condition
Opportunities
 BOP consumers get cheaper products, access to technology, and
opportunities to become entrepreneurs, and educate themselves.
 BOP markets present companies with a new source of:
 Top-line revenue growth
 Cost-savings and innovations that can influence existing
business models and management practices

 But selling into BOP markets is difficult and even harder to do


responsibly.
 In order to market to the BOP in a way that brings real benefits to
impacted communities, companies should follow some important
guidelines and lessons from leaders in the industry.
Overview

 Defining the ‘Bottom of the Pyramid’


 The Great Debate

 Risks & Challenges

 Opportunities

 Guidelines and Leading Practices

 Conclusion

 Appendix
4 Keys to Unlocking BOP
Markets to Corporate
Products

Source: Prahalad, C.K. and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,”
strategy+business, Issue 26, first quarter 2002
Shape Aspirations:
Engage the BOP as Joint Problem
Solvers
 Focus on the poor as producers,
not just consumers.
 Upgrade skills and productivity to
improve lives and increase
purchasing power.
 Channel resources back into local
communities to improve
standards of living.
Case Study: ITC
Enables Market Pricing

 Geography: Rural India


 Industry: Agricultural trading
 Product: E-Choupals; internet-
connected computers
 Background:
 Farmers sold grain to middlemen
at below market prices.
 Lack of information led to
exploitation of farmers.
Case Study: ITC
Enables Market Pricing
 Innovation:
 ITC developed E-choupals; network of
computers which provided web access in
rural farming villages, each manned by a
literate host farmer to support illiterate
farmers.
 Farmers check trading price of their
produce and sell directly to ITC.
 Farmers also order raw material at an
aggregate level, thereby saving money
(economies of scale)
 Impact: Farmers receive 2.5% higher price
($6/ton).
Tailor Local Solutions:
Innovate from the BOP up

 Reorient R&D efforts to create appropriate


technologies and new products and services
that consider the unique needs of the poor, by
region and by country.
 Nurture local markets and cultures and
leverage both local solutions and global best
practices to meet identified needs.
 At the BOP, capital – not labor – is the scarce
resource, and focusing on that difference can
lead to greater productivity and higher returns.
Tailor Local Solutions:
Reevaluate Price-Performance-
Process Matrix
 Incorporate local know-how.
 Rethink the entire business process –
from product development to production
to logistics – with a focus on meeting
functionality needs.
 By Prahalad’s estimates, BOP
innovations must achieve a drastic price
reduction (30 – 100x) in order to be
locally competitive.
Improve Access: Identify
Innovative Distribution &
Communication Strategies
 BOP communities are often physically
and economically isolated.
 Create direct distribution and word-of-
mouth mechanisms to educate
consumers and expand access and
availability.
 Add value by finishing product
manufacturing within the community.
Improve Access:
Create a Scalable Model
 Design solutions for adaptability across
markets.
 Scalability is key to profitability since
BOP products tend to be low margin.
 BOP profits are driven by volume and
capital efficiency.
Create Buying Power:
Identify Innovative Financing
Schemes
 Provide financial services that focus
not only on access but building
financial literacy and encouraging a
habit of savings.

 Do not provide credit for luxury


purchases (note: definition of luxury
items is controversial.)

 Encourage investment in
productive assets (tools,
agricultural materials, preventative
health).

 Community credit pooling with a


revolving loan fund is one successful
strategy proven to reduce default
risk.
Build the Commercial
Infrastructure: Develop
Partnerships
 A company’s product or service
offerings are its core
competency, but BOP strategies BOP
require a higher level of
engagement.

 Develop partnerships with


NGOs, local governments,
financial institutions and local
entrepreneurs to expand
training, development, micro- NGO’s &
finance and other expertise. MNC’s
Gov’ts
 Building a base of local support
can also help to establish
credibility within local
communities, gain insight into a
country’s culture, increase local
knowledge and overcome
opposition when entering a new
market.
Overview

 Defining the ‘Bottom of the


Pyramid’
 The Great Debate

 Risks & Challenges

 Opportunities

 Guidelines and Leading Practices

 Conclusion

 Appendix
Conclusion:
For those combating
poverty
 IF corporations can…
 without causing the very
poor to divert income from
pressing needs,
 sell products that make
people more productive,
 that are produced in a way
that create local jobs and
increase local human capital,
 without driving out local
industries,
 and reinvest locally instead
of repatriating profits,

 THEN, they can be an important


part of the solution to poverty,
which is excellent CSR.
Conclusion:
For corporations interested
in BOP
 IF corporations can…
 create low price, quality
products,
 that can be scaled across
many BOP markets and
achieve high volume,
 while creating means for the
capital constrained poor to
buy,
 and building relationships and
infrastructure that allow them
to reach poor consumers,
 and finally, follow the
directives on the previous slide
(at least enough to avoid
becoming a publicized “bad”
example)

 THEN, they can serve BOP


markets profitably.