Book Summary: The Fortune at the Bottom of the Pyramid (BOP)

This book by C K Prahalad, Harvey C. Fruehauf Professor of Corporate Strategy and International Business at the University of Michigan Business School addresses a challenge that the author had thrown to himself in 1995 - "What are we doing about the poorest people in the world? … Why can't we mobilize the investment capacity of large firms with the knowledge and commitment of NGOs and the communities that need help? Why can't we co create new solutions?"

The ideas given in the book had earlier been propounded in a working paper, called "The Strategies for the Bottom of Pyramid", which the author had produced with his colleague, Professor Stu Hart but was considered too radical for publication by journals. However, a number of managers at Hwelett-Packard, DuPont, Monsanto and others read it on the internet and accepted its premise. Widespread discussions and acceptance came with publication of two articles, "The Fortune at the Bottom of the Pyramid" in Strategy+Business (January 2002) with Stu Hart, and "Serve the World's Poor Profitably" in the Harvard Business Review (September 2002) with Allen Hammond.

The book is divided into three parts. First part, 'The Fortune at the Bottom of the Pyramid' gives a framework for active engagement of the private sector at the Bottom of Pyramid (BOP) and is divided into six chapters. The starting proposition of the author is that 'if we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up.'

The first Chapter is titled "The Market at the Bottom of the Pyramid" and discusses the unique character of the BOP market. The BOP as a segment consists of an estimated 4 billion people who live at below $2/day. They represent a latent market for goods and services. Active engagement of private enterprises at the BOP is a critical element in creating inclusive capitalism as private sector competition for this market will foster attention to the poor as consumers. The author states that each of the groups that is focusing on poverty alleviation - the World Bank, rich countries providing aid, charitable organizations, national governments and private sector - is conditioned by its own dominant logic. For example India had a deep suspicion about the private sector. Multinational companies (MNCs) suffer from deeply entrenched logic regarding cost structure, consumers and BOP sector. The donors consider private sector greedy. All these agencies have come to an implicit agreement that market based solutions cannot lead to poverty reduction and economic development.

If these agencies cross the barriers posed by their dominant logic, a whole set of opportunities emerge in terms of BOP market, representing a major engine of growth and global trade. This market has its own set of characteristics which are discussed in the book as under:

a. The dominant assumption is that there is no money at the BOP. The reality is that BOP offer huge opportunity due to their large numbers. BOP consumers also pay a high premium for the product and services they avail.

b. The dominant assumption is that distribution access to BOP markets is very difficult and therefore represents a major impediment for the participation of large firms and MNCs. The reality is that with urbanization and widespread migration of poor to the cities, distribution logistics have become easier. In rural areas, there may be "media dark" areas and dispersed communities. Solutions have emerged in different contexts - Project Shakti from Hindustan Lever Limited and "Avon ladies" in Brazil. These cases have been discussed in detail in part II of the book (discussed later in this review).

c. The third 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.

d. Contrary to the popular view, BOP consumers are getting connected and networked. They are readily exploiting the benefits of information networks.

e. Contrary to popular belief, the BOP consumers accept advanced technology readily.

The task therefore, is to convert the poor into consumers through market development. This would require giving the poor capacity to consume on a sustainable basis. Philanthropy might feel good but does not yield scalable and sustainable solutions. One illustration is innovative purchase schemes of Casas Bahia, a retail chain started by Samuel Klein in 1952 in Brazil and Cemex, started by Patrimonio Hoy in Mexico. Single serve packaging by consumer goods marketers is another example. The principles in creating the capacity to consume has been described as "Three As"

i. Affordability: Without compromising quality or efficacy

ii. Access: To be ensured through geographically intensive distribution

iii. Availability: To be ensured through distribution efficiency.

The ideal situation is to create capacity to earn more so that BOP consumers can afford to consume more. ITC's e-Choupal is a successful example in this regard. The critical requirement is the ability to invent ways that can take into account the variability in the cash flows of BOP consumers that makes it difficult for them to access the traditional market.
The involvement of the private sector at the BOP can provide opportunities for the development of new products and services, poor as consumers get more access to products and services and acquire the dignity of attention and choices from the private sector that were previously reserved for the middle-class and rich. The prerequisite is that both sides, the large firms and the BOP consumers develop trust, which has been missing traditionally.

Chapter 2, on "Products and Services for the BOP" calls for a new philosophy of product development and innovation in tune with the realities of the BOP market. The author has identified 12 principles of Innovations for BOP Markets:

1. Price performance: Quantum jumps in the price performance are required.

2. Hybrid Solutions: Advanced and emerging technologies that are creatively blended with existing and rapidly evolving infrastructure.

3. Scalable, transportable across countries, cultures and languages: Ease of adoption in similar BOP markets is a key consideration for gaining scale.

4. Focus on conserving resources: Eliminate, reduce and recycle resources.

5. Product development must start from a deep understanding of functionality not just form.

6. Process innovations are as important as product innovations.

7. Deskilling work is critical. Products and services must take into account skill levels, poor infrastructure, and difficulty of access for service in remote areas.

8. Education of customers on product usage is key.

9. Products must work in hostile environments.

10. Research on interfaces is critical given the nature of consumer population.

11. Innovations must reach the poor – designing methods for accessing the poor at low cost is critical.

12. Product developers must focus on the broad architecture of the system – the platform – so that new features can be easily incorporated.

Innovating at the BOP may seem daunting, but it is highly rewarding. It is also necessary for the MNCs who want to stay ahead of the curve. Such successful innovations are seen in Reliance Telecom’s “Monsoon Hungama”; Dr Venkataswamy’s Aravind Eye Care system in Madurai; Molecular encapsulation technology for iodizing salt by Hindustan Levers Limited; Amul’s Automatic Milk Collection System Units; Ram Chandra and Dr P K Sethi’s Jaipur Foot; Device agnostic system by Voxiva, Peru; ICICI banks multi channel delivery mode; ITC and EID Parry’s access to farmers through their networks.

Chapter 3 is titled “BOP: A Global Opportunity”. It justifies the efforts required for innovating for BOP by identifying four source of opportunity for a large firm that makes and effort to understand and cater to BOP:

a. Some BOP markets are large and attractive as stand-alone entities.

b. Many local innovations can be leveraged across other BOP markets, creating a global opportunity for local innovations. For example, Unilever has replicated products in India in other BOP markets – lessons from developing Wheel were used to launch a similar product, “Ala” in Brazil.

c. Some innovations from the BOP will find applications in developed markets. The Voxvia system found use in the U. S. Department of Defense in its inoculation programme.

d. Lessons from BOP markets can influence the management practices of global firms – Nirma and Wheel operate on lower gross margin but yield a higher return on capita employed.

The BOP market pose challenge emerging from rapid acceptance of innovation (a “I curve” as compared to traditional “S curve”. The rapid growth demands new approaches. Innovations such as SHGs and Shakti Amma cut costs drastically and reduce risks.

Chapter 4, “The Ecosystem for Wealth Creation”, shows how large firms can create a private sector ecosystem and act as a nodal firm. The author has included social organizations of different types – individual entrepreneurs, SMEs, Cooperatives and MNCs. A market based ecosystem for wealth creation consists of the following players:

• Extralegal NGO enterprises

• Micro enterprises

• Small and medium enterprises

• Cooperatives

• Large local firms

• MNCs

• NGOs

Every country has all these players, the relative importance of these firms differs across countries and the policymakers face a dilemma in this regard – If we can’t pick one sector for special attention, how do we mobilize the whole ecosystem? Alternatively, how do we move the composition of the ecosystem towards large firms? The author says that the debate must shift towards building market-based ecosystems for broad-based wealth creation. The HLL project Shakti and ITC’s e-chaupal are such examples. The benefit of private sector ecosystems result from the acceptance of sanctity of contracts by BOP and reduction in inequities of traditional money-lender, local slum lord based contract system. The private sector, in its desire to leverage resources and gain market coverage, will invest new systems depending on the nature of the market. This means not only gaining the benefits of globalization but also accepting the disciplines that it imposes. Also, opaque, local moneylender based contract enforcement and participating in a national or regional private-sector ecosystem are not compatible.

Chapter 5, “Reducing Corruption: Transaction Governance Capacity”, addresses the issue of corruption. Corruption is a market mechanism for privileged access. It adds to cost burden and business uncertainty. The author refers to the work of Hernando De Soto titled 'The Mystery of Capital' and establishes that substantial values lies locked within the underdeveloped societies due to corruption. This can be overcome by developing Transaction Governance Capacity (TGC) in the BOP.

TGC constitutes
a. Law to protect the property;
b. Micro regulation;
c. Social norms; and d. Institutions for enforcement.

BOP consumers live in a varying degrees of TGC – arbitrary, those where laws and market economy exist or where all the components are well developed. The specifications prescribed for building TGC are four fold:
a. A system of laws that allows for ownership and transfer of property
b. A process for changing the laws governing property rights that is clear and unambiguous.
c. A system of regulations that accommodates complex transactions.
d. Institutions that allow the laws to be implemented fairly, in a timely fashion and with transparency.

A successful attempt at building TGC is Government of Andhra Pradesh’s e-governance initiative. Here, however, it has been discovered that the level of corruption has initially increased during the transition period. However, once the transition to digital delivery of service and transfer of data in electronic mode is made and people become conversant with the new technology, the accompanying transparency would ensure an almost nil level of corruption.

Given the capacity to solve problems of poverty through profit, innovations are required in product design and in converting poor into market. The process generates TCG. These factors can trigger rapid economic and social development. The author discusses this aspect in Chapter 6, titled Development as Social Transformation.

Building markets help in breaking down barriers in communication. This is evident in e-choupal model. Farmers from villages could get information from Chicago Board of Trade. One of the farmers also wrote an e-mail to one of the researchers who was assisting the author in compiling the case studies. The BOP consumers are constantly upgrading in the process of participating in expanded market, gain access to knowledge and identity as individuals.

Another well understood but poorly articulated reality is the role of women in development. Their critical role is to be seen in the case of Avon Ladies, SHGs, Amul and in Cemex. Another feature is that a system of checks and balances are emerging, thanks to civil society organizations and free press. The last point the author makes is that the social transformation should lead the pyramid structure to morph a diamond. Pyramid depicts unequal distribution in the society. A diamond structure represents a minority at top and bottom and a majority of middle class. He quotes National Council of Applied Economic Research to discern such trend in states such Gujarat and Haryana. While states like Bihar and Orissa show a pyramid type of structure, Maharashtra and Punjab show an inverted pyramid. This pattern is likely to repeat itself in rural and urban India. The author concludes by emphasizing that the best allies in fighting poverty are the poor themselves and also conjectures that the bold initiatives would lead to elimination of poverty by 2020.

Part II of the book is a detailed discussion on the successful innovations under the heading Innovative Practices at the Bottom of the Pyramid. The cases are categorized into different sections –
1. The Market at the BOP, discusses Casas Bahia and CEMEX;
2. Known Problems and Known Solutions: What is the Missing Link, discusses Annapurna Salt Story and HLL’s initiative in soap market and public health;
3. Known Problems and Unique Solutions; Documents the Jaipur Foot and Aravind Eye Care System.
4. Known Problems and System Wide Reform; Documents ICICI Banks innovation in finance, ITC’s e-choupal storey and The EIC Parry Story (on CD);
5. Scaling Innovations: The Voxiva story and Innovations in Energy by E+Co’s Investment in Tecnosol (on CD);
6. Creating Enabling Conditions for the Development of Private Sector: E-Governance in Andhra Pradesh (on CD).

The cases are quite detailed with the objective of providing information about how to innovate at the BOP. The author also says that the cases go on to establish that there is no mystery to unlocking the potential of these markets. Finally, they demonstrate the size of the market.
___