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Bottom of the Pyramid Strategies: Exploitation or a Win-Win Solution?

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Title: Bottom of the Pyramid Strategies: Exploitation or a Win-Win Solution?


1
Bottom of the Pyramid StrategiesExploitation or
a Win-Win Solution?
  • March 14, 2007
  • Matt Evans
  • Wiam Hasanain
  • Lorin May
  • Melissa Ong

2
Overview
  • Defining the Bottom of the Pyramid
  • The Great Debate
  • Opportunities
  • Risks Challenges
  • Guidelines and Leading Practices
  • Conclusion
  • Appendix

3
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,
strategybusiness, Issue 26, first quarter 2002
4
Defining the Bottom of the Pyramid Changing
Attitudes

Modern View Incorporates Both

HistoricView
Source Bonsall, Amy, et al., Turning Poverty
Into Opportunity As A Means for Prosperity, DLN
White Paper, November 2005
5
Overview
  • Defining the Bottom of the Pyramid
  • The Great Debate
  • Risks Challenges
  • Opportunities
  • Guidelines and Leading Practices
  • Conclusion
  • Appendix

6
(No Transcript)
7
The Great Debate Win-Win or Misguided Strategy?
Win-Win
Misguided
  • Latent market for goods and services
  • Large growth opportunity, due to size of BOP
  • Catalyst for economic development through
    providing affordable products and services
  • Poor lack income and jobs should produce before
    consume
  • Vulnerable to poor purchasing decisions income
    should be spent on shelter not ice cream.
  • Sale of MNC products does not clearly improve
    social indicators
  • MNC profits flow abroad, do not help local
    economies

8
(No Transcript)
9
Case Study BOP Strategy Gone Wrong at Nestle
  • Project In 1970s, 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 Nestles 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.

10
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.
  • Nestles 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/UNICEFs International
    Code of Marketing Breast-Milk Substitutes.

11
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

12
Overview
  • Defining the Bottom of the Pyramid
  • The Great Debate
  • Risks Challenges
  • Opportunities
  • Guidelines and Leading Practices
  • Conclusion
  • Appendix

13
Risks Challenges
Operating Environment
Economics
  • Exposure to new political and economic risks
  • Resources, capabilities and knowledge of the
    complexities and subtleties of sustainable
    development are required.
  • Consumers cant afford differentiated products
  • Competing with local business can threaten the
    existing power structure.
  • Market size unclear estimates range from 0.3
    trillion to 13 trillion.
  • Prahalad uses purchasing power parity and assumes
    4 billion BOP spending 4/day to estimate 13
    trillion.
  • Aneel uses financial exchange rates (that MNCs
    would use to expatriate profits) and assumes 2.7
    billion BOP spending 1.25/day¹ to estimate 0.3
    trillion.
  • Low margin high fixed costs
  • Distribution challenges
  • High price sensitivity and per unit transaction
    costs
  • ¹World Bank 2005 estimate

14
Overview
  • Defining the Bottom of the Pyramid
  • The Great Debate
  • Risks Challenges
  • Opportunities
  • Guidelines and Leading Practices
  • Conclusion
  • Appendix

15
Opportunities
  • BOP consumers suffer a poverty penalty
  • Lack of access to competitively and
    efficiently-provided goods and services
  • Higher prices for some goods and services (i.e.
    manufactured goods, credit)
  • Poorer quality goods and services
  • At the same time, BOP consumers
  • Are brand-conscious
  • Have well-connected communities (word-of-mouth)
  • Readily accept advanced technology
  • Collectively have purchasing power
  • Are always trying to upgrade from their existing
    condition

16
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.

17
Overview
  • Defining the Bottom of the Pyramid
  • The Great Debate
  • Risks Challenges
  • Opportunities
  • Guidelines and Leading Practices
  • Conclusion
  • Appendix

18
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,
strategybusiness, Issue 26, first quarter 2002
19
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.

20
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.

21
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).

22
Tailor Local Solutions Innovate from the BOP up
  • Reorient RD 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.

23
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 Prahalads estimates, BOP innovations must
    achieve a drastic price reduction (30 100x) in
    order to be locally competitive.

24
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.

25
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.

26
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.

27
Build the Commercial Infrastructure Develop
Partnerships
  • A companys product or service offerings are its
    core competency, but BOP strategies require a
    higher level of engagement.
  • Develop partnerships with NGOs, local
    governments, financial institutions and local
    entrepreneurs to expand training, development,
    micro-finance and other expertise.
  • Building a base of local support can also help to
    establish credibility within local communities,
    gain insight into a countrys culture, increase
    local knowledge and overcome opposition when
    entering a new market.

28
Overview
  • Defining the Bottom of the Pyramid
  • The Great Debate
  • Risks Challenges
  • Opportunities
  • Guidelines and Leading Practices
  • Conclusion
  • Appendix

29
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.

30
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.
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