Title: Bottom of the Pyramid Strategies: Exploitation or a Win-Win Solution?
1Bottom of the Pyramid StrategiesExploitation or
a Win-Win Solution?
- March 14, 2007
- Matt Evans
- Wiam Hasanain
- Lorin May
- Melissa Ong
2Overview
- Defining the Bottom of the Pyramid
- The Great Debate
- Opportunities
- Risks Challenges
- Guidelines and Leading Practices
- Conclusion
- Appendix
3Defining 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
4Defining 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
5Overview
- Defining the Bottom of the Pyramid
- The Great Debate
- Risks Challenges
- Opportunities
- Guidelines and Leading Practices
- Conclusion
- Appendix
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7The 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
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9Case 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.
10Case 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.
11The 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
12Overview
- Defining the Bottom of the Pyramid
- The Great Debate
- Risks Challenges
- Opportunities
- Guidelines and Leading Practices
- Conclusion
- Appendix
13Risks 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
14Overview
- Defining the Bottom of the Pyramid
- The Great Debate
- Risks Challenges
- Opportunities
- Guidelines and Leading Practices
- Conclusion
- Appendix
15Opportunities
- 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
16Opportunities
- 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.
17Overview
- Defining the Bottom of the Pyramid
- The Great Debate
- Risks Challenges
- Opportunities
- Guidelines and Leading Practices
- Conclusion
- Appendix
184 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
19Shape 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.
20Case 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.
21Case 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).
22Tailor 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.
23Tailor 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.
24Improve 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.
25Improve 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.
26Create 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.
27Build 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.
28Overview
- Defining the Bottom of the Pyramid
- The Great Debate
- Risks Challenges
- Opportunities
- Guidelines and Leading Practices
- Conclusion
- Appendix
29Conclusion 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.
30Conclusion 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.