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

Source: Bonsall, Amy, et al., “Turning Poverty Into Opportunity As A Means for Prosperity”, DLN White Paper, November 2005 Defining the ‘Bottom of the Pyramid’: Changing Attitudes { } Modern View Incorporates Both Historic View

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? 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 Win-WinMisguided

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: Exposure to new political and economic risks Resources, capabilities and knowledge of the complexities and subtleties of sustainable development are required. Consumers can’t 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 Operating Environment Economics

Overview Defining the ‘Bottom of the Pyramid’ The Great Debate Risks & Challenges Opportunities Guidelines and Leading Practices Conclusion Appendix

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

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

Source: Prahalad, C.K. and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,” strategy+business, Issue 26, first quarter Keys to Unlocking BOP Markets to Corporate Products

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 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 country’s culture, increase local knowledge and overcome opposition when entering a new market. BOP NGO’s & Gov’ts MNC’s

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.