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The Fortune at the Bottom of the Pyramid by C.K strategy+business The Fortune at the Bottom of the Pyramid by C.K. Prahalad and Stuart L. Hart from strategy+business issue26, first quarter 2002 © 2002 Booz Allen Hamilton Inc. All rights reserved. e-Doc SECURITY AND The Fortune STRATEGY at theBottom of the Pyramid content by C.K. Prahalad and Stuart L. Hart strategy strategy & competition Low-income markets present a prodigious opportunity for the world’s wealthiest companies — to seek their fortunes and bring prosperity to the aspiring poor. 1 With the end of the Cold War, the former Soviet attacks in the United States last September. Union and its allies, as well as China, India, and Latin The lackluster nature of most MNCs’ emerging- America, opened their closed markets to foreign invest- market strategies over the past decade does not change ment in a cascading fashion. Although this significant the magnitude of the opportunity, which is in reality economic and social transformation has offered vast new much larger than previously thought. The real source of growth opportunities for multinational corporations market promise is not the wealthy few in the developing (MNCs), its promise has yet to be realized. world, or even the emerging middle-income consumers: First, the prospect of millions of “middle-class” con- It is the billions of aspiring poor who are joining the sumers in developing countries, clamoring for products market economy for the first time. from MNCs, was wildly oversold. To make matters This is a time for MNCs to look at globalization worse, the Asian and Latin American financial crises strategies through a new lens of inclusive capitalism. For have greatly diminished the attractiveness of emerging companies with the resources and persistence to com- markets. As a consequence, many MNCs worldwide pete at the bottom of the world economic pyramid, the slowed investments and began to rethink risk–reward prospective rewards include growth, profits, and incal- structures for these markets. This retreat could become culable contributions to humankind. Countries that still Illustration Illustration by Ventura Marco even more pronounced in the wake of the terrorist don’t have the modern infrastructure or products to C.K. Prahalad Stuart L. Hart ([email protected]) is the ([email protected]) is professor Harvey C. Fruehauf Professor of strategic management, of Business Administration at Sarah Graham Kenan the University of Michigan Distinguished Scholar, and Business School, Ann Arbor. codirector of the Center for He is also the founder and Sustainable Enterprise at the chairman of Praja Inc., a University of North Carolina’s pioneer company in interactive Kenan–Flagler Business event experiences, based in School. San Diego, Calif. meet basic human needs are an ideal testing ground for the rising middle classes in developing countries, the tar- content developing environmentally sustainable technologies gets of MNCs’ past emerging-market strategies. and products for the entire world. Now consider the 4 billion people in Tier 4, at the Furthermore, MNC investment at “the bottom of bottom of the pyramid. Their annual per capita income strategy strategy & competition the pyramid” means lifting billions of people out of — based on purchasing power parity in U.S. dollars — poverty and desperation, averting the social decay, polit- is less than $1,500, the minimum considered necessary ical chaos, terrorism, and environmental meltdown that to sustain a decent life. For well over a billion people — is certain to continue if the gap between rich and poor roughly one-sixth of humanity — per capita income is countries continues to widen. less than $1 per day. Doing business with the world’s 4 billion poorest Even more significant, the income gap between rich people — two-thirds of the world’s population — will and poor is growing. According to the United Nations, require radical innovations in technology and business the richest 20 percent in the world accounted for about models. It will require MNCs to reevaluate price– 70 percent of total income in 1960. In 2000, that figure performance relationships for products and services. It reached 85 percent. Over the same period, the fraction will demand a new level of capital efficiency and new of income accruing to the poorest 20 percent in the ways of measuring financial success. Companies will be world fell from 2.3 percent to 1.1 percent. forced to transform their understanding of scale, from a This extreme inequity of wealth distribution rein- 2 “bigger is better” ideal to an ideal of highly distributed forces the view that the poor cannot participate in the small-scale operations married to world-scale capabilities. global market economy, even though they constitute the In short, the poorest populations raise a prodigious majority of the population. In fact, given its vast size, new managerial challenge for the world’s wealthiest Tier 4 represents a multitrillion-dollar market. companies: selling to the poor and helping them According to World Bank projections, the population at improve their lives by producing and distributing prod- the bottom of the pyramid could swell to more than 6 ucts and services in culturally sensitive, environmentally billion people over the next 40 years, because the bulk of sustainable, and economically profitable ways. the world’s population growth occurs there. The perception that the bottom of the pyramid is Four Consumer Tiers not a viable market also fails to take into account the At the very top of the world economic pyramid are 75 growing importance of the informal economy among to 100 million affluent Tier 1 consumers from around the poorest of the poor, which by some estimates the world. (See Exhibit 1.) This is a cosmopolitan group accounts for 40 to 60 percent of all economic activity in issue 26 composed of middle- and upper-income people in developing countries. Most Tier 4 people live in rural developed countries and the few rich elites from the villages, or urban slums and shantytowns, and they usu- developing world. In the middle of the pyramid, in Tiers ally do not hold legal title or deed to their assets (e.g., 2 and 3, are poor customers in developed nations and dwellings, farms, businesses). They have little or no for- strategy+business strategy+business issue 26 Exhibit 1: The World Economic Pyramid Annual Per Capita Income* Tiers Population in Millions More Than $20,000 1 75–100 $1,500–$20,000 2 & 3 1,500–1,750 Less Than $1,500 4 4,000 * Based on purchasing power parity in U.S.$ Source: U.N. World Development Reports mal education and are hard to reach via conventional Institute for Policy Studies. So it is not surprising that distribution, credit, and communications. The quality MNCs’ views of business are conditioned by their and quantity of products and services available in Tier 4 knowledge of and familiarity with Tier 1 consumers. is generally low. Therefore, much like an iceberg with Perception of market opportunity is a function of the content only its tip in plain view, this massive segment of the way many managers are socialized to think and the ana- global population — along with its massive market lytical tools they use. Most MNCs automatically dismiss opportunities — has remained largely invisible to the the bottom of the pyramid because they judge the mar- strategy & competition corporate sector. ket based on income or selections of products and serv- Fortunately, the Tier 4 market is wide open for ices appropriate for developed countries. technological innovation. Among the many possibilities To appreciate the market potential of Tier 4, MNCs for innovation, MNCs can be leaders in leapfrogging to must come to terms with a set of core assumptions and products that don’t repeat the environmental mistakes of practices that influence their view of developing coun- developed countries over the last 50 years. Today’s tries. We have identified the following as widely shared MNCs evolved in an era of abundant natural resources orthodoxies that must be reexamined: and thus tended to make products and services that were • Assumption #1 The poor are not our target con- resource-intensive and excessively polluting. The United sumers because with our current cost structures, we can- States’ 270 million people — only about 4 percent of not profitably compete for that market. the world’s population — consume more than 25 per- • Assumption #2 The poor cannot afford and have cent of the planet’s energy resources. To re-create those no use for the products and services sold in developed 4 types of consumption patterns in developing countries markets. would be disastrous. • Assumption #3 Only developed markets appreci- We have seen how the disenfranchised in Tier 4 can ate and will pay for new technology. The poor can use disrupt the way of life and safety of the rich in Tier 1 — the previous generation of technology. poverty breeds discontent and extremism. Although • Assumption #4 The bottom of the pyramid is complete income equality is an ideological pipe dream, not important to the long-term viability of our business. the use of commercial development to bring people out We can leave Tier 4 to governments and nonprofits. of poverty and give them the chance for a better life is • Assumption #5 Managers are not excited by critical to the stability and health of the global economy business challenges that have a humanitarian dimension. and the continued success of Western MNCs. • Assumption #6 Intellectual excitement is in developed markets. It is hard to find talented managers The Invisible Opportunity who want to work at the bottom of the pyramid. Among the top 200 MNCs in the world, the over- Each of these key assumptions obscures the value at whelming majority are based in developed countries.
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