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

aspiring poor

This is a time for MNCs to look at globalization The lackluster nature of most MNCs’ emerging- of most MNCs’ The lackluster nature market economy for the first time. market a new capitalism. For strategies through lens of inclusive and persistence to com- companies with the resources pete at the bottom of the world economic pyramid, the and incal- profits, include growth, rewards prospective culable contributions to humankind. Countries that still to or products the modern infrastructure have don’t attacks in the United States last September. States attacks in the United does not change the past decade strategies over market which is in reality the magnitude of the opportunity, of source The real thought. much larger than previously few wealthy is not the in the developing promise market the emerging middle-income consumers: world, or even is the billions of It by C.K. Prahalad and Stuart L. Hart

of the Bottom

bring prosperity to the aspiring poor. bring to prosperity the aspiring poor.

opportunity for the world’s opportunity wealthiest for the world’s at the Low-income markets Low-income a present prodigious

companies companies — to seek their fortunes and Pyramid First, the prospect of millions of “middle-class” con- of millions of “middle-class” the prospect First,

sumers in developing countries, clamoring for products sumers in developing make matters To MNCs, was wildly oversold. from worse, the Asian and Latin American financial crises of emerging the attractiveness diminished greatly have As a consequence, many MNCs worldwide markets. risk–reward to rethink and began investments slowed could become This retreat for these markets. structures in the wake of the terrorist pronounced more even

With the end of the Cold War, the former Soviet and Latin China, India, as and its allies, as well Union invest- to foreign America, opened their closed markets ment in a cascading fashion. Although this significant new vast economic and social transformation has offered opportunities for multinational corporations growth to be realized. has yet (MNCs), its promise

The The Fortune

Illustration by Marco Ventura Ventura Marco Marco by by Illustration Illustration

su 26 issue strategy+business Now consider the 4 billion people in Tier 4, at the Tier consider the 4 billion people in Now rich significant, the income gap between more Even distribution rein- inequity of wealth This extreme that the bottom of the pyramid is The perception the rising middle classes in developing countries, the tar- the rising middle classes in developing strategies. past emerging-market gets of MNCs’ Their annual per capita income bottom of the pyramid. parity in U.S. dollars — power — based on purchasing necessaryis less than $1,500, the minimum considered a billion people — over well to sustain a decent life. For is one-sixth of humanity — per capita income roughly less than $1 per day. Nations, United to the According and poor is growing. in the world accounted for about the richest 20 percent 2000, that figure total income in 1960. In of 70 percent the same period, the fraction Over 85 percent. reached in the 20 percent of income accruing to the poorest to 1.1 percent. 2.3 percent world fell from the viewforces the poor cannot participate that in the they constitute the though even economy, global market size, its vast fact, given majority of the population. In market. a multitrillion-dollar 4 represents Tier the population at projections, Bank World to According than 6 to more the bottom of the pyramid could swell the bulk of because the next 40 years, billion people over occurs there. population growth the world’s also fails to take into account the not a viable market importance of the informal economy among growing some estimates which by of the poor, the poorest of all economic activity in accounts for 40 to 60 percent in rural 4 people live Tier countries. Most developing and they usu- villages, or urban slums and shantytowns, ally do not hold legal title or deed to their assets (e.g., little or no for- They have farms, businesses). dwellings, sor es f o r p

management,

egic t a r t s

Stuart Stuart L. Hart ([email protected]) of Sarah Sarah Graham Kenan Distinguished Scholar, and of the codirector Center for Enterprise at Sustainable the University of North Carolina’s Kenan–Flagler Business School. In short, the poorest populations raise a prodigious short, the poorest In Doing business with the world’s 4 billion poorest business with the world’s Doing Furthermore, MNC investment at “the bottom of at “the investment MNC Furthermore, At the very 75 At top of the world economic pyramid are around 1 consumers from Tier to 100 million affluent This is a cosmopolitan group 1.) Exhibit the world. (See composed of middle- and upper-income people in countries and the few the developed rich elites from Tiers the middle of the pyramid, in world. In developing nations and poor customers in developed 2 and 3, are Four Consumer Four Tiers new managerial challenge for the world’s wealthiest new managerial challenge for the world’s companies: selling to the poor and helping them and distributing prod- producing by their lives improve ucts and services environmentally in culturally sensitive, ways. sustainable, and economically profitable people — two-thirds of the world’s population — will of the world’s people — two-thirds in technology and business radical innovations require price– MNCs to reevaluate will require models. It and services. for products performance relationships It will demand a new of capital efficiency and new level will be ways of measuring financial success. Companies a their understanding of scale, from to transform forced to an ideal of highly distributed ideal “bigger is better” capabilities. small-scale operations married to world-scale the pyramid” means lifting billions of people out of means lifting billions of people the pyramid” polit- and desperation, averting the social decay, poverty that meltdown and environmental ical chaos, terrorism, is certain rich and poor to continue if the gap between countries continues to widen. meet basic human needs are an ideal testing ground for an ideal testing ground meet basic human needs are sustainable technologies environmentally developing world. for the entire and products C.K. Prahalad ([email protected]) is the Harvey C. Professor Fruehauf of Business Administration at the University of Michigan Business School, Ann Arbor. He is also the founder and chairman of Praja Inc., a pioneer company in interactive event based experiences, in San Diego, Calif.

content strategy & competition 2 strategy+business issue 26 content strategy & competition 4 Population in Millions Population 75–100 4,000 1,500–1,750 Intellectual excitement is in excitement Intellectual Managers are not excited by not excited are Managers The bottom of the pyramid is The poor are not our target con- The poor are Only developed markets appreci- markets developed Only The poor cannot afford and have The poor cannot afford Each of these key assumptions obscures the value at the value Each of these key assumptions obscures • Assumption #6 • #1 Assumption •#2 Assumption •#3 Assumption • Assumption #4 • Assumption #5 To appreciate the market potential of Tier 4, MNCs Tier potential of the market appreciate To not important to the long-term viability of our business. and nonprofits. 4 to governments Tier can leave We developed markets. It is hard to find talented managers is hard It markets. developed at the bottom of the pyramid. who want to work is like the story of the per- the bottom of the pyramid. It son who finds a $20 bill on the sidewalk. Conventional existed, economic wisdom suggests if the bill really picked it up! Like the $20 have someone would already business challenges that have a humanitarian dimension. business challenges that have ate and will pay for new technology. The poor can use ate and will pay for new technology. generation of technology. the previous Institute for Policy Studies. So it is not surprising that it is not surprising So Studies. for Policy Institute their by conditioned views of business are MNCs’ 1 consumers. Tier of and familiarity with knowledge opportunity of market is a function of the Perception to think and the ana- socialized way many managers are MNCs automatically dismiss lytical tools they use. Most judge the mar- the bottom of the pyramid because they and serv-ket based on income or selections of products countries. for developed ices appropriate assumptions and must come to terms with a set of core practices that influence their view coun- of developing as widely shared the following identified have We tries. orthodoxies must be reexamined: that can- we cost structures, sumers because with our current compete for that market. not profitably no use for the products and servicesno use for the products sold in developed markets. 1 4 Tiers 2 & 3 The World Economic Pyramid Economic The World

We have seen how the disenfranchised in Tier 4 can Tier in the disenfranchised seen how have We Fortunately, the Tier 4 market is wide open for 4 market Tier the Fortunately, Annual Per Capita Income* Annual Per Than $20,000 More $1,500–$20,000 Than $1,500 Less The Invisible The Opportunity Invisible Among the top 200 MNCs in the world, the over- countries. based in developed whelming majority are firms, U.S. corporations dominate, with 82; Japanese in to a list compiled second, according with 41, are D.C.–based Washington, the 2000 by December disrupt the way of life and safety of the rich in Tier 1 — Tier disrupt the way of life and safety of the rich in Although discontent and extremism. breeds poverty complete income equality is an ideological pipe dream, to bring people out development the use of commercial them the chance for a better life is and give of poverty critical to the stability and health of the global economy MNCs. Western and the continued success of technological innovation. Among the many possibilities Among technological innovation. to be leaders in leapfrogging MNCs can for innovation, mistakes of environmental the repeat don’t that products Today’s the last 50 years. over countries developed resources in an era of abundant natural MNCs evolved and servicesand thus tended to make products that were The United polluting. and excessively resource-intensive of 270 million people — only about 4 percent States’ than 25 per- population — consume more the world’s those re-create To energy resources. cent of the planet’s countries types of consumption patterns in developing would be disastrous. mal education and are hard to reach via conventional to reach hard are mal education and The quality and communications. distribution, credit, 4 Tier and servicesand quantity of products in available much like an iceberg with Therefore, is generally low. of the segment this massive only its tip in plain view, market massive global population — along with its largely invisible to the opportunities — has remained corporate sector. * Based on purchasing power parity in U.S.$ * Based on purchasing Reports Development U.N. World Source: Exhibit 1: Exhibit

su 26 issue strategy+business HLL’s new detergent, called Wheel, was formulated new called detergent, HLL’s close competitors in the and HLL are Nirma Today, Contrary assumptions, the poor can be a to popular has become one of the largest branded deter- Nirma and is aspiring to share the benefits share to and is aspiring MNCs entering for climate investment hospitable More from cooperation and more countries developing organizations nongovernmental profitable for market a huge untapped Tier 4 represents growth to substantially reduce the ratio of oil to water in the to substantially reduce to the fact that the poor often wash responding product, and other public water systems. their clothes in rivers and dis- marketing, the production, HLL decentralized the abundant labor to leverage tribution of the product sales channels quickly creating pool in rural India, people at thousands of small outlets where the through HLL also changed the the bottom of the pyramid shop. of its detergent business so it could intro- cost structure price point. Wheel at a low duce each, share market with 38 percent detergent market, intelligence a business to IndiaInfoline.com, according analysis of own service.research Unilever’s and market competition in the detergent business and HLL’s Nirma potential of the mar- profit about the more even reveals 4.) Exhibit (See ketplace at the bottom of the pyramid. very — especially if MNCs change market profitable 4 is not a market Tier their business models. Specifically, for the traditional pursuit of high margins; that allows and capital effi- volume by driven are instead, profits norms), current (by likely to be low are Margins ciency. who high. Managers but unit sales can be extremely margins will miss the opportunityfocus on gross at the and bottom of the pyramid; managers who innovate will be rewarded. focus on economic profit HLL, stimulated gent makers in the world. Meanwhile, and its changed business model, its emergent rival by and per year in revenues growth a 20 percent registered 1995 between per year in profits growth a 25 percent capital- market the same period, HLL’s and 2000. Over Innovation and MNC Implications in Tier 4 in Tier MNC Implications and Innovation

HLL, in typical MNC fashion, initially dismissed Furthermore, MNCs cannot exploit these new MNCs Furthermore, Deregulation and the diminishing role of governments of governments and the diminishing role Deregulation aid and international competition with intense combined overcapacity Global 1, 2, and 3 in Tiers urban centers overcrowded to migration discourage The need to populations rural for and services products create MNCs must Drivers of InnovationDrivers TV and informationto among the poor access Increased and services of many products aware Tier 4 is becoming MNCs for Implications Nirma’s strategy. However, as Nirma grew rapidly, HLL rapidly, grew as Nirma However, strategy. Nirma’s it could see its local competitor was winning in a market HLL saw its vulnerability Ultimately, had disregarded. 1995, the company responded and its opportunity: In drastically altering offering for this market, with its own its traditional business model. Hindustan Lever Ltd. (HLL), a subsidiary Lever of Great Hindustan the best- and widely considered PLC Unilever Britain’s among has been a pioneer managed company in India, at the bottom of the pyramid. MNCs exploring markets small HLL has served than 50 years, India’s more For the In to buy MNC products. elite who could afford Ltd., began offering deter- 1990s, a local firm, Nirma for poor consumers, mostly in ruralgent products areas. a new business system that created fact, Nirma In manufac- included a new formulation, low-cost product pack- special wide distribution network, turing process, pricing. and value aging for daily purchasing, Tier 4 Pioneers opportunities without radically rethinking how they go how opportunities without radically rethinking no means all) 3 suggests some (but by Exhibit to market. to new is required perspective an entirely where areas 4. Tier in markets profitable create bill, the bottom of the pyramid defies conventional bill, the bottom of the pyramid defies a large mean it isn’t managerial logic, but that doesn’t territoryand unexplored growth. for profitable and opportunities for of innovation Consider the drivers 2.) MNCs must rec- Exhibit 4. (See Tier companies in poses a major newthis market that challenge: ognize sustainability, cost, good quality, to combine low how and profitability. Exhibit 2: Exhibit

content strategy & competition 5 content strategy & competition 6 , commer- Profitability Views of Quality Views for harsh conditions conditions harsh for etc.) (heat, dust, • Investment intensity • Investment • Margins • Volume • New delivery formats • New delivery products of robust • Creation The Mystery of Capital: Why Capitalism of Capital: The Mystery

Sustainability Price Performance Price Commercial credit historically has been unavailable historically credit Commercial coun- of the poor in developing majority The vast to the poor so they can elevate credit Extending intensity • Product development • Product • Manufacturing • Distribution • Reduction in resource • Reduction in resource • Recyclability energy • Renewable Exhibit 3: the Bottom of the Pyramid for Strategies New cial — providing access to credit, and increasing the and increasing to credit, access providing cial — A fewcompa- farsighted of the poor. earning potential trail with startling- this to blaze begun already nies have results. ly positive had in poverty if those living Even to the very poor. cred- to get collateral it is hard access to a bank, without system. As Peruvian the traditional banking it from in his path- demonstrates de Soto economist Hernando work, breaking Else Everywhere and Fails West in the Triumphs economy. to building a market is central cial credit of mod- people has allowed in the U.S. to credit Access build their equity and make est means to systematically cars, and education. such as houses, major purchases, or extralegal economy, tries operate in the “informal” in securing legal title for since the time and cost involved is their assets or incorporation of their microenterprises govern- tried countries have Developing prohibitive. of the cycle the poor from mental subsidies to free able to if the poor were with little success. Even poverty, support to start small busi- government benefit from local money- from nesses, their dependence on credit it impossible to lenders charging usurious rates makes charge India, succeed. Local moneylenders in Mumbai, This means per day. rates of up to 20 percent interest Rs.100 ($2.08) in who borrows vendor that a vegetable Rs.120 ($2.50) in the evening. the morning must return is not a new economically themselves idea. Consider founded in 1851, pro- & Company, I.M. Singer how as a way for millions of women to purchase vided credit few those women could have of Very sewing machines. , nearly a billion people Each of these four elements demands innovation in Each of these four elements demands innovation Further, contrary investment conventional to more Further, Serving Tier 4 markets is not the same as serving 4 markets Tier Serving As the Unilever example makes clear, the starting clear, example makes As the Unilever Creating Buying Creating Power Labor Organization’s to the International According 2001 Report Employment World — roughly one-third of the world’s work force — are force work of the world’s one-third — roughly jobs that such low-paying or have either underemployed they cannot support or their families. themselves this above themselves poor elevate the world’s Helping desperation line is a business opportunity and to do well two interventions cru- are do so effectively, To do good. technology, business models, and management process- technology, es. And business leaders must be willing to experiment, new of sources locals, and create collaborate, empower wealth. and advantage competitive strategies, no firm can do this alone. Multiple players Multiple strategies, no firm can do this alone. author- including local governmental must be involved, commu- (NGOs), organizations ities, nongovernmental companies. Four nities, financial institutions, and other shaping aspirations, buying power, elements — creating local solutions — access, and tailoring improving are the 5.) Exhibit (See 4 market. Tier keys to a thriving existing markets better or more efficiently. Managers efficiently. better or more existing markets tailored infrastructure a commercial first must develop such an 4. Creating Tier to the needs and challenges of much like must be seen as an investment, infrastructure prod- in plants, processes, familiar investments the more ucts, and R&D. assumption must be that serving Tier 4 involves bring- 4 involves Tier that servingassumption must be of technology and a global resource ing together the best Cheap and low- conditions. local market base to address Tier The potential of not the goal. are quality products orienta- without an entrepreneurial 4 cannot be realized is to visu- strategic challenge for managers The real tion: exists only abject poverty where market an active alize to imagination and creativity takes tremendous It today. out of a completely infrastructure engineer a market sector. unorganized ization grew to $12 billion — a growth rate of 40 per- of 40 rate growth — a to $12 billion grew ization also has Unilever, company, parent HLL’s cent per year. in India. experience its subsidiary’s from benefited the principles (not business transported HLL’s Unilever a new detergent market to create or the brand) product brand has been the Ala where poor in Brazil, among the the has adopted important, Unilever a big success. More as a corporate strategic priority. bottom of the pyramid

su 26 issue strategy+business also . Sunday Times Sunday Sunday Times Sunday Computerization of micro- attached to every account to encourage poor customers to save. low, rates on deposits are Interest but superior to keeping cash in The a jar. is Bank that Standard reported for considering a loan program clients. low-income lending services not only makes effi- operation more the overall cient, but also makes it possible to Standard does not require a minimum income of does not require Standard Perhaps the most pertinent measure of Grameen the most pertinent measure Perhaps customers opening an AutoBank E account, although E account, customers opening an AutoBank who have income. People some regular they must have bank can open an account with a deposit of used a never and card issued an ATM are as little as $8. Customers of staff who speak a variety to use it by how shown African dialects. A small flat fee is charged for each ATM is purse” “savings transaction. An interest-bearing easy to assess. Historically, the bank was an entirely bank was the Historically, to assess. easy that undercut a structure operation, manual, field-based Telecom Grameen spin-offs such as Today, its efficiency. Shakti phone service) of village Grameen and (a provider helping are sources) energy of renewable (a developer to infrastructure build a technology Bank Grameen its online develops As the bank automate its processes. dramatical- increase should business model, profitability highlighting the importance of information technol- ly, revolution. of the microcredit ogy in the acceleration is the global explosion of institutional success Bank’s the around it has stimulated in microlending interest of the popula- 73 percent Africa, where South world. In R5,000 ($460) per month, accord- tion earns less than banking services retail study, Bank World ing to a 2001 becoming one of the most customers are for low-income 1994, In mass markets. and fast-growing competitive leading Africa’s Africa Ltd., of South Bank Standard volume-driven consumer bank, launched a low-cost, revenue E, to grow e-banking business, called AutoBank the Through banking services to the poor. providing by and 98 (ATMs) use of 2,500 automated teller machines has the largest now Standard E-centres, AutoBank and other under- townships Africa’s in South presence 2001, serviced of any domestic bank. As of April areas served customers nearly 3 million low-income Standard 60,000 customers per month, and is adding roughly Africa’s to South according Nirma HLL (Wheel)150 HLL (High-End Products) 18 100121 18 93 180 25 22 Nirma vs. HLL in India’s Detergent Market (1999) Market Detergent HLL in India’s Nirma vs.

In addition, Grameen Bank’s rate of return is not rate of return Bank’s addition, Grameen In With 1,170 branches, Grameen Bank today pro- Bank 1,170 branches, Grameen With Grameen Bank’s program is designed to addresses is designed program Bank’s Grameen The same logic applies on a much larger scale in much larger scale logic applies on a The same Total Sales ($ Million) Sales Total (%) Margin Gross ROCE (%) vides microcredit services than 40,000 villages, vides microcredit in more As of than half the total number in Bangladesh. more repay- a 95 percent had achieved Bank 1996, Grameen in the Indian ment rate, higher than any other bank the popularity of its services has subcontinent. However, local competitors, which has cut into also spawned more few the past years. its portfolio and shrunk over its profits the problems of extending credit to lowest-income cus- to lowest-income of extending credit the problems risk, and con- tomers — lack of collateral, high credit 2.3 of its percent Ninety-five tractual enforcement. women, who, as the traditional million customers are in rural communities, and entrepreneurs breadwinners for loans risks than men. Candidates better credit are and sup- evaluated thoroughly proposals their must have nonfamily members of the community. ported five by sales and service fre- people visit the villages The bank’s loans and the women who have to know getting quently, this In supposed to invest. which they are in the projects due diligence is accomplished without the lending way, mountain of paperwork common language and arcane West. in the Tier 4. Consider the experience of the Grameen Bank Grameen the experience of the 4. Consider Tier the world to apply one of the first in Ltd. in Bangladesh, banking. Started in commercial model a microlending then a pro- Yunus, Muhammad by ago 20 years just over Department at Chittagong fessor in the Economics a pioneered Bank Grameen Bangladesh, University, lending service thousands for the poor that has inspired servingof microlenders, in 25 million clients worldwide, the nations, including countries and wealthy developing Britain. and Great States United afforded the steep $100 price tag, but most could afford most could tag, but $100 price the steep afforded of $5 per month. a payment Source: Presentation by John Ripley, senior vice president, Unilever, Unilever, president, senior vice by John Ripley, Presentation Source: 10, 1999 of Management Meeting, August at the Academy Exhibit 4:

content strategy & competition 7 content strategy & competition 8 In the United States, microlending has also taken has microlending States, the United In beginning to offer banks are multinational Several For example, Unilever’s HLL subsidiary has tackled example, Unilever’s For and many other refrigeration, water, Electricity, like Citigroup. This would greatly expand the capital expand greatly This would like Citigroup. from pool the current beyond for microlending available governments. donors and urban neighborhoods. past decade in poor the over root formerly Corporation, the ShoreBank example, For of demonstrated the profitability has Bank, Shore South Side. South troubled in Chicago’s banking for the poor based in program a Grameen-like Enterprise, Project entrepreneurs. is aimed at minority City, York New servicesmicrobanking countries. in developing in Bangalore, for instance, is experimenting Citigroup, 24/7 services with India, customers with as little as a for very are positive. results $25 on deposit. Initial Shaping Aspirations 4, and Tier initiated in innovations product Sustainable consumer education, will not only through promoted the choices of people at the bottom influence positively the way reshape of the pyramid, but may ultimately in 20 years, Indeed, 1 live. Tier Americans and others in the early 4 provided Tier back to see that may look we for disruptive pull technologies that replaced market countries and unsustainable technologies in developed fortunes the advanced of MNCs with foresight. low-energy-consum- the lack of practical, inexpensive, laboratories developed HLL’s in India. ing refrigeration that allows to refrigeration approach a radically different to be transported the country across ice cream in stan- quantum allows The system trucks. nonrefrigerated dard and dangerous in electricity use and makes reductions As a bonus, the new unnecessary. polluting refrigerants system is cheaper to build and use. essential services all opportunities in developing are Light Electric countries. A U.S.-based NGO, the Solar adapted technology and (SELF), has creatively Fund financing to bring electrical serviceapplied microcredit villages in Africa and Asia who to people in remote otherwise would spend money to burn hazardous candles, wood, or dung for their light and kerosene, rural electrification system is based on cooking. SELF’s generation using renewable small-scale on-site power villagers the finan- loan fund gives A revolving resources. cial means to operate these electrical systems themselves, its founding in 1990, SELF has jobs. Since also creating Lanka, Nepal, Sri in China, India, launched projects development • Sustainable Shaping Aspirations • Consumer education Power Solutions innovation • Bottom-up development Tailoring Local Tailoring Creating Buying Creating • Access to credit to • Access • Targeted product • Targeted • Income generation • Income

links Ultimately, the development of an automated solu- the development Ultimately, To address these issues and accelerate the develop- address To At the 1999 Microcredit Summit, the United Summit, Microcredit the 1999 At Improving Access Improving • Communications • Distribution systems • Distribution tion for tracking and processing the millions of small tion for tracking and processing should be possible. If loans associated with microlending enough, and transaction costs can be reduced processing they can then be bundled together and sold in the sec- ondary financial institutions to multinational market ment of microlending, French banker Jacques Attali, the Attali, banker Jacques French ment of microlending, for Bank of the European founding president and a former chief and Development Reconstruction during the Mitterand François President aide of French site, Web Its Finance. PlaNet 1980s, has created thousands of microcredit links www.planetfinance.org, to help microbanks worldwide into a network groups costs. solutions and lower share Nations, in conjunction with several major MNCs, such in conjunction with several Nations, set a goal of Company, Monsanto and Inc. as Citigroup to the 100 million poorest available making basic credit 2005. Unfortunately, the year families in the world by by the success of this undertaking has been slowed and poor high transaction costs, a lack of automation, in information and communications infrastructures rural areas. reach many more people — lending money to individ- many more reach Since address. uals with no collateral and no formal and little paperwork, AutoBank’s overhead is lower there those at tradition- than lower 30 to 40 percent costs are al branches. Exhibit 5: Exhibit The Commercial Infrastructure at the Bottom of at the Bottom of Infrastructure The Commercial the Pyramid

su 26 issue strategy+business MNCs can also play a role in distributing the prod- MNCs can also play a role The Body Shop of CEO Anita Roddick, Corporation, in coop- the Starbucks recently, More single biggest may be the poverty Information jeans components (denim, zipper, rivets, and a patch) rivets, jeans components (denim, zipper, a net- distributed through priced at about $6. Kits were of local tailors, many in small rural of thousands work them motivated and villages, whose self-interest towns now jeans are Tuf & Ruf kits extensively. the to market easily surpassing Levi’s the largest-selling jeans in India, the U.S. and Europe. and other brands from giving 1 markets, Tier in 4 enterprises Tier ucts of first links to bottom-of-the-pyramid enterprises their it is possible through Indeed, international markets. bases to partnerships traditional knowledge to leverage sustainable, and in some cases superior, more produce 1 customers. Tier consumption by for products this of demonstrated the power PLC, International “trade her company’s strategy in the early 1990s through local raw material and of sourcing program not aid” indigenous people. from products eration with Conservation has pioneered International, farmers in the from directly coffee to source a program coffee These farms grow of Mexico. Chiapas region using shade, which preserves songbird beans organically, to U.S. con- the product markets habitat. Starbucks coffee; the Mexican premium sumers as a high-quality, arrange- the sourcing farmers benefit economically from the business ment, which eliminates intermediaries from the local also improves relationship This direct model. 1 Tier of the understanding and knowledge farmers’ and its customer expectations. market than half More sustainable development. to roadblock to make a single phone call. of humanity has yet Bringing Bringing modern IT equipment to Tier 4 tele-education, telemedicine, microbanking, telemedicine, tele-education, and agricultural extension services. villages villages makes such possible applications as Creative local companies, however, lead the way in local companies, however, Creative The success of SELF and other NGOs focused on The success of SELF and other NGOs effective rural distribution. In India, for instance, India, ruraleffective distribution. In new deliveryArvind an entirely has introduced Mills fifth-largest system for blue jeans. Arvind, the world’s denim domestic found Indian denim manufacturer, not were the jeans $40 to $60 a pair, sales limited. At to the masses, and the existing distribution affordable Arvind and villages. So only a few towns system reached kit of jeans — a ready-to-make Tuf” & “Ruf introduced Because Tier 4 communities are often physically and are 4 communities Tier Because systems and economically isolated, better distribution the of essential to development communication links are of the large emerging- bottom of the pyramid. Few systems that reach distribution countries have market the continued than half of the population. (Hence more consumers on local products dependence of the poorest and services and moneylenders.) As a consequence, few designed their distribution systems to cater MNCs have to the needs of poor rural customers. Improving Access Improving small-scale distributed energy solutions has begun to small-scale distributed energy solutions companies such as the Western attract the attention of Inc. (fuel cells) and Honeywell Inc. Power Plug U.S.’s into a They see the logic in moving (microturbines). 4 rather than trying to force Tier in wide-open market for the into applications their technology prematurely incumbents and institutions where markets, developed billion potential cus- several With stand in their way. in such innova- the world, investments tomers around worthtions should be well it. Vietnam, Indonesia, Brazil, Uganda, Tanzania, South Tanzania, Uganda, Brazil, Indonesia, Vietnam, Islands. Africa, and the Solomon

content strategy & competition 9 content strategy & competition 10 Bringing such technology to villages in Tier 4 makes 4 Tier in to villages such technology Bringing they must in the 21st century, to thrive MNCs are If do this, MNCs must combine their advanced To prod- of personal care 30 percent in India, Already affordable, through credit vehicles, at the village level. village level. at the vehicles, credit through affordable, including tele-educa- number of applications, possible a extension agricultural microbanking, tion, telemedicine, services, all of which monitoring, environmental and development, economic microenterprise, help to spur named This project, markets. and access to world pilot sites in today’s from to spread Lincos, is expected the Caribbean to Asia, Africa, and Central America and Central Europe. Local Solutions Tailoring the combined sales of the enter the newAs we century, of total nearly 30 percent top 200 MNCs equal world’s these same corpora- Yet domestic product. world gross labor of the world’s less than 1 percent tions employ 100 largest economies, 51 are the world’s Of force. Third of scores Yet economies internal to corporations. absolute economic stag- suffered have countries World nation or decline. widely. it more economic base and share their broaden the gap in narrowing role active They must play a more if these This cannot be achieved and poor. rich between for only so-called global products companies produce They must 1 consumers. Tier consumption primarily by local solu- leverage and cultures, local markets nurture on the levels at the lowest tions, and generate wealth in, rather than extracting wealth pyramid. Producing will be the guiding principle. these countries from, packag- technology with deep local insights. Consider the disposable 1 countries have Tier ing. Consumers in (e.g., 10-pound income and the space to buy in bulk Club) and like Sam’s superstores of detergent from boxes They use their spending money to shop less frequently. 4 consumers, strapped for Tier “inventory convenience.” but cash and with limited living space, shop every day, to stock up on house- afford They can’t not for much. about what they buy; hold items or be highly selective they look for single-serve consumers packaging. But the benefit of experimenta- with small means also have they large quantities of product, by tion. Unburdened can switch brands every buy. time they ucts and other consumables, such as shampoo, tea, and sold in single-servecold medicines, are packages. Most in innovation Without priced at Rs. 1 (about 1¢). are in a moun- could result this trend packaging, however, Recognizing an enormous business and develop- Recognizing New ventures such as CorDECT in India and such as CorDECT in India ventures New Other entrepreneurs have introduced fax services, fax introduced have entrepreneurs Other Ten years ago, Sam Pitroda, currently chairman and currently Pitroda, ago, Sam years Ten ment opportunity, Hewlett-Packard Company has artic- Hewlett-Packard ment opportunity, e-inclusion,” with a focus on ulated a vision of “world and services products, appropriate technology, providing As part of this strategy, poor. to the needs of the world’s Lab with the MIT Media into a venture HP has entered of Development for Sustainable and the Foundation Maria Jose former President Costa Rica — led by and implement “telecen- — to develop Olsen Figueres cen- These digital town areas. for villages in remote ters” modern information technology equipment ters provide connection at a price that is with a high-speed Internet Celnicos Communications in Latin America are devel- are Celnicos Communications in Latin America models suit- oping information technology and business of the of the bottom ed to the particular requirements models (e.g., Internet shared-access Through pyramid. technology and focused infrastructure, kiosks), wireless the dramatically reducing companies are development, and data example, voice cost of being connected. For $850 to $2,800 connectivity typically costs companies world; CorDECT has reduced per line in the developed this cost to less than $400 per line, with a goal of $100 per line, which would bring telecommunications within of virtually everyone world. reach in the developing and some are experimenting with low-cost e-mail and experimenting with low-cost and some are dra- These communication links have access. Internet they the way villages function and how matically altered of the country connected to the rest and the world. are connections, the emergence of global broadband With 4 Tier opportunities in for information-based business will expand significantly. CEO of London-based Worldtel Ltd., a company creat- Ltd., a company Worldtel CEO of London-based to fund telecom a telecommunications union ed by with India came to in emerging markets, development original concept was telephones.” His the idea of “rural an entre- operated by a community telephone, to have who charged a fee for the use (usually a woman) preneur for as wages kept a percentage of the telephone and parts most from of Today, maintaining the telephone. in the world. it is possible to call anyone India, However, where telephones and Internet connections do connections Internet and telephones where However, possible to imag- it is first time in history, exist, for the uniting the world’s market interconnected ine a single, truly in the quest for rich and poor sustainable econom- transform the “digi- could The process ic development. dividend.” a “digital into tal divide”

su 26 issue strategy+business MNCs, with their Building a complex commercial Building MNCs can transfer knowledge from MNCs can transfer knowledge MNCs can be nodes for building the Not only can MNCs leverage learning can MNCs leverage only Not MNCs are best positioned to unite the range of best positioned to unite the range MNCs are Few local entrepreneurs have the managerial or have local entrepreneurs Few • Transfer. • Resources. • Leverage. • Bridging. Yet someone must take the lead to make this revo- someone must take Yet emotionally if multinational managers are Even infrastructure for the bottom of the pyramid is a infrastructure task. Developing management-intensive and resource- and services sustainable products environmentally channels and Distribution significant research. requires and to develop expensive are communication networks sustain. this infrastructure. to create technological resources one market to another — from China to Brazil or India China to Brazil another — from to one market and others have Citigroup, Unilever, — as Avon, to have demonstrated. Although practices and products to servebe customized local needs, that is an advantage base, have unique global knowledge not easily accessible to local entrepreneurs. from the bottom of the pyramid, but they also have the the bottom of the pyramid, but they also have from year since 1974. The per capita availability of milk in of milk capita availability The per 1974. since year per day to 213 grams 107 grams from has grown India in 20 years. Putting It All Together improving shaping aspirations, buying power, Creating local solutions — the four elements access, and tailoring the bottom of the for infrastructure of the commercial in one leverages intertwined. Innovation pyramid are only one of in the others. Corporations are innovation together with NGOs, must work the actors; MNCs and communities. local and state governments, Why should it be The question is, lution happen. MNCs? that large corporations have persuaded, it is not obvious small, local organizations. MNCs over advantages real of able to beat the cost or responsiveness be may never local entre- empowering Indeed, village entrepreneurs. 4 mar- Tier and enterprises is key to developing preneurs for compelling reasons several are there kets. Still, on this course: MNCs to embark commercial infrastructure, providing access to knowl- providing infrastructure, commercial edge, managerial imagination, and financial resources. NGOs, MNCs as catalysts, well-intentioned Without and entrepreneurs, communities, local governments, agencies will continue to multilateral development even to the flounder in their attempts to bring development bottom. 4 market. Tier the to develop actors required Twenty years ago, milk was in short years supply in India. Twenty The entire value chain is carefully managed, from chain is carefully value The entire Unlike the large industrial dairy the large industrial West, farms of the Unlike The development of India’s milk industry has many of India’s The development For MNCs, the best approach is to marry the best approach MNCs, capa- local For Today, India is the world’s largest producer of milk. largest producer is the world’s India Today, Dairy Development National to India’s According dairy now network cooperative the country’s Board, claims 10.7 million individual farmer member–owners, 170 milk- societies, includes 96,000 village-level covers than 285 dis- unions, and operates in more producer per 4.7 percent has increased production tricts. Milk the village-based milk production to the world-scale the village-based milk production pro- cooperative The Khira District facilities. processing vides such servicesto the farmers as veterinary and care manages the distribu- also The cooperative cattle feed. cheese, butter, milk, milk powder, tion of pasteurized The uniqueness of the food, and other products. baby origi- is its blending of decentralized Amul cooperative and nation with the efficiencies of a modern processing mar- previously As a result, distribution infrastructure. earning steady incomes and ginal village farmers are participants. market being transformed into active in India, milk originates in many small villages. Villagers milk originates in many small villages. in India, each and buffaloes or cows only two to three may own collection cen- bring their milk twice a day to the village paid everyThey are day for the milk they deliver, ter. vans Refrigerated based on fat content and volume. it transport plants, where the milk to central processing cars then transport Railroad the milk to is pasteurized. major urban centers. lessons for MNCs. The transformation began around The transformation lessons for MNCs. locat- Cooperative, Milk 1946, when the Khira District plant processing set up its own ed in the state of Gujarat, the and created Kurien Verghese under the leadership of in the brand Amul, today one of the most recognized country. bilities global best practices. with and market knowledge entering an MNC involves whether an initiative But 4, the development Tier from 4 or an entrepreneur Tier business models must same: New the principles remain and lifestyles of local people. An not disrupt the cultures is global knowledge combination of local and effective system. Western of the needed, not a replication tain of solid waste. Dow Chemical Company and Company Chemical waste. Dow of solid tain an organic plastic with experimenting are Cargill Inc. packaging Such be totally biodegradable. that would but it could also revolu- 4, Tier in advantages clearly has world pyramid. at all four tiers of the markets tionize

content strategy & competition 11 content strategy & competition 12 It is neces- It • Conduct R&D focused on the poor. Finally, research must identify useful principles and research Finally, sary to conduct R&D and market research focused on sary research and market to conduct R&D and by region by of the poor, the unique requirements Africa, for example, China, and North India, In country. safe water for drinking, to provide on ways research cooking, washing, and cleaning is a high priority. solutions to seek to adapt foreign must also Research example, a daily dosage of vitamins can local needs. For prod- of food and beverage be added to a wide variety distribution and brand corporations that have ucts. For world, such as the developing throughout presence the bottom of the pyramid offers Coca-Cola Company, as water and for such products untapped market a vast nutritionals. 4, sig- Tier local practices. In potential applications from one gen- is transmitted orally from nificant knowledge of traditions but respectful eration to the next. Being them scientifically can lead to newwilling to analyze CEO, Ms. creative Shop’s The Body knowledge. build a local base of political support. As Monsanto and build a local base of political support. As Monsanto the establishment Company can attest, Electric General community leaders, and local of a coalition of NGOs, is interests authorities that can counter entrenched such a coalition can be a very slow essential. Forming agenda; MNCs have has a different player Each process. aspira- shared to understand these agendas and create The local is less onerous: China, this problem tions. In they can so also the local entrepreneurs, are bureaucrats and their village, easily see the benefits to their enterprise Brazil, and countries such as India In or province. town, discussion, such alignment does not exist. Significant benefits to each information sharing, the delineation of and sensitivity to local debates is necessary. constituency, Empowering the Empowering is needed, not system. a Western New New business models must not disrupt Many of the innovations for the bottom of the innovations Many combination combination of local and global knowledge local cultures and lifestyles. An and local cultures effective lifestyles. • Build a local base of support. MNCs must build an organizational infrastructure It is imperative, however, that managers recognize however, is imperative, It To overcome comparable problems, MNCs must MNCs comparable problems, overcome To to address opportunity at the bottom of the pyramid. to address This means building a local base of support, reorienting new forming R&D to focus on the needs of the poor, and rein- intensity, employment alliances, increasing organizational ele- These five cost structures. venting and mutually reinforcing. clearly interrelated ments are capacity to transfer innovations up-market all the way to up-market capacity to transfer innovations for ground 4 is a testing Tier seen, have we 1. As Tier sustainable living. 4 Tier in the of business leadership required the nature tolerance for ambiguity, imagination, Creativity, arena. and courage may be as stamina, passion, empathy, important and knowl- as analytical skill, intelligence, of the com- edge. Leaders need a deep understanding in the plexities and subtleties of sustainable development the inter- managers must have 4. Finally, Tier context of with a wide skills to work personal and intercultural range of organizations and people. can be adapted for use in the resource- and energy-intensivecan be adapted for use in the resource- world. of the developed markets poor threatens the existing power structure. Local oppo- structure. the existing power poor threatens found in as Cargill Inc. sition can emerge very quickly, offices were Cargill’s business in India. its sunflower-seed twice burned, and the local politicians accused the firm Cargill locally based seed businesses. But of destroying in farmer edu- investments Cargill’s Through persisted. cation, training, and supply of farm inputs, farmers have of per acre their productivity significantly improved Cargill is seen as the friend of the farmer. Today, land. opposition has vanished. Political

su 26 issue strategy+business MNCs accus- Managers must dra- Managers . services can be provided Such M . P . to 5 M . A . and at their homes. Cash-dispensing M . P • Increase employment intensity. • Reinvent cost structures. machines can be placed in safe areas — police stations machines can be placed in safe areas at a time and place convenient to the poor consumer — at a time and place convenient after 8 matically reduce cost levels relative to those in Tier 1. To 1. Tier to those in relative cost levels matically reduce and services MNCs products create the poor can afford, 10 per- their costs significantly — to, say, must reduce this cannot be achieved But today. cent of what they are devel- to product approaches fine-tuning the current by business The entire and logistics. opment, production, with a focus on functionality, must be rethought process example, financial services For itself. not on the product branch offices need not be distributed only through 9 open from MNC managers must learn to work with people who MNC managers must learn to work the same agenda or the same educational may not have The challenge as they do. and economic background — diversity manage and learn from to how is and payoff economic, intellectual, racial, and linguistic. tomed to Tier 1 markets think in terms of capital inten- 1 markets Tier tomed to the opposite logic Exactly sity and labor productivity. number of people at the the vast 4. Given Tier applies in and distribution bottom of the pyramid, the production case of as in the jobs for many, provide must approach an employed Arvind jeans from It Mills: Tuf & Ruf distributors, army of local tailors as stockers, promoters, though the cost of the jeans even and service providers, As Arvind demon- that of Levi’s. below was 80 percent large numbers of peo- strated, MNCs need not employ but the organizational on their payroll, ple directly intensity employment 4 must increase Tier model in them to groom (and incomes) among the poor and become new customers. MNCs have conventionally MNCs have •alliances. new Form MNCs must develop research facilities in emerging research MNCs must develop Given the difficulty and complexity of constructing the difficulty Given markets such as China, India, Brazil, Mexico, and Africa, Mexico, Brazil, as China, India, such markets is an Unilever although few a big effort made have so far. centers in research it operates highly regarded exception; dedicated researchers than 400 more employing India, markets.” of “India-like to the problems Roddick, built a business predicated on understanding built a business predicated Roddick, example, she For the basis for local rituals and practices. observed some African women use slices of pineap- that the surface,ple to cleanse their skin. On this practice research appears to be a meaningless ritual. However, away that cleared in pineapple ingredients active showed dead skin cells better than chemical formulations. business models dependent on relationships with business models dependent on relationships (e.g., large infrastruc- national or central governments alliances at the envision more we development), ture succeed in such alliances, To level. local and regional formed alliances solely to break into new now markets; formed alliances solely to break enter- their alliance strategies. By they need to broaden MNCs 4 markets, Tier ing into alliances to expand in and local culture countries’ gain insight into developing their own time, MNCs improve the same At knowledge. or exclusive preferred They may also secure credibility. three foresee We or raw material. access to a market Alliances with local kinds of important relationships: Milk (such as the Khira District firms and cooperatives alliances with local and international Cooperative); alliance with Conservation (like Starbucks’s NGOs in coffee); and alliances with governments International alliance in Costa Rica recent & Company’s (e.g., Merck for bio- preservation in exchange to foster rain forest rights). prospecting

content strategy & competition 13 content strategy & competition 14 (ITDG Reprint No. 02106 Business Week Business + (Alfred A. Knopf, 1999) A. Knopf, (Alfred , July–August 1998; , July–August (Basic Books, 2000) (Basic , January–February 1997; , January–February The Lexus and the Olive Tree: Understanding Tree: The Lexus and the Olive The Mystery of Capital: Why Capitalism Triumphs in Triumphs Why Capitalism of Capital: The Mystery Whose Reality Counts? Putting First Last First Counts? Putting Whose Reality Harvard Business Review Business Harvard Development as Freedom Development (Farrar, Straus and Giroux, 1999) and Giroux, Straus (Farrar, It is tragic that as Western capitalists we have capitalists we Western that as is tragic It only begun to scratch the sur- have we Collectively, and a few MNCs such as Starbucks, Dow, Hewlett- Dow, a fewand as Starbucks, MNCs such & Johnson DuPont, Citigroup, Unilever, Packard, global business part- and ABB, and Novartis, Johnson, Council for Business World such as the nerships to date, NGOs But Development. Business Sustainable than the fewerbusinesses with far and local resources more made and have innovative been more MNCs have these markets. in developing progress that the rich will be servedimplicitly assumed the by will and NGOs while governments corporate sector, implicit This the poor and the environment. protect in MNCs, Managers than most realize. divide is stronger and NGO activists all suffer from public policymakers, A huge opportunity of roles. this historical division lies this code — linking the poor and the rich in breaking around organized in a seamless market the world across and development. the concept of sustainable growth opportunityface of what is the biggest potential market sector Those in the private in the history of commerce. capi- inclusive who commit their companies to a more their opportunity the and share talism have to prosper a very less fortunate. In those who are with prosperity sense, the fortune at the bottom of the pyramid rep- real the loftiest of our global goals. resents Hernando de Soto, de Soto, Hernando Supplement, December 18, 2000 December Supplement, Chambers, Robert 1997) Publishing, Thomas L. Friedman, Globalization Amartya Sen, Else Everywhere and Fails West the Resources first articulated been The concepts in this article in 1998, and have were information, more For paper. for discussion in a working made available contact the authors. World,” for a Sustainable Strategies Greening: Hart, “Beyond Stuart Review Business Harvard www.hbsp.harvard.edu/hbr/index.html Lieberthal, and Kenneth “The of Corporate End C.K. Prahalad Imperialism,” www.hbsp.harvard.edu/hbr/index.html or an Opportunity?” a Problem Divide the Digital “Is So far, three kinds of organizations have led the kinds of organizations have three far, So New commerce in Tier 4 will not be restricted to 4 will not be restricted Tier in commerce New Yet the products and services currently offered to and services the products offered currently Yet Lowering cost structures also forces a debate on a debate also forces cost structures Lowering way: local firms such as Amul and Grameen Bank; way: local firms such as Amul and Grameen SELF, Institute, Resources World such as the NGOs Defense The Environmental Alliance, The Rainforest and Conservation among others; International, Fund, businesses filling such basic needs as food, textiles, and of the pyramid is waiting for high- The bottom housing. tech businesses such as financial services, cellular fact, computers. In telecommunications, and low-end for many emerging disruptive technologies (e.g., fuel satellite-based telecommunications, cells, photovoltaics, and nano- thin-film microelectronics, biotechnology, to be technology), the bottom of the pyramid may prove early market. the most attractive Tier 1 consumers are not appropriate for Tier 4, and Tier for not appropriate are 1 consumers Tier fun- approaches will require accessing this latter market 2 and 3. Tiers in those even from damentally different are cost, and distribution credit, Changes in technology, large firms with global reach Only critical prerequisites. managerial, and financial the technological, have needed to of innovations into the well to dip resources this opportunity. from profit A Common Cause who make up the The emergence of the 4 billion people also opportunity for MNCs. It is a great 4 market Tier and civil a chance for business, government, represents we Indeed, society to join together in a common cause. pursuing strategies for the bottom of the that believe of proponents the conflict between pyramid dissolves trade and global capitalism on one hand, and envi- free and social sustainability on the other. ronmental ways to reduce investment costs. This will inevitably This will costs. investment ways to reduce technology to develop use of information lead to greater As noted, village- and distribution systems. production transforming the pattern of already based phones are world. Add developing the communications throughout a whole new have way of commu- and we the Internet, in poor, economic development nicating and creating mar- use of IT will emerge in these Creative rural areas. the costs associat- lower kets as a means to dramatically and services,ed with access to products and distribution, management. credit and post offices. Iris recognition used as a security device as a security used recognition Iris offices. and post personal-identification for the tedious could substitute identification. for card number and strategy+business magazine is published by Booz Allen Hamilton. To subscribe, visit www.strategy-business.com or call 1-877-829-9108