Improving the Uves of the billions of peopie at the bottom

of the economic pyramid is a nobie endeavor

It can aiso be a lucrative one.

Serving the World's Poor,Profitably

by C.K. Prahalad and Allen Hammond

CONSIDER THIS BLEAK VISION

of tbe world 15 years from now:The global economy recovers

from its current stagnation but growthremains anemic. Deflation continues tothreaten, the gap between rich and poorkeeps widening, and incidents of eco-nomic chaos, governmental collapse,and civil war plague developing regions.Terrorism remains a constant threat,diverting significant public and privateresources to security concerns. Opposi-tion to the global market system inten-sifies. Multinational companies find itdifficult to expand, and many becomerisk averse, slowing investment and puli-ing back from emerging markets.

Now consider this much brighter sce-nario: Driven by private investment andwidespread entrepreneurial activity, theeconomies of developing regions growvigorously, creating jobs and wealth andbringing hundreds of millions of new

48

consumers into the global marketplaceevery year. China, India, Brazil, and,gradually. South Africa become new en-gines of global economic growth, pro-moting prosperity around the world.The resulting decrease in poverty pro-duces a range of social benefits, helpingto stabilize many developing regionsand reduce civil and cross-border con-flicts. The threat of terrorism and war re-cedes. Multinational companies expandrapidly in an era of intense innovationand competition.

Both of these scenarios are possible.Which one comes to pass vdll be deter-mined primarily by one factor: the will-ingness of big, multinational companiesto enter and invest in the world's poor-est markets. By stimulating commerceand development at the bottom of theeconomic pyramid, MNCs could radi-cally improve the lives of billions of peo-ple and help bring into being a more

stable, less dangerous world. Achievingthis goal does not require multination-als to spearhead global social develop-ment initiatives for charitable purposes.They need only act in their own self-interest, for there are enormous busi-ness benefits to be gained by enteringdeveloping markets. In fact, many in-novative companies - entrepreneurialoutfits and large, established enterprisesalike - are already serving the world'spoor in ways that generate strong rev-enues, lead to greater operating efficien-cies, and uncover new sources of inntvvation. For these companies-and thosethat follow their lead - building busi-nesses aimed at the bottom of the pyr-amid promises to provide importantcompetitive advantages as the twenty-first century unfolds.

Big companies are not going to solvethe economic ills of developing coun-tries by themselves, of course. It will also

HARVARD BUSINESS REVIEW

B I G P I C T U R E

take targeted financial aid from the de-veloped world and improvements in thegovernance of the developing nationsthemselves. But it's clear to us that pros-perity can come to the poorest regionsonly through the direct and sustainedinvolvement of multinational compa-nies. And it's equally clear that the multi-nationals can enhance their own pros-perity in the process.

Untapped PotentialEveryone knows that the world's poorare distressingly plentiful. Fully 65% ofthe world's population earns less than$2,000 each per year-that's 4 billionpeople. But despite the vastness of thismarket, it remains largely untapped bymultinational companies. The reluc-tance to invest is easy to understand.Companies assume that people withsuch low incomes have little to spend ongoods and services and that what they

do spend goes to basic needs like foodand shelter. They also assume that vari-ous barriers to commerce - corruption,illiteracy, inadequate infrastructure,currency fluctuations, bureaucratic redtape - make it impossible to do businessprofitably in these regions.

But such assumptions refiect a nar-row and largely outdated view of thedeveloping world. The fact is, manymultinationals already successfully dobusiness in developing countries (al-though most currently focus on sell-ing to the small upper-middle-class seg-ments of these markets), and theirexperience shows that the barriers tocommerce - although real - are muchlower than is typically thought. More-over, several positive trends in develop-ing countries -from political reform,to a growing openness to investment, tothe development of low-cost wirelesscommunication networks-are reducing

the barriers further while also providingbusinesses with greater access to eventhe poorest city slums and rural areas.Indeed, once the misperceptions arewiped away, the enormous economicpotential that ties at the bottom of thepyramid becomes clear.

Take the assumption that the poorhave no money. It sounds obvious onthe surface, but it's wrong. While indi-vidual incomes may be low, the aggre-gate buying power of poor communi-ties is actually quite large. The averageper capita income of villagers in ruralBangladesh, for instance, is less than$200 per year, but as a group they areavid consumers of telecommunicationsservices. Grameen Telecom's villagephones, which are owned by a single en-trepreneur but used by the entire com-munity, generate an average revenue ofroughly $90 a month-and as much as$1,000 a month in some large villages.

SEPTEMBER 2002 49

BIC PICTURE • Serving the World's Poor, Profitably

Customers of these village phones, whopay cash for each use, spend an averageof 7% of their income on phone ser-vices-a far higher percentage than con-sumers in traditional markets do.

It's also incorrect to assume that theptx)r are too concerned with fulfillingtheir basic needs to "waste" money onnonessentlal goods. In fact, the pooroften do buy "luxury" items. In theMumbai shantytown of Dharavi, forexample, 85% of households own a tele-vision set, 75% own a pressure cookerand a mixer, 56% own a gas stove, and21% have telephones. That's becausebuying a house in Mumbai, for mostpeople at the bottom of the pyramid, isnot a realistic option. Neither is gettingaccess to running water. They acceptthat reality, and rather than saving fora rainy day, they spend their income onthings they can get now that improvethe quality of their lives.

Another big misperception aboutdeveloping markets is that the goodssold there are incredibly cheap and,hence, there's no room for a new com-petitor to come in and turn a profit. Inreality, consumers at the bottom of thepyramid pay much higher prices formost things than middle-class consum-ers do, which means that there's a realopportunity for companies, particularlybig corporations with economies ofscale and efficient supply chains, to cap-ture market share by offering higherquality goods at lower prices wbilemaintaining attractive margins, in fact,throughout the developing world, ur-ban slum dwellers pay, for instance, be-tween four and 100 times as much fordrinking water as middle- and upper-class families. Food also costs 20% to30% more in the poorest communitiessince there is no access to bulk discountstores. On the service side of the econ-omy, local moneylenders charge interestof 10% to 15% per day, with annual ratesrunning as higb as 2,000%. Even thelucky small-scale entrepreneurs who

get loans from nonprofit microfinanceinstitutions pay between 40% and 70%interest per year-rates that are illegal inmost developed countries. (For a closerlook at how the prices of goods comparein rich and poor areas, see the exhibit"The High-Cost Economy of the Poor.")

It can also be surprisingly cheap tomarket and deliver products and ser-vices to the world's poor. That's becausemany of them live in cities that aredensely populated today and will be

Markets at the bottom

of the economic pyramid

are fundamentally

new sources of growth

for multinationals. And

because these markets are

in the earliest stages, growth

can be extremely rapid.

even more so in the years to come. Fig-ures from the UN and the World Re-sources Institute indicate that by 2015,in Africa, 225 cities will each have pop-ulations of more than i million; in LatinAmerica, another 225; and in Asia, 903.The population of at least 27 cities willreach or exceed 8 million. Collectively,the 1,300 largest cities will account forsome 1.5 billion to 2 billion people,roughly half of whom will be bottom-of-the-pyramid (BOP) consumers nowserved primarily by informal economies.Companies that operate in these areaswill have access to millions of potentialnew customers, who together have bil-lions of dollars to spend. The poor inRio de Janeiro, for instance, have a totalpurchasing power of $1.2 billion ($600per person). Shantytowns in Johannes-burg or Mumbai are no different.

The slums of these cities already havedistinct ecosystems, with retail shops.

CK. Prahalad is the Harvey C Fruehauf Professor of Business Administration at the Uni-versity of Michigan Business School in Ann Arbor and the chairman ofPraja, a softwarecompany in San Diego. Allen Hammond is the CIO, senior scientist, and director of theDigital Dividend project at the World Resources Institute in Washiiïgton, DC.

small businesses, schools, clinics, andmoneylenders. Although there are fewreliable estimates of the value of com-mercial transactions in slums, businessactivity appears to be thriving. Dhar-avi-covering an area of just 435 acres-boasts scores of businesses rangingfrom leather, textiles, plastic recycling,and surgical sutures to gold jewelry, il-licit liquor, detergents, and groceries.The scale of the businesses varies fromone-person operations to bigger, well-recognized producers of brand-nameproducts. Dharavi generates an esti-mated $450 million in manufacturingrevenues, or about $i million per acreof land. Established shantytowns in SaoPaulo, Rio, and Mexico City are equallyproductive.The seeds of a vibrant com-mercial sector have been sown.

While the rural poor are naturallyharder to reach than the urban poor,they also represent a large untapped op-portunity for companies. Indeed, 60% ofIndia's GDP is generated in rural areas.The critical barrier to doing business inrural regions is distribution access, nota lack of buying power. But new infor-mation technology and communica-tions infrastructures - especially wire-less-promise to become an inexpensiveway to establish marketing and distri-bution channels in these communities.

Conventional wisdom says that peo-ple in BOP markets cannot use such ad-vanced technologies, but that's just an-other misconception. Poor rural womenin Bangladesh have had no difficultyusing GSM cell phones, despite neverbefore using phones of any type. InKenya, teenagers from slums are beingsuccessfully trained as Web page de-signers. Poor farmers in El Salvador useteiecenters to negotiate the sale of theircrops over tbe Internet. And women inIndian coastal villages have in less thana week learned to use PCs to interpretreal-time satellite images showing con-centrations of schools offish in the Ara-bian Sea so they can direct their hus-bands to the best fishing areas. Clearly,poor communities are ready to adoptnew technologies that improve theireconomic opportunities or their qualityof life. The lesson for multinationals;

50 HARVARD BUSINESS REVIEW

Serving the World's Poor, Profitably • BIG PICTURE

Don't hesitate to deploy advanced tech-nologies at the bottom of the pyramidwhile, or even before, deploying themin advanced countries.

A final misperception concerns thehighly charged issue of exploitation ofthe pcxïr by MNCs. The informal econo-mies that now serve poor communitiesare full of inefficiencies and exploitiveintermediaries. So if a microfinance in-stitution charges 50% annual interestwhen the alternative is either i,ooo%interest or no loan at all, is that exploit-ing or helping the poor? If a large finan-cial company such as Citigroup were touse its scale to offer microloans at 20%,is that exploiting or helping the poor?The issue is not just cost but also qual-ity-quality in the range and fairness offinancial services, quality of food, qual-ity of water. We argue that when MNCsprovide basic goods and services that re-duce costs to the poor and help improvetheir standard of living-while generat-ing an acceptable return on invest-ment-the results benefit everyone.

The Business Case

The business opportunities at the bot-tom of the pyramid have not gone un-noticed. Over the last five years, we haveseen nongovernmental organizations(NGOs), entrepreneurial start-ups, anda handful of forward-thinking multi-nationals conduct vigorous commercialexperiments in poor communities. Theirexperience is a proof of concept: Busi-nesses can gain three important advan-tages by serving the poor-a new sourceof revenue growth, greater efficiency,and access to innovation. Let's look atexamples of each.

Top-Line Growth. Growth is an im-portant challenge for every company,but today it is especially critical for verylarge companies, many of which appearto have nearly saturated their existingmarkets. That's why BOP markets rep-resent such an opportunity for MNCs:They are fundamentally new sources ofgrowth. And because these markets arein the earliest stages of economic devel-opment, growth can be extremely rapid.

Latent demand for low-priced, high-quality goods is enormous. Consider

the reaction when Hindustan Lever, theIndian subsidiary of Unilever, recentlyintroduced what was for it a new prod-uct category-candy-aimed at the bot-tom of the pyramid. A high-quality con-fection made with real sugar and fruit,the candy sells for only about a penny aserving. At such a price, it may seem likea marginal business opportunity, but injust six months it became the fastest-growing category in the company's port-folio. Not only is it profitable, but thecompany estimates it has the potentialto generate revenues of $200 million

to English proficiency to vocationalskills. The products are expected to bethe largest single revenue generatorfor the company and its franchisees overthe next several years.' Credit and fi-nancial services are also in high demandamong the pi>or. Citibank's ATM-basedbanking experiment in India, called Su-vidha, for instance, which requires aminimum deposit of just $25, enlisted150,000 customers in one year in thecity of Bangalore alone.

Small-business services are also pop-ular in BOP markets. Centers run in

The World Pyramid

Most companies target consumers at the upper tiers of the economic pyramid,

completeiy overlooking the business potential at its base. But though they may

each be earning the equivalent of less than $2,000 a year, the people at the

bottom of the pyramid make up a colossal market-4 billion strong-the vast

majority of the world's population.

purchasing power parity(in U.S. dollars)

>$20,000 100

$2,000-20,000 2,000

<$2,000

population (in millions)

per year in India and comparable mar-kets in five years. Hindustan Lever hashad similar successes in India with low-priced detergent and iodized salt. Be-yond generating new sales, the companyis establishing its business and its brandin a vast new market

There is equally strong demand foraiïordable services. TARAhaat, a start-upfocused on rural India, has introduceda range of computer-enabled educationservices ranging from basic IT training

Uganda by the Women's InformationResource Electronic Service (WIRES)provide female entrepreneurs with in-ft>rmation on markets and prices, as wellas credit and trade support services,packaged in simple, ready-to-use for-mats in local languages. The centers areplanning to offer other small-businessservices such as printing, faxing, andcopying, along with access to account-ing, spreadsheet, and other software. InBolivia, a start-up has partnered with

SEPTEMBER 2002 51

BIG PICTURE • Serving the World's Poor, Profitably

the Bolivian Association of EcologicalProducers Organizations to oifer busi-ness information and communicationsservices to more than 25,000 small pro-ducers of ecoagricultural products.

It's true that some services simply can-not be offered at a low-enough cost tobe profitable, at least not with tradi-tional technologies or business models.Most mobile telecommunications pro-viders, for example, cannot yet prof-itably operate their networks at afford-able prices in the developing world. Oneanswer is to find alternative technology.A microfinance organization in Bolivianamed PRODEM, for example, usesmultilingual smart-card ATMs to sub-stantially reduce its marginal cost percustomer. Smart cards store a custom-er's personal details, account numbers,transaction records, and a fingerprint,allowing cash dispensers to operatewithout permanent network connec-tions - which is key in remote areas.What's more, the machines offer voicecommands in Spanish and several localdialects and are equipped with touchscreens so that PRODEM's customerbase can be extended to illiterate andsemiliterate people.

Another answer is to aggregate de-mand, making the community-not theindivldual-the network customer. Gyan-doot, a start-up in the Dhar district ofcentral India, where 60% of the popula-tion falls below the poverty level, illus-trates the benefits of a shared accessmodel. The company has a network of39 Internet-enabled kiosks that providelocal entrepreneurs with Internet andtelecommunications access, as well aswith governmental, educational, andother services. Each kiosk serves 25 to 30surrounding villages; the entire networkreaches more than 600 villages and overhalf a million people.

Networks like these can be usefulchannels for marketing and distributingmany kinds of low-cost products andservices. Aptech's Computer Educationdivision, for example, has built Its ownnetwork of 1,000 learning centers inindia to market and distribute Vidya, acomputer-training course specially de-signed for BOP consumers and available

52

in seven Indian languages. Pioneer Hi-Bred, a DuPont company, uses Internetkiosks in Latin America to deliver agri-cultural information and to interactwith customers. Earmers can report dif-ferent crop diseases or weather condi-tions, receive advice over the wire, andorder seeds, fertilizers, and pesticides.This network strategy increases bothsales and customer loyalty.

Reduced Costs. No less importantthan top-line growth are cost-saving op-portunities. Outsourcing operations tolow-cost labor markets has, of course,long been a popular way to containcosts, and it has led to the increasingprominence of China in manufacturingand India in sofrware. Now, thanks tothe rapid expansion of high-speed digi-tal networks, companies are realizingeven greater savings by locating suchlabor-intensive service functions as callcenters, marketing services, and back-office transaction processing in devel-oping areas. For example, the nearly 20companies that use OrphanlT.com'saffiliate-marketing services, providedvia its telecenters in India and the Phil-ippines, pay one-tenth the going rate

for similar services in the United Statesor Australia. Venture capitalist VinodKhosla describes the remote-servicesopportunity this way: "1 suspect that by2010, we will be talking about [remoteservices] as the fastest-growing part ofthe world economy, with many tril-lions of dollars of new markets created."Besides keeping costs down, outsourc-ing jobs to BOP markets can enhancegrowth, since job creation ultimatelyincreases local consumers' purchasingpower.

But tapping into cheap labor pools isnot the only way MNCs can enhancetheir efficiency by operating in devel-oping regions. The competitive neces-sity of maintaining a low cost structurein these areas can push companies todiscover creative ways to configure theirproducts, finances, and supply chains toenhance productivity. And these discov-eries can often be incorporated backinto their existing operations in devel-oped markets.

For instance, companies targeting theBOP market are finding that the sharedaccess model, which disaggregates accessfrom ownership, not only widens their

The High-Cost Economy of the Poor

When we compare the costs of essentials in Dharavi.a shantytown of more than

1 million people in the heart of Mumbai, India, with those of Warden Road, an

upper-class community in a nice Mumbai suburb, a disturbing picture emerges.

Clearly, costs could be dramatically reduced if the poor could benefit from the

scope, scale, and supply-chain efficiencies of large enterprises, as their middle-

class counterparts do. This pattern is common around the world, even in de-

veloped countries. For instance, a similar, if less exaggerated, disparity exists

between the inner-city poor and the suburban rich in the United States.

Cost Dharavi WardenRoad

Povertypremium

credit(annual interest)

municipal-gradewater (per cubic meter)

phone call (per minute)

diarrhea medication

rice (per kilogram)

600%-! ,000%

$1.12

$0.04-$0.05

$20

$0,28

12%-,8%

$0.03

$0,025

$2

$0.24

53X

37X

1.8X

10X

1.2X

HARVARD BUSINESS REVIEW

customer base but increases asset pro-ductivity as well. Poor people, ratherthan buyingtheirown computers, inter-net connections, cell phones, refrigera-tors, and even cars, can use such equip-ment on a pay-per-use basis. Typically,the providers of such services get con-siderably more revenue per dollar of in-vestment in the underlying assets. Oneshared Internet line, for example, canserve as many as 50 peopie, generatingmore revenue per day than if it werededicated to a single customer at a flatfee. Shared access creates the opf>ortu-nity to gain far greater returns from allsorts of infrastructure investments.

In terms of finances, to operate suc-cessfully in BOP markets, managersmust also rethink their business met-rics - specifically, the traditional focuson high gross margins. In developingmarkets, the profit margin on individualunits will always be low. What reallycounts is capital efficiency-getting thehighest possible returns on capital em-ployed (ROCE). Hindustan Ixver, for in-stance, operates a $2.6 billion businessportfolio with zero working capital.Thekey is constant efforts to reduce capitalinvestments by extensively outsourc-ing manufacturing, streamlining supplychains, actively managing receivables,and paying close attention to distrib-utors' performance. Very low capitalneeds, focused distribution and tech-nology investments, and very large vol-umes at low margins lead to very highROCE businesses, creating great eco-nomic value for shareholders. It's amodel that can be equally attractive indeveloped and developing markets.

Streamlining supply chains often in-volves replacing assets with informa-tion. Consider, for example, the expe-rience of ITC, one of India's largestcompanies. Its agribusiness division hasdeployed a total of 970 kiosks serving600,000 farmers who supply it with soy,coffee, shrimp, and wheat from 5,000villages spread across India. This kioskprogram, called e-Choupal, helps in-crease the fanners' productivity by dis-seminating the latest information onweather and best practices in farming,and by supporting other services like

soil and water testing, thus facilitatingthe supply of quality inputs to both thefanners and iTC. The kiosks also serveas an e-procurement system, helpingfarmers eam higher prices by minimiz-ing transaction costs involved in mar-keting farm produce. The head of (TC'sagribusiness reports that the company'sprocurement costs have fallen sincee-Choupal was implemented. And that'sdespite paying higher prices to its farm-ers: The program has enabled the com-pany to eliminate multiple transpor-tation, bagging, and handling steps -from farm to local market, from marketto broker, from broker to processor -that did not add value in the chain.

Innovation. BOP markets are hot-beds of commercial and technologicalexperimentation. The Swedish wirelesscompany Ericsson, for instance, has de-veloped a small cellular telephone sys-tem, called a MiniGSM,that local oper-ators in BOP markets can use to offercell phone service to a small area at aradically lower cost than conventionalequipment entails. Packaged for easyshipment and deployment, it providesstand-alone or networked voice and datacommunications for up to 5,000 userswithin a 35-kiIometer radius. Capitalcosts to the operator can be as low as $4per user, assuming a shared-use modelwith individual phones operated by localentrepreneurs. The MIT Media Lab, incollaboration with the indian govern-ment, is developing low-cost devicesthat allow people to use voice com-mands to communicate - without key-boards - with various Internet sites inmultiple languages. These new access de-vices promise to be far less complex thantraditional computers but would per-form many of the same basic functions.^

As we have seen, connectivity is a bigissue for BOP consumers. Companiesthat can find ways to dramatically lowerconnection costs, therefore, will havea very strong market position. And thatis exactly what the Indian companyn-Logue is trying to do. It connects hun-dreds of franchised village kiosks con-taining both a computer and a phonewith centralized nodes that are, in turn,connected to the national phone net-

OxfordManagementChanging Minds...

LeadersTalkLeader-shipTop Executives

Speok Their Minds

MEREDITH D.

ASHBY and

STEPHEN A. MILES

SM.« 0I9-5ISÏB3-2Sepiïiïib« 2002

Tbi CEOi fren tk« warM'i tap lOMpaniBi ipiak:

Heidnck and Struggles • American Express • FedEx • Hizec •

PepsiCo • Cap Gemini • China Telecom • PeopleSofi • Procter &

Gambte • Siemens • Bonk oí America • And 30 more...

"Whether you are leading a transformotion of yourbusiness, identifying your next generation of lead-ers, or working to energize your organization'sculture. Leaders Talk Leadership provides valuableobservations and advice from leadership's top echelon. —Jonathan Ward, Choicman and Œ0,

Ihe ServiceMaster Company

... and Changing Directions

FastForwrardOfgonizational

Change in 100

DaysELSPETH MURRAY

•ii>HtiT«iii DIME Olli till I and PETER

RICHARDSON

S29.9S 0-19.S1S311 1

(Werkbo<A¡SI!.« 0I9SISÎ1!)!OKember 1002

FasI Forward presents G powerful dynamic model ofrapid change, whether you are trying to be the firstto morket or whether you must execute a turn-around in 100 days. This book ond accompanyingworkbook will show you how to build speed andmomentum within organizations, inspire employees, and slosh the time it takes to moke major deci-sions and deploy resources.

OXfORDUNIVERSITY PRESS

To order, call 1-800-451-7556 or

visit www.oup-usa.org

SEPTEMBER 2002

BIG PICTURE • Serving the World's Poor, Profitably

work and the Internet Each node, alsoa fr^anchise, can serve between 30,000and 50,000 customers, providing phone,e-mail, Internet services, and relevantlocal information at affordable pricesto villagers in rural India. Capital costsfor the n-Logue system are now about$400 per wireless "line" and are prt>jected to decline to $ioo-at least tentimes lower than conventional telecomcosts. On a per-customer basis, the costmay amount to as little as $i.̂ This ap-pears to be a powerful model for endingrural isolation and linking untappedrural markets to the global economy.

New wireless technologiesare likely to spur furtherbusiness model innovationsand lower costs even more.Ultrawideband, for exam-ple, is currently licensed inthe United States only forlimited, very low-power ap-plications, in part becauseit spreads a signal acrossalready-crowded portionsof the broadcast spectrum.In many developing coun-tries, however, the spec-trum is less congested. Infact, the U.S.-based Dandin Group is al-ready building an ultrawideband com-munications system for the Kingdomof Tonga, whose population of about100,000 is spread over dozens of is-lands, making it a test bed for a next-generation technology that could trans-form the economics of Internet access.

E-commerce systems that run overthe phone or the Internet are enor-mously important in BOP markets be-cause they eliminate the need for layersof intermediaries. Consider how the U.S.start-up Voxiva has changed the wayinformation is shared and business istransacted in Peru. The company part-ners with Telefónica, the dominant localcarrier, to offer automated business ap-plications over the phone. The inexpen-sive services include voice mail, dataentry, and order placement; customerscan check account balances, monitor de-livery status, and access prerecorded in-formation directories. According to theBoston Consulting Group, the Peruvian

Ministry of Health uses Voxiva to dis-seminate information,take pharmaceu-tical orders, and link health care workersspread across 6,000 offices and clinics.Microfinance institutions use Voxiva toprocess loan applications and commu-nicate with borrowers. Voxiva offersWeb-based services, tot), but far more ofits potential customers in Latin Americahave access to a phone.

E-commerce companies are not theonly ones turning the limitations ofBOP markets to strategic advantage.A lack of dependable electric powerstimulated the UK-based start-up Free-

play Group to introducehand-cranked radios inSouth Africa that sub-sequently became pop-ular with hikers in theUnited States. Similarbreakthroughs are beingpioneered in the use ofsolar-powered devicessuch as battery chargersand water pumps. InChina, where pesticidecosts have often limitedthe use of modem agri-

cuitural techniques, thereare now 13,000 small farmers - morethan in the rest of the world combined-growing cotton that has been geneti-cally engineered to be pest resistant.

Strategies for ServingBOP MarketsCertainly, succeeding in BOP marketsrequires multinationals to think cre-atively. The biggest change, though, hasto come in the attitudes and practices ofexecutives. Unless CEOs and other busi-ness leaders confront their own precon-ceptions, companies are unlikely to mas-ter the challenges of BOP markets. Thetraditional workforce is so rigidly con-ditioned to operate in higher-marginmarkets that, without formal training, itis unlikely to see the vast potential ofthe BOP market The most pressingneed, then, is education. Perhaps MNCsshould create the equivalent of thePeace Corps; Having young managersspend a couple of formative years inBOP markets would open their eyes to

the promise and the realities of doingbusiness there.

To date, few multinationals have de-veloped a cadre of people who are com-fortable with these markets. HindustanLever is one of the exceptions. The com-pany expects executive recruits to spendat least eight weeks in the villages ofIndia to get a gut-level experience of In-dian BOP markets. The new executivesmust become involved in some com-munity project-building a road, clean-ing up a water catchment area, teachingin a school, improving a health clinic.The goal is to engage with the local pop-ulation. To buttress this effort, Hindu-stan Lever is initiating a massive pro-gram for managers at all levels - fromthe CEO down - to reconnect withtheir poorest customers. They'll talkwith the pot>r in both rural and urbanareas, visit the shops these customersfrequent, and ask them about their ex-perience with the company's productsand those of its competitors.

In addition to expanding managers'understanding of BOP markets, com-panies will need to make structuralchanges. To capitalize on the innovationpotential of these markets, for exam-ple, they might set up R&D units in de-veloping countries that are specificallyfocused on local opportunities. WhenHewlett-Packard launched its e-Inclusiondivision, which concentrates on ruralmarkets, it established a branch of itsfamed HP Labs in India charged withdeveloping products and services ex-plicitly for this market Hindustan Levermaintains a significant R&D effort inIndia, as well.

Companies might also create venturegroups and intemal investment fundsaimed at seeding entrepreneurial effortsin BOP markets. Such investments reapdirect benefits in terms of business ex-perience and market developmentThey can also play an indirect but vitalrole in growing the overall BOP marketin sectors that will ultimately benefitthe multinational. At least one majorU.S. corporation is planning to launchsuch a fund, and the G8's Digital Op-portunity Task Force is propt)sing a sim-ilar one focused on digital ventures.

54 HARVARD BUSINESS REVIEW

MNCs should also consider creating abusiness development task force aimedat these markets. Assembling a diversegroup of people from across the corpo-ration and empowering it to functionas a skunk works team that ignoresconventional dogma will likely lead to

should look beyond businesses to NGOsand community groups. They are keysources of knowledge about customers'behavior, and they often experiment themost with new services and new deliv-ery models. In fact, of the social enter-prises experimenting with creative uses

To operate successfully in developing markets, managers

must rethink their business metrics-specifically,the traditional focus on high gross margins.

greater innovation. Companies thathave tried this approach have been sur-prised by the amount of interest sucha task force generates. Many employ-ees want to work on projects that havethe potential to make a real differencein improving the Uves of the poor.When Hewlett-Packard announced itse-Inclusion division, for example, it wasoverwhelmed by far more volunteersthan it could accommodate.

Making internal changes is impor-tant, but so is reaching out to externalpartners. Joining with businesses thatare already established in these marketscan be an effective entry strategy, sincethese companies will naturally under-stand the market dynamics better. Inaddition to limiting the risks for eachplayer, partnerships also maximize theexisting infrastructure - both physicaland social. MNCs seeking partners

of digital technology that the DigitalDividend Project Clearinghouse tracked,nearly 80% are NGOs. In Namibia, forinstance, an organization called School-Net is providing low-cost, alternativetechnology solutions - such as solarpower and wireless approaches-toschtxils and community-based groupsthroughout the country. SchoolNet iscurrently linking as many as 35 newschools every month.

Entrepreneurs also will be criticalpartners. According to an analysis byMcKinsey & Company, the rapid growthof cable TV in India-there are 50 mil-lion connections a decade after intro-duction - is largely due to small entre-preneurs. These individuals have beenbuilding the last mile of the network,typically by putting a satellite dish ontheir own houses and laying cable to con-nect their neighbors. A note of caution,

Sharing Intelligence

What creative new approaches to serving the bottom-of-the-pyramid markets havedigital technologies made possible? Which sectors or countries show the mosteconomic activity or the fastest growth? What new business models show promise?What kinds of partnerships-for funding, distribution, public relations-have beenmost successful?

The Digital Dividend Project Clearinghouse (digitaldividend.org) helps answerthose types of questions. The Web site tracks the activities of organizations thatuse digital tools to provide connectivity and deliver services to underserved popu-lations in developing countries. Currently, it contains information on 700 activeprojects around the world. Maintained under the auspices of the nonprofit WorldResources Institute, the site lets participants in different projects share experi-ences and swap knowledge with one another. Moreover, the site provides data fortrend analyses and other specialized studies that facilitate market analyses, localpartnerships, and rapid, low-cost learning.

SEPTEMBER 2002

**A POWERFUL &

REVOLUTIONARY

APPROACH—*

"NPB offersnumerous goldennuggets..."

"...a must read foranyone interestedin making apositive, effectiveand meaningfulimpact withinthe social sector."

"She has veryeffectivelycombined the twoconcepts ofphilanthropy andcompetition."

Bronfman

Gates

Milken

Monaghan

Soros

Spielberg

Steinhardt

7 Capitalist Philanthropists

7 Wisdom Points

7 Educational Components

New PhilanthropyBenchmarking

Wisdom for the Passionate

Kristína Anna KazarianVisit United University Press at:

www.unitedu.com/npb.htmi

Now, Harvard BusinessReview reprints helpyou convey the right

message to importantclients and employees.

InwentoryMonagemeni

I

From single-article reprints to cloth boundarticle collections. Harvard Business Reviewcustomiied reprints are an excellent way toensure your company's message will be noticed.

Put your name on customized Harvard

Business Review reprints and collections.

When you add your tiamc and logo to Harvard

Business Review article reprints and collections,

you combine the prestige of your company's

name with the power oí new ideas from leading

managers and business thinkers.

Customized reprints are an excellent way to:

• Offer useful business information in ilin>ct

mail, training programs, or seminars.

• Dißercnüate your company from your

competitors.

• Project an informed and innovative image.

• Open doors for your sales representatives.

• Gain new customers and boost sales.

Customizing reprints is easy,

cost-effective, and quick.

Avail^e in many st^es and formats to suit your

needs, customized materials can be delivered in as

little as two weeks. Por information, please contact:

Frank Tamoshunas, Director of Special Sales

Phone: 617-783-7626 Pax: 617-783-7658

Email:ftamosbunas@hbsp.harvard.edu

T H E P O W E R O F

I D E A S A T W O R K

6 1 7 - 7 8 3 - 7 6 2 6

however. Entrepreneurs in BOP marketslack access to the advice, technical help,seed funding, and business support ser-vices available in the industrial world.So MNCs may need to take on mentor-ing roles or partner with local businessdevelopment organizations that canhelp entrepreneurs create investmentand partnering opportunities.

It's worth noting that, contrary topopular opinion, women play a signif-icant role in the economic develop-ment of these regions. MNCs, there-fore, should pay particular attention towomen entrepreneurs. Women are alsolikely to play the most critical role inproduct acceptance not only because oftheir childcare and household manage-ment activities but also because of thesocial capital that they have built up intheir communities. Listening to and ed-ucating such customers is essential forsuccess.

Regardless of the opportunities, manycompanies will consider the bottom ofthe pyramid to be Xoo risky. We've shownhow partnerships can limit risk; anotheroption is to enter into consortia, imag-ine sharing the costs of building a ruralnetwork with the communications com-pany that would operate it, a consumergoods company seeking channels to ex-pand its sales, and a bank that is financ-ing the construction and wants to makeloans to and collect deposits from ruralcustomers.

Investing where powerful synergiesexist will also mitigate risk. The GlobalDigital Opportunity Initiative, a part-nership of the Markle Foundation andthe UN Development Programme, willhelp a small number of countries im-plement a strategy to harness the powerof information and communicationstechnologies to increase development.The countries will be chosen in partbased on their interest and their will-ingness to make supportive regulatoryand market reforms. To concentrate re-sources and create reinforcing effects,the initiative will encourage interna-tional aid agencies and global compa-nies to assist with implementation.

All of the strategies we've outlinedhere will be of little use, however, unless

the external barriers we've touched on-poor infrastructure, inadequate con-nectivity, corrupt intermediaries, andthe like - are removed. Here's wheretechnology holds the most promise. In-formation and communications tech-nologies can grant access to otherwiseisolated communities, provide market-ing and distribution channels, bypassintermediaries, drive down transactioncosts, and help aggregate demand and

buying power. Smart cards and otheremerging technologies are inexpensiveways to give poor customers a secureidentity, a transaction or credit history,and even a virtual address - prerequi-sites for interacting with the formaleconomy. That's why high-tech com-panies aren't the only ones that shouldbe interested in closing the global digi-tal divide; encouraging the spread oflow-cost digital networks at the bottomof the pyramid is a priority for virtuallyall companies that want to enter andengage with these markets. Improvedconnectivity is an important catalyst formore effective markets, which are criti-cal to boosting income levels and accel-erating economic growth.

Moreover, global companies stand togain from the effects of network expan-sion in these markets. According to Met-calfe's Law, the usefulness of a networkequals the square of the number ofusers. By the same logic, the value andvigor of the economic activity that willbe generated when hundreds of thou-sands of previously isolated rural com-munities can buy and sell from one an-other and from urban markets willincrease dramatically-tothe benefit ofall participants.

HARVARD BUSINESS REVIEW

Since BOP markets require significantrethinking of managerial practices, it islegitimate for managers to ask: Is itworth the effort?

We think the answer is yes. For onething, big corporations should solve bigproblems-and what is a more pressingconcern than alleviating the povertythat 4 billion people are currently miredin? It is hard to argue that the wealth oftechnology and talent within leadingmultinationals is better allocated toproducing incremental variations of ex-isting products than to addressing thereal needs-and real opportunities-atthe bottom of the pyramid. Moreover,through competition, multinationalsare likely to bring to BOP markets alevel of accountability for performanceand resources that neither internationaldevelopment agencies nor national gov-ernments have demonstrated duringthe last 50 years. Participation by MNCscould set a new standard, as well as anew market-driven paradigm, for ad-dressing poverty.

But ethical concerns aside, we'veshown that the potential for expandingthe bottom of the market is just toogreat to ignore. Big companies need tofocus on big market opportunities ifthey want to generate real growth. It issimply good business strategy to be in-volved in large, untapped markets thatoffer new customers, cost-saving oppor-tunities, and access to radical innova-tion. The business opportunities at thebottom of the pyramid are real, and theyare open to any MNC willing to engageand leam. ^

1. Andru'w Lawlor, Caitlin Peterson, and VivekSandell, "Catalyzing Rural Development: TARA-haat.com" (World Resources Institute, July 2tx)i).

2. Michael Best and Colin M. Maclay,"CommunityInternet Access in Rural Areas: Solving the Eco-nomic Sustainability Puzzle," The Global Intbrnia-tion Technology Rc[)ort 2001-2002: Readiness fortbe Networked World, ed., Geoffrey Kirkman (Ox-ford University Press, 2(H)2), available on-line athttpv'Mww.t;id.harvard.cdu/cr/gitrr_o3O2O2.html.

3. Joy Howard, Erik Simanis, and Chads Simms,"Sustainable Deployment for Rural Connectivity:The n-Logue Model" (World Resources Institute,July 2{X)i).

Reprint R0209CTo order reprints, see the last pageof Executive Summaries.

SEPTEMBER 2002

COLUMBIABUSINESS

SCHOOL

Learning that erformance®

Columbia Executive EducationWe set the global standard for success—for individuals and organizations.

Cutting-edge program designs and an active learning approach create a results-

oriented environment unmatched in the worid. Our commitment to our clients' needs

has helped us to achieve the # 1 ranking in executive education for three consecutive

years (Financial Times. 2000, 2001 and 2002). We give you the ideas and tools you need to

power your performance.

JJPCOMING COURSES AND DATES

Gnü> CreatingBreakthrough Strategy[December 1-6!

Executive DevelopmentProgram: The Transitionto Gênerai Management[November 3-15]

Leading and ManagingPeople[December 15-20]

Leading Strategic Growthand Change[November 10-15]

Marketing Management[December 8-13]

Cn^ New ProductDeveiopment andinnovation[October 16-181

Negotiation andDecision-MakingStrategies[December 16-17]

Finance and Accountingfor the NonfinanciaiExecutive[October 14-18]

Mergers and Acquisitions[October 16-18]

WWW.GSB.COLUMBIA.EDU/EXECED800-692-3932 EXT. 167212-854-3395 EXT. 167

Harvard Business Review Notice of Use Restrictions, May 2009

Harvard Business Review and Harvard Business Publishing Newsletter content on EBSCOhost is licensed for

the private individual use of authorized EBSCOhost users. It is not intended for use as assigned course material

in academic institutions nor as corporate learning or training materials in businesses. Academic licensees may

not use this content in electronic reserves, electronic course packs, persistent linking from syllabi or by any

other means of incorporating the content into course resources. Business licensees may not host this content on

learning management systems or use persistent linking or other means to incorporate the content into learning

management systems. Harvard Business Publishing will be pleased to grant permission to make this content

available through such means. For rates and permission, contact permissions@harvardbusiness.org.