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Bottom of the PyramidStrategies:Exploitation or a Win-Win
Solution?March 14, 2007Matt EvansWiam HasanainLorin May Melissa Ong
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Overview
Defining the Bottom of thePyramid
The Great DebateOpportunitiesRisks & Challenges
Guidelines and Leading PracticesConclusionAppendix
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Defining the Bottom of thePyramid: A Visual
Representation
Source: Prahalad, C.K. and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy+business, Issue 26, f irst quarter 2002
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Source: Bonsall, Amy, et al., Turning Poverty Into Opportunity As A Means for Prosperity, DLN White Paper, November 2005
Defining the Bottom of thePyramid: Changing Attitudes
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Modern View Incorporates Both
HistoricView
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Overview
Defining the Bottom of thePyramid
The Great DebateRisks & ChallengesOpportunities
Guidelines and Leading PracticesConclusionAppendix
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The Great Debate:Win-Win or Misguided
Strategy?Latent market forgoods and services
Large growthopportunity, due tosize of BOP
Catalyst foreconomicdevelopmentthrough providingaffordable productsand services
Poor lack income and jobs; should produce
before consume
Vulnerable to poorpurchasing decisions;income should be spenton shelter not ice cream.
Sale of MNC productsdoes not clearly improvesocial indicators
MNC profits flow abroad,do not help local
Win-WinWin-Win MisguideMisguidedd
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Case Study: BOP StrategyGone Wrong at NestleProject : In 1970s, Nestle began marketing infantformula to mothers in the developing world, with theargument that bottled milk is better for infantchildren.
Assumptions : Sterile water and bottles, no dilution.Impact : Babies using Nestles product in developingcountries were 25X more likely to die of diarrhea,and mothers developed an addiction to the productafter prolonged use stopped lactation.
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Case Study: BOP StrategyGone Wrong at Nestle
In addition to the incorrect assumption aboutsterile water, Nestle used questionable marketingtactics with BOP consumers:
Health agencies condemned Nestle formarketing instant infant formula in developingcountries.Nestles marketing implied that Western womensubstituted mothers milk with formula.Promoting infants milk as a product that wasmore beneficial to both mother and child thannatural breast milk.Clearly violated the WHO/UNICEFs InternationalCode of Marketing Breast-Milk Substitutes.
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Overview
Defining the Bottom of thePyramid
The Great DebateRisks & ChallengesOpportunities
Guidelines and Leading PracticesConclusionAppendix
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Risks & Challenges:
Exposure to newpolitical and economicrisksResources, capabilitiesand knowledge of the
complexities andsubtleties of sustainabledevelopment arerequired.Consumers cant afforddifferentiated productsCompeting with local
business can threatenthe existing powerstructure.
Market size unclear:estimates range from$0.3 trillion to $13trillion.
Prahalad uses purchasing power parityand assumes 4 billion BOP spending$4/day to estimate $13 trillion.Aneel uses financial exchange rates(that MNCs would use to expatriateprofits) and assumes 2.7 billion BOPspending $1.25/day to estimate $0.3trillion.
Low margin; high fixedcostsDistribution challengesHigh price sensitivityand per unittransaction costs
OperatingOperatingEnvironmentEnvironment
EconomicsEconomics
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Overview
Defining the Bottom of thePyramid
The Great DebateRisks & ChallengesOpportunities
Guidelines and Leading PracticesConclusionAppendix
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OpportunitiesBOP consumers suffera poverty penalty:
Lack of access tocompetitively and
efficiently-providedgoods and servicesHigher prices forsome goods andservices (i.e.manufacturedgoods, credit)Poorer qualitygoods and services
At the same time,BOP consumers:
Are brand-conscious
Have well-connectedcommunities(word-of-mouth)Readily acceptadvancedtechnologyCollectively havepurchasing powerAre always tryingto upgrade fromtheir existingcondition
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Opportunities
BOP consumers get cheaper products, access to technology, andopportunities to become entrepreneurs, and educate themselves.BOP markets present companies with a new source of:
Top-line revenue growthCost-savings and innovations that can influence existingbusiness models and management practices
But selling into BOP markets is difficult and even harder to doresponsibly.In order to market to the BOP in a way that brings real benefits toimpacted communities, companies should follow some importantguidelines and lessons from leaders in the industry.
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Overview
Defining the Bottom of the Pyramid The Great Debate
Risks & ChallengesOpportunitiesGuidelines and Leading PracticesConclusionAppendix
4 K U l ki BOP
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Source: Prahalad, C.K. and Stuart L. Hart, The Fortune at the Bottom of the Pyramid,strategy+business, Issue 26, first quarter 2002
4 Keys to Unlocking BOPMarkets to CorporateProducts
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Shape Aspirations: Engage the BOP as Joint Problem
SolversFocus on the poor as producers,not just consumers.
Upgrade skills and productivity toimprove lives and increasepurchasing power.
Channel resources back into localcommunities to improvestandards of living.
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Case Study: ITCEnables Market Pricing
Geography: R ural IndiaIndustry: Agricultural trading
Product: E-Choupals; internet-connected computersBackground:
Farmers sold grain to middlemenat below market prices.Lack of information led toexploitation of farmers.
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Case Study: ITCEnables Market Pricing
Innovation:ITC developed E-choupals; network of computers which provided web access inrural farming villages, each manned by a
literate host farmer to support illiteratefarmers.Farmers check trading price of theirproduce and sell directly to ITC.
Farmers also order raw material at anaggregate level, thereby saving money(economies of scale)
Impact: Farmers receive 2.5% higher price($6/ton).
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Tailor Local Solutions:Innovate from the BOP up
Reorient R&D efforts to create appropriatetechnologies and new products and servicesthat consider the unique needs of the poor, byregion and by country.Nurture local markets and cultures andleverage both local solutions and global bestpractices to meet identified needs.At the BOP, capital not labor is the scarce
resource, and focusing on that difference canlead to greater productivity and higher returns.
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Tailor Local Solutions:Reevaluate Price-Performance-Process Matrix
Incorporate local know-how.Rethink the entire business process from product development to production
to logistics with a focus on meetingfunctionality needs.By Prahalads estimates, BOPinnovations must achieve a drastic pricereduction (30 100x) in order to belocally competitive.
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Improve Access: IdentifyInnovative Distribution &
Communication StrategiesBOP communities are often physicallyand economically isolated.Create direct distribution and word-of-mouth mechanisms to educateconsumers and expand access andavailability.Add value by finishing productmanufacturing within the community.
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Improve Access: Create a Scalable Model
Design solutions for adaptability acrossmarkets.Scalability is key to profitability sinceBOP products tend to be low margin.BOP profits are driven by volume andcapital efficiency.
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Create Buying Power: Identify Innovative Financing
Schemes Provide financial services that focusnot only on access but buildingfinancial literacy and encouraging ahabit of savings.
Do not provide credit for luxurypurchases (note: definition of luxuryitems is controversial.)
Encourage investment inproductive assets (tools,agricultural materials, preventativehealth).
Community credit pooling with arevolving loan fund is one successfulstrategy proven to reduce defaultrisk.
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Build the CommercialInfrastructure: Develop
PartnershipsA companys product or serviceofferings are its corecompetency, but BOP strategiesrequire a higher level of engagement.
Develop partnerships withNGOs, local governments,financial institutions and localentrepreneurs to expandtraining, development, micro-finance and other expertise.
Building a base of local supportcan also help to establish
credibility within localcommunities, gain insight into acountrys culture, increase localknowledge and overcomeopposition when entering a newmarket.
BOP
NGOs &GovtsMNCs
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Overview
Defining the Bottom of thePyramid
The Great DebateRisks & ChallengesOpportunities
Guidelines and Leading PracticesConclusionAppendix
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Conclusion:For those combating
povertyIF corporations canwithout causing the verypoor to divert income frompressing needs,sell products that makepeople more productive,that are produced in a waythat create local jobs andincrease local human capital,without driving out localindustries,and reinvest locally insteadof repatriating profits,
THEN, they can be an importantpart of the solution to poverty,which is excellent CSR.
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Conclusion:For corporations interested
in BOPIF corporations cancreate low price, qualityproducts,that can be scaled acrossmany BOP markets andachieve high volume,while creating means for thecapital constrained poor tobuy,and building relationships andinfrastructure that allow themto reach poor consumers,and finally, follow thedirectives on the previous slide(at least enough to avoidbecoming a publicized badexample)
THEN, they can serve BOPmarkets profitably.