University of Michigan strategy guru C.K. Prahalad thinks that poverty can be solved — and profitably so. Doing so, though, will require corporations to think, uncharacteristically, as entrepreneurs, intentionally and intelligently targeting consumers at the lowest rungs of the economic food chain. His new study, The Fortune at the Bottom of the Pyramid (Wharton School Publishing, 2004), offers a powerful casebook for those who want to try. Prahalad spoke with Fast Company's Alison Overholt about the enormous opportunity business is missing.
Fast Company: Why focus on the "bottom of the pyramid"?
Prahalad: It's one of the largest markets — 5 billion poor people — and represents $14 trillion in purchasing power, more than Germany, the UK, Italy, France, and Japan put together. Demographically, it's young, growing at 6% a year or more. Purely from a business point of view, you ought to position yourself where the growth opportunities are. Most of these people have very little in terms of quality of life: clean water, clean energy, personal-care products, lighting. You go down the list, and they need everything.
FC: If they have so little, how can they be a viable market?
Prahalad: American and European businesses have to go back and look at their own roots. Sears was created to serve the poor. Singer sewing machines innovated with a scheme to make consumption possible by allowing customers to pay $5 a month instead of $100 at once. The world's largest company today, Wal-Mart, was created to serve poor people.
FC: And now?
Prahalad: Today, the bottom of the pyramid in developing countries is below the radar screen for most companies because of four assumptions: First, that poor people cannot afford our products. What we are really saying is, "Our cost structures are out of line." Instead, try innovating and customizing your solutions. If they don't have lump sums to buy 20 ounces of shampoo at one time, do what Unilever did in India: sell single servings of shampoo so the cost structure matches what they can afford.
The second assumption is that poor people will not accept new technologies, and the evidence is exactly the opposite. You see women with cell phones in the villages of India, running microbusinesses. They're accepting new technologies faster than we can!
The third assumption is that they do not have any use for our products and services. We are too caught up in form, not functionality. We should focus on the functionality called sanitation, for example, not the particular form in which sanitation is delivered, such as detergent. Creating a market for cleaning and hygiene products can help solve the social problem of poor sanitation and, in the process, create a huge market for the company that solves it.
And the fourth assumption is that working in these markets will not excite managers, and that also has totally been proven wrong. I can't keep students out of my classes. Top executives come to conferences to learn about this stuff. People are interested. They want to have meaning in their lives, so companies have to legitimize this work.
"Remove those lenses, and everywhere you turn you'll see an opportunity"
So if you take those four lenses and look at the market, there's nothing there. But if you remove those lenses and put on new ones, everywhere you turn you'll see an opportunity.
FC: Plus, it beats some of the business alternatives.
Prahalad: Correct. A few years ago, you would not have seen companies lining up to learn how to operate in India or Latin America. Companies haven't suddenly become more socially conscious. They've become more opportunity driven, and right now they're under more pressure to perform. What will they do here, the 75th version of coffee on the supermarket shelves? Product-development costs are going up, the margins are going down. So what do you do? You look for something else — you look somewhere else.
FC: Businesses' efforts to solve social problems are often placed under the umbrella of "corporate social responsibility."
Prahalad: I have nothing against corporate social responsibility. But unfortunately, that does not get the attention of top management. When you turn these issues into a major piece of the business, it does get the attention, it does get the resources, and it does get the best people to work on it. When you have good times and profitable times, you can put money into corporate social responsibility, and then in bad times, you can cut it off. But if that is your business, if 60% of your business is selling shampoo to the bottom of the pyramid in India, what do you cut off? I want companies to be deeply involved in these problems, and to build social collateral through business that solves many of the problems.
A version of this article appeared in the January 2005 issue of Fast Company magazine.