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The Fortune At The Bottom Of The Pyramid

How do developing countries provide a new market for companies? Is it really possible to do very well by doing good? We continue our Leadership Hall of Fame series, a year-long look at the top business books and authors in recent history, with an excerpt from “The Fortune at the Bottom of the Pyramid” (2004) by the late C.K. Prahalad.

The Fortune at the Bottom of the PyramidThe dominant assumption is that the poor have no purchasing power and,
therefore, do not represent a viable market.

Let us start with the aggregate purchasing power in developing
countries where most of the Bottom of the Pyramid (BOP) market exists. Developing countries
offer tremendous growth opportunities. Within these markets, the BOP
represents a major opportunity. Take China as an example. With a
population of 1.2 billion and an average per capita gross domestic
product (GDP) of U.S. $1,000, China currently represents a $1.2 trillion
economy. However, the U.S. dollar equivalent is not a good measure of
the demand for goods and services produced and consumed in China. If
we convert the GDP-based figure into its dollar purchasing power parity
(PPP), China is already a $5.0 trillion economy, making it the second
largest economy behind the United States in PPP terms. Similarly, the
Indian economy is worth about $3.0 trillion in PPP terms.

If we take
nine countries–China, India, Brazil, Mexico, Russia, Indonesia, Turkey,
South Africa, and Thailand–collectively they are home to about 3
billion people, representing 70 percent of the developing world
population. In PPP terms, this group’s GDP is $12.5 trillion, which
represents 90 percent of the developing world. It is larger than the GDP
of Japan, Germany, France, the United Kingdom, and Italy combined.
This is not a market to be ignored.

Now, consider the BOP within the broad developing country
opportunity. The dominant assumption is that the poor do not have
money to spend and, therefore, are not a viable market. Certainly, the
buying power for those earning less than U.S. $2 per day cannot be
compared with the purchasing power of individuals in the developed
nations. However, by virtue of their numbers, the poor represent a
significant latent purchasing power that must be unlocked. For example,
all too often, the poor tend to reside in high-cost ecosystems even within
developing countries.

In the shanty town of Dharavi, outside Mumbai,
India, the poor pay a premium for everything from rice to credit.
Compare the cost of everyday items of consumption between Dharavi
and Warden Road (now redesignated B. Desai Road), a higher-income
neighborhood in Mumbai. The poverty penalty in Dharavi can be as high
as 5 to 25 times what the rich pay for the same services (see Table 1.2).
Research indicates that this poverty penalty is universal, although the
magnitude differs by country. The poverty penalty is the result of local
monopolies, inadequate access, poor distribution, and strong traditional
intermediaries. Large-scale private-sector businesses can “unlock this
poverty penalty.”

For example, the poor in Dharavi pay 600 to 1,000
percent interest for credit from local moneylenders. A bank with access
to this market can do well for itself by offering credit at 25 percent.
Although 25 percent interest might look excessive to a casual observer,
from the point of view of the BOP consumer, access to a bank decreases
the cost of credit from 600 percent to 25 percent. The BOP consumer is
focused on the difference between the local moneylender rates and the
rates that a commercial bank would charge. The bank can make a
reasonable profit after adjusting for risk (10 percent over its traditional,
top-of-the-pyramid customers). We argue later that the BOP consumers
do not represent higher risk.

The Poor and High-cost Economic Ecosystems

These cost disparities between BOP consumers and the rich in the
same economy can be explained only by the fact that the poverty penalty
at the BOP is a result of inefficiencies in access to distribution and the
role of the local intermediaries. These problems can easily be cured if the
organized private sector decides to serve the BOP. The organized sector
brings with it the scale, scope of operations, and management know-how
that can lead to efficiencies for itself and its potential consumers.

The poor also spend their earnings in ways that reflect a different set
of priorities. For example, they might not spend disposable income on
sanitation, clean running water, and better homes but will spend it on
items traditionally considered luxuries. Without legal title to land, these
residents are unlikely to invest in improving their living quarters, much
less the public facilities surrounding their homes. For example, in
Dharavi, 85 percent of the households own a television set, 75 percent
own a pressure cooker and blender, 56 percent own a gas stove, and 21
percent have telephones. In Bangladesh, women entrepreneurs with cell
phones, which they rent out by the minute to other villagers, do a brisk
business. It is estimated that the poor in Bangladesh spend as much as 7
percent of their income on connectivity.

Reprinted by permission of Pearson Education, Inc. Publishing as Pearson Prentice Hall. Excerpted from The Fortune at the Bottom of the Pyramid, Revised and Updated 5th Anniversary Edition: Eradicating Poverty Through Profits by C.K. Prahalad. Copyright 2009. All rights reserved.

Read more from our Leadership Hall of Fame.

About the author

C.K. Prahalad is Paul and Ruth McCracken Distinguished University Professor of Strategy at the Ross School of Business, The University of Michigan and is a globally recognized management thinker.

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