Articles from June 2007
BOP too good to be true?
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In his now-famous book, Fortune at the Bottom of the Pyramid, C K Pralahad advocates ‘eradicating poverty through profits’. Bottom of the Pyramid (BOP) theories suggest that a win-win situation is possible if multinationals begin to see the world’s poorest 4 billion people as potential customers. It sounds too good to be true - and Ashok Khosla, founder and chairman of India-based Development Alternatives, thinks it is, as he tells Caroline Hartnell.
BOP strategies are perhaps best known for the promotion of disposable sachet packs of shampoo to very poor people. Though these shampoo sachets are hardly a pressing everyday need, selling shampoo in sachets is undeniably a valuable service, admits Khosla, and ‘there’s no question that the very poor are a huge and underserved market’. But it’s a market with ‘very low purchasing power’. Unless the act of selling is tied to the act of production (and thus to raising purchasing power, which can in turn lead to scaling up demand), selling products in remote markets is very costly.
This is a problem, he says, that ‘can be solved only if production and consumption are brought closer together. If people were employed in the village, maybe by big companies, to make some of these products, then they could use the money they make to buy the products. It’s the old Henry Ford dictum, that even if nobody else bought his cars, his workers would, because they made good money working in his factories. Only in that way can we bootstrap the village economy – by simultaneously producing, generating local incomes, and satisfying consumption.’
Not a great business proposition
Current BOP projects are ‘not a great business proposition’. Hindustan Lever – the Indian counterpart of Unilever, which pioneered the shampoo sachets – does not see this as a major profit line, he argues. The centralized production model of multinationals means expensive supply chains delivering to dispersed markets with little disposable income.‘They continue to sell them happily,’ he says, ‘because they see it as a long-term investment in creating new markets for their shampoos and other products.’
More importantly, says Khosla, BOP strategies aren’t even asking the right questions. ‘People need houses, food, water, clothing, energy. They need cooking appliances, water pumps, agricultural implements, ovens, refrigeration … and frankly, I don’t think any of these theories are addressing these issues.’
There are, of course, some projects flagged up by C K Pralahad in Fortune at the Bottom of the Pyramid that are to do with vital needs, like the Aravind Eye Hospital and the Jaipur Foot, which bring cheap eye care and prosthetic limbs to the very poor. ‘It’s an incredible model,’ says Khosla, and their pricing policies are ‘among the most dramatic breakthrough ideas there are’. But ‘which multinational is about to get into this kind of approach?’
Are these the right products at all?
‘Development is about creating livelihoods,’ says Khosla, ‘not about delivering large quantities of consumer products that are destroying the planet …We certainly need to make things cheaper and to deliver products in larger quantities, particularly basic needs products. Take plastic drinking water bottles: a one-litre bottle costs 15 rupees and uses up eight to ten times as much water in making the bottle as goes inside it. In a world that is chronically short of water, does that make sense?
‘Now we’re telling the multinationals to make bottled water cheap enough and they’ll have a bigger market when what we want is to get everybody off bottled drinking water. If the money that is spent on bottled water – and the Indian bottled water market is now worth almost $1 billion – were to be spent on municipal water supplies, everybody, rich and poor, would have clean water.’
What about the environment?
‘I think you’ve got to get into the deeper issues before you start promoting wasteful, environmentally damaging and socially inequitable consumption patterns. And you have to close the economic and ecological loops by tying consumption to production and by maximizing the value of the resources we extract from nature.’
Multinationals operate with large-scale models of supply and demand that work ‘as long as you spend huge amounts of money on marketing, get people to change their buying habits, and use economies of scale by building large factories and using bulk transportation. Neither the planet nor a poor country’s economy can stand such a model.’
Multinationals are actually quite inefficient, he suggests. They can make the kinds of profits they do only by taking huge subsidies – from public funds, from underpriced infrastructure, from nature – and by selling at grossly inflated prices made possible by monopolistic ownership of assets. ‘They believe they lower costs by doing things on a large scale, yet this means creating markets which are based on unrealistic ideas of demand, while ignoring people’s most basic needs.’
So ‘why are we bringing in multinationals to teach people how to make artificial shampoos and to put them in little sachet packs which will end up as litter when people can make them very well with local materials, using local skills?’ People in villages are perfectly capable of producing many, though certainly not all, of the things they need themselves, he argues, and cheaply, in small-scale industries that bring in local profits. ‘Then you create meaningful work, you minimize the use of toxins and fossil fuel-based chemicals, and you’ve got a terrific product.’
More lose-lose than win-win
Far from being a win-win situation, says Khosla, the results of BOP are more likely to be lose-lose. ‘Development is about giving people choices, and having some money in the bank does give people some choices.’ But this is not an end in itself. ‘Basically it's about making the right choices’ – not choices that involve the creation of disposable incomes to be spent on non-essential and often wasteful products but choices that lead the way to things that people actually need.
‘If BOP is supposed to be answering the needs of the poor, it’s the wrong way to do it. If it’s answering the needs of multinationals to create new markets, I think they’re going to fall on their face because the markets they are looking for will be few and far between.’ They are selling the wrong things at the wrong prices, he maintains. Their costs are determined by the global economy and their revenues will come from clients who earn less than $2 a day. ‘There is a fundamental disjunct here that I believe can be bridged by creating mini-industries in the community, based on sophisticated technology, and producing and selling the goods and services that improve people’s lives.’
Dr Ashok Khosla is Chairman, Development Alternatives Group, India. Email akhosla@devalt.org
Comment Jeb Brugmann
In 2003 Jeb Brugmann joined C K Pralahad in setting up a company called The Next Practice (www.thenextpractice.com) that helps big companies develop their BOP business models and strategies. Alliance asked him how many companies are taking up the idea and how the strategies are working out.
Since 2003, C K Prahalad, my partners and I have advised 21 multinational companies (MNCs) on creating profitable businesses that deliver meaningful benefits to low-income households. About one-third could not find the focus to go after these opportunities; another third launched what might be called learning exercises; the final third have made serious attempts to create real, high-impact businesses.
This sample has been enough to convince me that it is extremely hard for large, established companies to go after big new opportunities that involve re-making themselves; yet, that there is nothing inherent to the MNC that prevents it from making large, positive contributions to poor people’s lives through a ‘bottom of the pyramid’ (BOP) business model.
Such a model has to meet certain requirements. First, it has to deliver concrete consumer benefits, both functional and emotional, which liberate the BOP consumer from some part of the weight of poverty. These households need so many things that no company has to manufacture illusions of benefit through marketing and spin.
Second, considering both functionality for BOP users and sustainability, intensive efforts need to go into product design. Repackaging products designed for the TOP tend to fail on both business and sustainability grounds. New products can themselves provide solutions to income poverty. Increased health, convenience, financial options, information and education increase both productivity and opportunities for income generation. Many BOP business models engage local people as distributors or retailers, but these and even local manufacturing roles will affect total income poverty less than direct product benefits.
Third, considering the affordability issue, the business has to be scalable so that the tiny margins from each transaction cover the unusual business costs associated with putting in place an entire new system to deliver the products. This is why MNCs can be so valuable in BOP efforts. However, our intensive market research and experience with BOP product introductions highlights the inaccuracies of census and other macro data on BOP household income and spending. For a variety of reasons, for instance, the so-called $2/day households have far more income and assets – or ‘capacity to consume’ – than ever anticipated.
Finally, putting new BOP business systems in place forces the MNC to partner closely with local companies, large, medium and small, with NGO networks and research institutes, with informal micro-entrepreneurs and traders. There is no MNC model; there are only market-based models with all kinds of actors aligned in a tightly geared effort.
Jeb Brugmann is a Founding Partner of The Next Practice. Email jeb@jebbrugmann.com
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Back to topFrom Alliance, Vol 12, No 2, June 2007
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