Thursday, August 19, 2004
The Economist on C.K.Prahalad
I figured CKP would attract a lot of attention in the wake of the publication of "Fortune at the Bottom of the Pyramid," the new book that exhorts businessmen to look anew at the fortune that lies untapped at the bottom of the economic pyramid. In its current issue, the Economist reviews CKP's ideas in its Face Value column.
He is a fierce critic of traditional top-down thinking on aid, by governments and non-governmental organisations alike. They tend to see the poor as victims to be helped, he says, not as people who can be part of the solution—and so their help often creates dependency. Nor does he pin much hope on the “corporate social responsibility” (CSR) programmes of many large companies. If you want serious commitment from a firm, he says, its involvement with the poor “can't be based on philanthropy or CSR”.
Mr Prahalad reckons that there are huge potential profits to be made from serving the 4 billion-5 billion people on under $2 a day—an economic opportunity he values globally at $13 trillion a year. The win for the poor of being served by big business includes, he says, being empowered by choice and being freed from having to pay the currently widespread “poverty penalty”. In shanty towns near Mumbai, for example, the poor pay a premium on everything from rice to credit—often five to 25 times what the rich pay for the same services. Driving down these premiums can make serving the BOP more profitable than serving the top, he argues, and points to a growing number of leading firms—from Unilever in India to Cemex in Mexico and Casas Bahia in Brazil—that are profiting by doing precisely that.
But to be profitable, firms cannot simply edge down market fine-tuning the products they already sell to rich customers. Instead, they must thoroughly re-engineer products to reflect the very different economics of BOP: small unit packages, low margin per unit, high volume. Big business needs to swap its usual incremental approach for an entrepreneurial mindset, because BOP markets need to be built not simply entered.
Mr Prahalad worries that firms may be deterred from BOP strategies by fear of attracting criticism from activists. If a large international bank were to start lending to the poor at interest rates, reflecting higher risks and start-up costs, of say 20% (compared with around 10% in rich countries), “the whole anti-globalisation lobby would probably be against it. Yet the alternative is for the poor to borrow at 500% from a money lender. Whose side are the activists on?” If you are on the side of the poor, he says, “surely you need to help get rates down from 500% to 20%. After that, you can work on getting them from 20% to 10% like in the rich world.”
The more time I spend in the economic development space, the more I am convinced that CKP is fundamentally right, with one minor caveat. I think businesses who buy into the BOP strategy would be well-advised to first tap the top (say 10%) of the bottom of the pyramid first rather than try to tap the whole of the BOP. We have tried hard to keep this in mind while trying to implement the RISC model.
PS: I havent read the book yet, only the background papers that have been in circulation for a while now. I ought to get the book tomorrow. Will try and post a review after I finish with reading it.
He is a fierce critic of traditional top-down thinking on aid, by governments and non-governmental organisations alike. They tend to see the poor as victims to be helped, he says, not as people who can be part of the solution—and so their help often creates dependency. Nor does he pin much hope on the “corporate social responsibility” (CSR) programmes of many large companies. If you want serious commitment from a firm, he says, its involvement with the poor “can't be based on philanthropy or CSR”.
Mr Prahalad reckons that there are huge potential profits to be made from serving the 4 billion-5 billion people on under $2 a day—an economic opportunity he values globally at $13 trillion a year. The win for the poor of being served by big business includes, he says, being empowered by choice and being freed from having to pay the currently widespread “poverty penalty”. In shanty towns near Mumbai, for example, the poor pay a premium on everything from rice to credit—often five to 25 times what the rich pay for the same services. Driving down these premiums can make serving the BOP more profitable than serving the top, he argues, and points to a growing number of leading firms—from Unilever in India to Cemex in Mexico and Casas Bahia in Brazil—that are profiting by doing precisely that.
But to be profitable, firms cannot simply edge down market fine-tuning the products they already sell to rich customers. Instead, they must thoroughly re-engineer products to reflect the very different economics of BOP: small unit packages, low margin per unit, high volume. Big business needs to swap its usual incremental approach for an entrepreneurial mindset, because BOP markets need to be built not simply entered.
Mr Prahalad worries that firms may be deterred from BOP strategies by fear of attracting criticism from activists. If a large international bank were to start lending to the poor at interest rates, reflecting higher risks and start-up costs, of say 20% (compared with around 10% in rich countries), “the whole anti-globalisation lobby would probably be against it. Yet the alternative is for the poor to borrow at 500% from a money lender. Whose side are the activists on?” If you are on the side of the poor, he says, “surely you need to help get rates down from 500% to 20%. After that, you can work on getting them from 20% to 10% like in the rich world.”
The more time I spend in the economic development space, the more I am convinced that CKP is fundamentally right, with one minor caveat. I think businesses who buy into the BOP strategy would be well-advised to first tap the top (say 10%) of the bottom of the pyramid first rather than try to tap the whole of the BOP. We have tried hard to keep this in mind while trying to implement the RISC model.
PS: I havent read the book yet, only the background papers that have been in circulation for a while now. I ought to get the book tomorrow. Will try and post a review after I finish with reading it.
