Government Policy And Regulation

Serving the World’s Poor, Profitably by C.K. Prahalad and Allen Hammond

From the Magazine (September 2002)

Consider this bleak vision of the world 15 years from now: The

global economy recovers from its current stagnation but growth

remains anemic. Deflation continues to threaten, the gap between

rich and poor keeps widening, and incidents of economic chaos,

governmental collapse, and civil war plague developing regions.

Terrorism remains a constant threat, diverting significant public

and private resources to security concerns. Opposition to the

global market system intensifies. Multinational companies find it

difficult to expand, and many become risk averse, slowing

investment and pulling back from emerging markets.

Now consider this much brighter scenario: Driven by private

investment and widespread entrepreneurial activity, the

economies of developing regions grow vigorously, creating jobs

and wealth and bringing hundreds of millions of new consumers

into the global marketplace every year. China, India, Brazil, and,

gradually, South Africa become new engines of global economic

growth, promoting prosperity around the world. The resulting

decrease in poverty produces a range of social benefits, helping to

stabilize many developing regions and reduce civil and cross-

border conflicts. The threat of terrorism and war recedes.

Multinational companies expand rapidly in an era of intense

innovation and competition.

Both of these scenarios are possible. Which one comes to pass will

be determined primarily by one factor: the willingness of big,

multinational companies to enter and invest in the world’s

poorest markets. By stimulating commerce and development at

the bottom of the economic pyramid, MNCs could radically

improve the lives of billions of people and help bring into being a

more stable, less dangerous world. Achieving this goal does not

require multinationals to spearhead global social development

initiatives for charitable purposes. They need only act in their

own self-interest, for there are enormous business benefits to be

gained by entering developing markets. In fact, many innovative

companies—entrepreneurial outfits and large, established

enterprises alike—are already serving the world’s poor in ways

that generate strong revenues, lead to greater operating

efficiencies, and uncover new sources of innovation. For these

companies—and those that follow their lead—building

businesses aimed at the bottom of the pyramid promises to

provide important competitive advantages as the twenty-first

century unfolds.

Big companies are not going to solve the economic ills of

developing countries by themselves, of course. It will also take

targeted financial aid from the developed world and

improvements in the governance of the developing nations

themselves. But it’s clear to us that prosperity can come to the

poorest regions only through the direct and sustained

involvement of multinational companies. And it’s equally clear

that the multinationals can enhance their own prosperity in the

process.

Untapped Potential

Everyone knows that the world’s poor are distressingly plentiful.

Fully 65% of the world’s population earns less than $2,000 each

per year—that’s 4 billion people. But despite the vastness of this

market, it remains largely untapped by multinational companies.

The reluctance to invest is easy to understand. Companies

assume that people with such low incomes have little to spend on

goods and services and that what they do spend goes to basic

needs like food and shelter. They also assume that various

barriers to commerce—corruption, illiteracy, inadequate

infrastructure, currency fluctuations, bureaucratic red tape—

make it impossible to do business profitably in these regions.

But such assumptions reflect a narrow and largely outdated view

of the developing world. The fact is, many multinationals already

successfully do business in developing countries (although most

currently focus on selling to the small upper-middle-class

segments of these markets), and their experience shows that the

barriers to commerce—although real—are much lower than is

typically thought. Moreover, several positive trends in developing

countries—from political reform, to a growing openness to

investment, to the development of low-cost wireless

communication networks—are reducing the barriers further

while also providing businesses with greater access to even the

poorest city slums and rural areas. Indeed, once the

misperceptions are wiped away, the enormous economic potential

that lies at the bottom of the pyramid becomes clear.

Take the assumption that the poor have no money. It sounds

obvious on the surface, but it’s wrong. While individual incomes

may be low, the aggregate buying power of poor communities is

actually quite large. The average per capita income of villagers in

rural Bangladesh, for instance, is less than $200 per year, but as a

group they are avid consumers of telecommunications services.

Grameen Telecom’s village phones, which are owned by a single

entrepreneur but used by the entire community, generate an

average revenue of roughly $90 a month—and as much as $1,000

a month in some large villages. Customers of these village phones,

who pay cash for each use, spend an average of 7% of their income

on phone services—a far higher percentage than consumers in

traditional markets do.

It’s also incorrect to assume that the poor are too concerned with

fulfilling their basic needs to “waste” money on nonessential

goods. In fact, the poor often do buy “luxury” items. In the

Mumbai shantytown of Dharavi, for example, 85% of households

own a television set, 75% own a pressure cooker and a mixer, 56%

own a gas stove, and 21% have telephones. That’s because buying

a house in Mumbai, for most people at the bottom of the pyramid,

is not a realistic option. Neither is getting access to running water.

They accept that reality, and rather than saving for a rainy day,

they spend their income on things they can get now that improve

the quality of their lives.

Another big misperception about developing markets is that the

goods sold there are incredibly cheap and, hence, there’s no room

for a new competitor to come in and turn a profit. In reality,

consumers at the bottom of the pyramid pay much higher prices

for most things than middle-class consumers do, which means

that there’s a real opportunity for companies, particularly big

corporations with economies of scale and efficient supply chains,

to capture market share by offering higher quality goods at lower

prices while maintaining attractive margins. In fact, throughout

the developing world, urban slum dwellers pay, for instance,

between four and 100 times as much for drinking water as

middle- and upper-class families. Food also costs 20% to 30%

more in the poorest communities since there is no access to bulk

discount stores. On the service side of the economy, local

moneylenders charge interest of 10% to 15%per day, with annual

rates running as high as 2,000%. Even the lucky small-scale

entrepreneurs who get loans from nonprofit microfinance

institutions pay between 40% and 70% interest per year—rates

that are illegal in most developed countries. (For a closer look at

how the prices of goods compare in rich and poor areas, see the

exhibit “The High-Cost Economy of the Poor.”)

The High-Cost Economy of the Poor

When we compare the costs of essentials in Dharavi, a

shantytown of more than 1 million people in the heart of

…

It can also be surprisingly cheap to market and deliver products

and services to the world’s poor. That’s because many of them live

in cities that are densely populated today and will be even more

so in the years to come. Figures from the UN and the World

Resources Institute indicate that by 2015, in Africa, 225 cities will

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each have populations of more than 1 million; in Latin America,

another 225; and in Asia, 903. The population of at least 27 cities

will reach or exceed 8 million. Collectively, the 1,300 largest cities

will account for some 1.5 billion to 2 billion people, roughly half of

whom will be bottom-of-the-pyramid (BOP) consumers now

served primarily by informal economies. Companies that operate

in these areas will have access to millions of potential new

customers, who together have billions of dollars to spend. The

poor in Rio de Janeiro, for instance, have a total purchasing power

of $1.2 billion ($600 per person). Shantytowns in Johannesburg or

Mumbai are no different.

The slums of these cities already have distinct ecosystems, with

retail shops, small businesses, schools, clinics, and moneylenders.

Although there are few reliable estimates of the value of

commercial transactions in slums, business activity appears to be

thriving. Dharavi—covering an area of just 435 acres—boasts

scores of businesses ranging from leather, textiles, plastic

recycling, and surgical sutures to gold jewelry, illicit liquor,

detergents, and groceries. The scale of the businesses varies from

one-person operations to bigger, well-recognized producers of

brand-name products. Dharavi generates an estimated $450

million in manufacturing revenues, or about $1 million per acre of

land. Established shantytowns in São Paulo, Rio, and Mexico City

are equally productive. The seeds of a vibrant commercial sector

have been sown.

While the rural poor are naturally harder to reach than the urban

poor, they also represent a large untapped opportunity for

companies. Indeed, 60% of India’s GDP is generated in rural

areas. The critical barrier to doing business in rural regions is

distribution access, not a lack of buying power. But new

information technology and communications infrastructures—

especially wireless—promise to become an inexpensive way to

establish marketing and distribution channels in these

communities.

Conventional wisdom says that people in BOP markets cannot use

such advanced technologies, but that’s just another

misconception. Poor rural women in Bangladesh have had no

difficulty using GSM cell phones, despite never before using

phones of any type. In Kenya, teenagers from slums are being

successfully trained as Web page designers. Poor farmers in El

Salvador use telecenters to negotiate the sale of their crops over

the Internet. And women in Indian coastal villages have in less

than a week learned to use PCs to interpret real-time satellite

images showing concentrations of schools of fish in the Arabian

Sea so they can direct their husbands to the best fishing areas.

Clearly, poor communities are ready to adopt new technologies

that improve their economic opportunities or their quality of life.

The lesson for multinationals: Don’t hesitate to deploy advanced

technologies at the bottom of the pyramid while, or even before,

deploying them in advanced countries.

A final misperception concerns the highly charged issue of

exploitation of the poor by MNCs. The informal economies that

now serve poor communities are full of inefficiencies and

exploitive intermediaries. So if a microfinance institution charges

50% annual interest when the alternative is either 1,000% interest

or no loan at all, is that exploiting or helping the poor? If a large

financial company such as Citigroup were to use its scale to offer

microloans at 20%, is that exploiting or helping the poor? The

issue is not just cost but also quality—quality in the range and

fairness of financial services, quality of food, quality of water. We

argue that when MNCs provide basic goods and services that

reduce costs to the poor and help improve their standard of living

—while generating an acceptable return on investment—the

results benefit everyone.

The Business Case

The business opportunities at the bottom of the pyramid have not

gone unnoticed. Over the last five years, we have seen

nongovernmental organizations (NGOs), entrepreneurial start-

ups, and a handful of forward-thinking multinationals conduct

vigorous commercial experiments in poor communities. Their

experience is a proof of concept: Businesses can gain three

important advantages by serving the poor—a new source of

revenue growth, greater efficiency, and access to innovation. Let’s

look at examples of each.

Top-Line Growth.

Growth is an important challenge for every company, but today it

is especially critical for very large companies, many of which

appear to have nearly saturated their existing markets. That’s why

BOP markets represent such an opportunity for MNCs: They are

fundamentally new sources of growth. And because these markets

are in the earliest stages of economic development, growth can be

extremely rapid.

Markets at the bottom of the economic pyramid are fundamentally new sources of growth for multinationals. And because these markets are in the earliest stages, growth can be extremely rapid.

Latent demand for low-priced, high-quality goods is enormous.

Consider the reaction when Hindustan Lever, the Indian

subsidiary of Unilever, recently introduced what was for it a new

product category—candy—aimed at the bottom of the pyramid. A

high-quality confection made with real sugar and fruit, the candy

sells for only about a penny a serving. At such a price, it may seem

like a marginal business opportunity, but in just six months it

became the fastest-growing category in the company’s portfolio.

Not only is it profitable, but the company estimates it has the

potential to generate revenues of $200 million per year in India

and comparable markets in five years. Hindustan Lever has had

similar successes in India with low-priced detergent and iodized

salt. Beyond generating new sales, the company is establishing its

business and its brand in a vast new market.

There is equally strong demand for affordable services.

TARAhaat, a start-up focused on rural India, has introduced a

range of computer-enabled education services ranging from basic

IT training to English proficiency to vocational skills. The

products are expected to be the largest single revenue generator

for the company and its franchisees over the next several years.

Credit and financial services are also in high demand among the

poor. Citibank’s ATM-based banking experiment in India, called

Suvidha, for instance, which requires a minimum deposit of just

$25, enlisted 150,000 customers in one year in the city of

Bangalore alone.

Small-business services are also popular in BOP markets. Centers

run in Uganda by the Women’s Information Resource Electronic

Service (WIRES) provide female entrepreneurs with information

on markets and prices, as well as credit and trade support

services, packaged in simple, ready-to-use formats in local

languages. The centers are planning to offer other small-business

services such as printing, faxing, and copying, along with access

to accounting, spreadsheet, and other software. In Bolivia, a start-

up has partnered with the Bolivian Association of Ecological

Producers Organizations to offer business information and

communications services to more than 25,000 small producers of

ecoagricultural products.

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It’s true that some services simply cannot be offered at a low-

enough cost to be profitable, at least not with traditional

technologies or business models. Most mobile

telecommunications providers, for example, cannot yet profitably

operate their networks at affordable prices in the developing

world. One answer is to find alternative technology. A

microfinance organization in Bolivia named PRODEM, for

example, uses multilingual smart-card ATMs to substantially

reduce its marginal cost per customer. Smart cards store a

customer’s personal details, account numbers, transaction

records, and a fingerprint, allowing cash dispensers to operate

without permanent network connections—which is key in remote

areas. What’s more, the machines offer voice commands in

Spanish and several local dialects and are equipped with touch

screens so that PRODEM’s customer base can be extended to

illiterate and semiliterate people.

Another answer is to aggregate demand, making the community

—not the individual—the network customer. Gyan-doot, a start-

up in the Dhar district of central India, where 60% of the

population falls below the poverty level, illustrates the benefits of

a shared access model. The company has a network of 39 Internet-

enabled kiosks that provide local entrepreneurs with Internet and

telecommunications access, as well as with governmental,

educational, and other services. Each kiosk serves 25 to 30

surrounding villages; the entire network reaches more than 600

villages and over half a million people.

Networks like these can be useful channels for marketing and

distributing many kinds of low-cost products and services.

Aptech’s Computer Education division, for example, has built its

own network of 1,000 learning centers in India to market and

distribute Vidya, a computer-training course specially designed

for BOP consumers and available in seven Indian languages.

Pioneer Hi-Bred, a DuPont company, uses Internet kiosks in Latin

America to deliver agricultural information and to interact with

customers. Farmers can report different crop diseases or weather

conditions, receive advice over the wire, and order seeds,

fertilizers, and pesticides. This network strategy increases both

sales and customer loyalty.

The World Pyramid Most companies target consumers at the

upper tiers of the economic pyramid, completely overlooking the

business potential at its base. But though they may each be

earning the equivalent of less than $2,000 a year, the people at the

bottom of the pyramid make up a colossal market—4 billion

strong—the vast majority of the world’s population.

Reduced Costs.

No less important than top-line growth are cost-saving

opportunities. Outsourcing operations to low-cost labor markets

has, of course, long been a popular way to contain costs, and it has

led to the increasing prominence of China in manufacturing and

India in software. Now, thanks to the rapid expansion of high-

speed digital networks, companies are realizing even greater

savings by locating such labor-intensive service functions as call

centers, marketing services, and back-office transaction

processing in developing areas. For example, the nearly 20

companies that use OrphanIT.com’s affiliate-marketing services,

provided via its telecenters in India and the Philippines, pay one-

tenth the going rate for similar services in the United States or

Australia. Venture capitalist Vinod Khosla describes the remote-

services opportunity this way: “I suspect that by 2010, we will be

talking about [remote services] as the fastest-growing part of the

world economy, with many trillions of dollars of new markets

created.” Besides keeping costs down, outsourcing jobs to BOP

markets can enhance growth, since job creation ultimately

increases local consumers’ purchasing power.

But tapping into cheap labor pools is not the only way MNCs can

enhance their efficiency by operating in developing regions. The

competitive necessity of maintaining a low cost structure in these

areas can push companies to discover creative ways to configure

their products, finances, and supply chains to enhance

productivity. And these discoveries can often be incorporated

back into their existing operations in developed markets.

For instance, companies targeting the BOP market are finding

that the shared access model, which disaggregates access from

ownership, not only widens their customer base but increases

asset productivity as well. Poor people, rather than buying their

own computers, Internet connections, cell phones, refrigerators,

and even cars, can use such equipment on a pay-per-use basis.

Typically, the providers of such services get considerably more

revenue per dollar of investment in the underlying assets. One

shared Internet line, for example, can serve as many as 50 people,

generating more revenue per day than if it were dedicated to a

single customer at a flat fee. Shared access creates the

opportunity to gain far greater returns from all sorts of

infrastructure investments.

In terms of finances, to operate successfully in BOP markets,

managers must also rethink their business metrics—specifically,

the traditional focus on high gross margins. In developing

markets, the profit margin on individual units will always be low.

What really counts is capital efficiency—getting the highest

possible returns on capital employed (ROCE). Hindustan Lever,

for instance, operates a $2.6 billion business portfolio with zero

working capital. The key is constant efforts to reduce capital

investments by extensively outsourcing manufacturing,

streamlining supply chains, actively managing receivables, and

paying close attention to distributors’ performance. Very low

capital needs, focused distribution and technology investments,

and very large volumes at low margins lead to very high ROCE

businesses, creating great economic value for shareholders. It’s a

model that can be equally attractive in developed and developing

markets.

Streamlining supply chains often involves replacing assets with

information. Consider, for example, the experience of ITC, one of

India’s largest companies. Its agribusiness division has deployed a

total of 970 kiosks serving 600,000 farmers who supply it with

soy, coffee, shrimp, and wheat from 5,000 villages spread across

India. This kiosk program, called e-Choupal, helps increase the

farmers’ productivity by disseminating the latest information on

weather and best practices in farming, and by supporting other

services like soil and water testing, thus facilitating the supply of

quality inputs to both the farmers and ITC. The kiosks also serve

as an e-procurement system, helping farmers earn higher prices

by minimizing transaction costs involved in marketing farm

produce. The head of ITC’s agribusiness reports that the

company’s procurement costs have fallen since e-Choupal was

implemented. And that’s despite paying higher prices to its

farmers: The program has enabled the company to eliminate

multiple transportation, bagging, and handling steps—from farm

to local market, from market to broker, from broker to processor—

that did not add value in the chain.

Innovation.

BOP markets are hot-beds of commercial and technological

experimentation. The Swedish wireless company Ericsson, for

instance, has developed a small cellular telephone system, called

a MiniGSM, that local operators in BOP markets can use to offer

cell phone service to a small area at a radically lower cost than

conventional equipment entails. Packaged for easy shipment and

deployment, it provides stand-alone or networked voice and data

communications for up to 5,000 users within a 35-kilometer

radius. Capital costs to the operator can be as low as $4 per user,

assuming a shared-use model with individual phones operated by

local entrepreneurs. The MIT Media Lab, in collaboration with the

Indian government, is developing low-cost devices that allow

people to use voice commands to communicate—without

keyboards—with various Internet sites in multiple languages.

These new access devices promise to be far less complex than

traditional computers but would perform many of the same basic

functions.

As we have seen, connectivity is a big issue for BOP consumers.

Companies that can find ways to dramatically lower connection

costs, therefore, will have a very strong market position. And that

is exactly what the Indian company n-Logue is trying to do. It

connects hundreds of franchised village kiosks containing both a

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computer and a phone with centralized nodes that are, in turn,

connected to the national phone network and the Internet. Each

node, also a franchise, can serve between 30,000 and 50,000

customers,