rekha

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

Reprint r0209c

September 2002

HBR Case Study
Growing for Broke

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Paul Hemp

HBR at Large
Crucibles of Leadership

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Warren G. Bennis and Robert J. Thomas

Big Picture
Serving the World’s Poor, Profitably

r0209c

C.K. Prahalad and Allen Hammond

The Curse of the Superstar CEO

r0209d

Rakesh Khurana

Taking the Mystery Out of Investor Behavior

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Kevin P Coyne and Jonathan W. Witter
.

Three Questions You Need to Ask
About Your Brand

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Kevin Lane Keller, Brian Sternthal, and Alice Tybout

Pricing and the Psychology of Consumption

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John Gourville and Dilip Soman

Best Practice
What Makes Great Boards Great

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Jeffrey A. Sonnenfeld

Tool Kit
A Better Way to Deliver Bad News
Jean-François Manzoni

r0209j

Big Picture
Improving the lives of the billions of people at the bottom of the economic pyramid is a noble endeavor.
It can also be a lucrative one.

Serving the World’s Poor,

Profitably by C.K. Prahalad and Allen Hammond

C

onsider 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

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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 selfinterest, 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 pyr-

Copyright © 2002 by Harvard Business School Publishing Corporation. All rights reserved.

S e r v i n g t h e W o r l d ’s Po o r, P ro f i ta b l y • B I G P I C T U R E

amid promises to provide important competitive advantages as the twentyfirst 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. september 2002

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 cap-

ture 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 upperclass 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.”)
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 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 bottomof-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. Dhar5

B I G P I C T U R E • S e r v i n g t h e W o r l d ’s Po o r, P ro f i ta b l y

avi – 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, wellrecognized 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%

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. 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

C.K. Prahalad is the Harvey C. Fruehauf Professor of Business Administration at the University of Michigan Business School in Ann Arbor and the chairman of Praja, a software company in San Diego. Allen Hammond is the CIO, senior scientist, and director of the
Digital Dividend project at the World Resources Institute in Washington, DC.
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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.
Latent demand for low-priced, highquality 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 fastestgrowing 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 lowpriced 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.1 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 harvard business review

S e r v i n g t h e W o r l d ’s Po o r, P ro f i ta b l y • B I G P I C T U R E

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 smallbusiness 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.
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. Gyandoot, 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 september 2002

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

This network strategy increases both sales and customer loyalty.
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

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.

purchasing power parity
(in U.S. dollars)
>$20,000

100

2,000

$2,000–20,000

4,000