Government Policy And Regulation
Serving the World’s Poor,Profitablyby 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
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 theeconomic pyramid are fundamentallynew sources of growth formultinationals. And because thesemarkets 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.
1
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
2
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, providing phone, e-mail, Internet services, and
relevant local information at affordable prices to villagers in rural
India. Capital costs for the n-Logue system are now about $400
per wireless “line” and are projected to decline to $100—at least
ten times lower than conventional telecom costs. On a per-
customer basis, the cost may amount to as little as $1. This
appears to be a powerful model for ending rural isolation and
linking untapped rural markets to the global economy.
New wireless technologies are likely to spur further business
model innovations and lower costs even more. Ultra-wideband,
for example, is currently licensed in the United States only for
limited, very low-power applications, in part because it spreads a
signal across already-crowded portions of the broadcast
spectrum. In many developing countries, however, the spectrum
is less congested. In fact, the U.S.-based Dandin Group is already
building an ultra-wideband communications system for the
Kingdom of Tonga, whose population of about 100,000 is spread
over dozens of islands, making it a test bed for a next-generation
technology that could transform the economics of Inter-net
access.
E-commerce systems that run over the phone or the Internet are
enormously important in BOP markets because they eliminate the
need for layers of intermediaries. Consider how the U.S. start-up
3
Voxiva has changed the way information is shared and business is
transacted in Peru. The company partners with Telefónica, the
dominant local carrier, to offer automated business applications
over the phone. The inexpensive services include voice mail, data
entry, and order placement; customers can check account
balances, monitor delivery status, and access prerecorded
information directories. According to the Boston Consulting
Group, the Peruvian Ministry of Health uses Voxiva to
disseminate information, take pharmaceutical orders, and link
health care workers spread across 6,000 offices and clinics.
Microfinance institutions use Voxiva to process loan applications
and communicate with borrowers. Voxiva offers Web-based
services, too, but far more of its potential customers in Latin
America have access to a phone.
E-commerce companies are not the only ones turning the
limitations of BOP markets to strategic advantage. A lack of
dependable electric power stimulated the UK-based start-up Free-
play Group to introduce hand-cranked radios in South Africa that
subsequently became popular with hikers in the United States.
Similar breakthroughs are being pioneered in the use of solar-
powered devices such as battery chargers and water pumps. In
China, where pesticide costs have often limited the use of modern
agricultural techniques, there are now 13,000 small farmers—
more than in the rest of the world combined—growing cotton that
has been genetically engineered to be pest resistant.
Strategies for Serving BOP Markets
Certainly, succeeding in BOP markets requires multinationals to
think creatively. The biggest change, though, has to come in the
attitudes and practices of executives. Unless CEOs and other
business leaders confront their own preconceptions, companies
are unlikely to master the challenges of BOP markets. The
traditional workforce is so rigidly conditioned to operate in
higher-margin markets that, without formal training, it is unlikely
to see the vast potential of the BOP market. The most pressing
need, then, is education. Perhaps MNCs should create the
equivalent of the Peace Corps: Having young managers spend a
couple of formative years in BOP markets would open their eyes
to the promise and the realities of doing business there.
To date, few multinationals have developed a cadre of people who
are comfortable with these markets. Hindustan Lever is one of the
exceptions. The company expects executive recruits to spend at
least eight weeks in the villages of India to get a gut-level
experience of Indian BOP markets. The new executives must
become involved in some community project—building a road,
cleaning up a water catchment area, teaching in a school,
improving a health clinic. The goal is to engage with the local
population. To buttress this effort, Hindustan Lever is initiating a
massive program for managers at all levels—from the CEO down
—to reconnect with their poorest customers. They’ll talk with the
poor in both rural and urban areas, visit the shops these
customers frequent, and ask them about their experience with the
company’s products and those of its competitors.
In addition to expanding managers’ understanding of BOP
markets, companies will need to make structural changes. To
capitalize on the innovation potential of these markets, for
example, they might set up R&D units in developing countries
that are specifically focused on local opportunities. When
Hewlett-Packard launched its e-Inclusion division, which
concentrates on rural markets, it established a branch of its famed
HP Labs in India charged with developing products and services
explicitly for this market. Hindustan Lever maintains a
significant R&D effort in India, as well.
Companies might also create venture groups and internal
investment funds aimed at seeding entrepreneurial efforts in BOP
markets. Such investments reap direct benefits in terms of
business experience and market development. They can also play
an indirect but vital role in growing the overall BOP market in
sectors that will ultimately benefit the multinational. At least one
major U.S. corporation is planning to launch such a fund, and the
G8’s Digital Opportunity Task Force is proposing a similar one
focused on digital ventures.
MNCs should also consider creating a business development task
force aimed at these markets. Assembling a diverse group of
people from across the corporation and empowering it to function
as a skunk works team that ignores conventional dogma will
likely lead to greater innovation. Companies that have tried this
approach have been surprised by the amount of interest such a
task force generates. Many employees want to work on projects
that have the potential to make a real difference in improving the
lives of the poor. When Hewlett-Packard announced its e-
Inclusion division, for example, it was overwhelmed by far more
volunteers than it could accommodate.
Making internal changes is important, but so is reaching out to
external partners. Joining with businesses that are already
established in these markets can be an effective entry strategy,
since these companies will naturally understand the market
dynamics better. In addition to limiting the risks for each player,
partnerships also maximize the existing infrastructure—both
physical and social. MNCs seeking partners should look beyond
businesses to NGOs and community groups. They are key sources
of knowledge about customers’ behavior, and they often
experiment the most with new services and new delivery models.
In fact, of the social enterprises experimenting with creative uses
of digital technology that the Digital Dividend Project
Clearinghouse tracked, nearly 80% are NGOs. In Namibia, for
instance, an organization called School-Net is providing low-cost,
alternative technology solutions—such as solar power and
wireless approaches—to schools and community-based groups
throughout the country. SchoolNet is currently linking as many as
35 new schools every month.
Entrepreneurs also will be critical partners. According to an
analysis by McKinsey & Company, the rapid growth of cable TV in
India—there are 50 million connections a decade after
introduction—is largely due to small entrepreneurs. These
individuals have been building the last mile of the network,
typically by putting a satellite dish on their own houses and
laying cable to connect their neighbors. A note of caution,
however. Entrepreneurs in BOP markets lack access to the advice,
technical help, seed funding, and business support services
available in the industrial world. So MNCs may need to take on
mentoring roles or partner with local business development
organizations that can help entrepreneurs create investment and
partnering opportunities.
It’s worth noting that, contrary to popular opinion, women play a
significant role in the economic development of these regions.
MNCs, therefore, should pay particular attention to women
entrepreneurs. Women are also likely to play the most critical role
in product acceptance not only because of their child-care and
household management activities but also because of the social
capital that they have built up in their communities. Listening to
and educating such customers is essential for success.
Sharing Intelligence
What creative new approaches to serving the bottom-
of-the-pyramid markets have digital technologies made
possible? …
Regardless of the opportunities, many companies will consider
the bottom of the pyramid to be too risky. We’ve shown how
partnerships can limit risk; another option is to enter into
consortia. Imagine sharing the costs of building a rural network
with the communications company that would operate it, a
consumer goods company seeking channels to expand its sales,
and a bank that is financing the construction and wants to make
loans to and collect deposits from rural customers.
Investing where powerful synergies exist will also mitigate risk.
The Global Digital Opportunity Initiative, a partnership of the
Markle Foundation and the UN Development Programme, will
help a small number of countries implement a strategy to harness
the power of information and communications technologies to
increase development. The countries will be chosen in part based
on their interest and their willingness to make supportive
regulatory and market reforms. To concentrate resources and
create reinforcing effects, the initiative will encourage
international aid agencies and global companies to assist with
implementation.
All of the strategies we’ve outlined here will be of little use,
however, unless the external barriers we’ve touched on—poor
infrastructure, inadequate connectivity, corrupt intermediaries,
and the like—are removed. Here’s where technology holds the
most promise. Information and communications technologies
can grant access to otherwise isolated communities, provide
marketing and distribution channels, bypass intermediaries,
drive down transaction costs, and help aggregate demand and
buying power. Smart cards and other emerging technologies are
inexpensive ways to give poor customers a secure identity, a
transaction or credit history, and even a virtual address—
prerequisites for interacting with the formal economy. That’s why
high-tech companies aren’t the only ones that should be
interested in closing the global digital divide; encouraging the
spread of low-cost digital networks at the bottom of the pyramid
is a priority for virtually all companies that want to enter and
engage with these markets. Improved connectivity is an
important catalyst for more effective markets, which are critical
to boosting income levels and accelerating economic growth.
Moreover, global companies stand to gain from the effects of
network expansion in these markets. According to Metcalfe’s Law,
the usefulness of a network equals the square of the number of
users. By the same logic, the value and vigor of the economic
activity that will be generated when hundreds of thousands of
previously isolated rural communities can buy and sell from one
another and from urban markets will increase dramatically—to
the benefit of all participants.• • •
Since BOP markets require significant rethinking of managerial
practices, it is legitimate for managers to ask: Is it worth the
effort?
We think the answer is yes. For one thing, big corporations should
solve big problems—and what is a more pressing concern than
alleviating the poverty that 4 billion people are currently mired
in? It is hard to argue that the wealth of technology and talent
within leading multinationals is better allocated to producing
incremental variations of existing products than to addressing the
real needs—and real opportunities—at the bottom of the
pyramid. Moreover, through competition, multinationals are
likely to bring to BOP markets a level of accountability for
performance and resources that neither international
development agencies nor national governments have
demonstrated during the last 50 years. Participation by MNCs
could set a new standard, as well as a new market-driven
paradigm, for addressing poverty.
But ethical concerns aside, we’ve shown that the potential for
expanding the bottom of the market is just too great to ignore. Big
companies need to focus on big market opportunities if they want
to generate real growth. It is simply good business strategy to be
involved in large, untapped markets that offer new customers,
cost-saving opportunities, and access to radical innovation. The
business opportunities at the bottom of the pyramid are real, and
they are open to any MNC willing to engage and learn.
1. Andrew Lawlor, Caitlin Peterson, and Vivek Sandell,
“Catalyzing Rural Development: TARA-haat.com” (World
Resources Institute, July 2001).
2. Michael Best and Colin M. Maclay, “Community Internet Access
in Rural Areas: Solving the Economic Sustainability Puzzle,” The
Global Information Technology Report 2001—2002: Readiness for
the Networked World, ed., Geoffrey Kirkman (Oxford University
Press, 2002), available on-line at
http://www.cid.harvard.edu/cr/gitrr_030202.html.
3. Joy Howard, Erik Simanis, and Charis Simms, “Sustainable
Deployment for Rural Connectivity: The n-Logue Model” (World
Resources Institute, July 2001).
A version of this article appeared in the September 2002 issue of HarvardBusiness Review.
C.K. Prahalad was the Paul and RuthMcCracken Distinguished University Professorof Strategy at the University of Michigan’s RossSchool of Business. He wrote 16 articles for HBRbefore he passed away, on April 16, 2010.
Allen Hammond is the CIO, senior scientist,and director of the Digital Dividend project atthe World Resources Institute in Washington,DC.
AH