The Hindu Business Line : C.K. Prahalad is now a seeker at the bottom of the pyramid

YOU know C. K. Prahalad as the professor who has helped leading companies of the world to make more profits. Now, in his new book, The Fortune at the Bottom of the Pyramid, from Wharton School and Pearson Education (www.pearsoned.co.in) , you see a different dimension of the renowned consultant — as a prophet aiming at "eradicating poverty through profits".

Poverty may not sound as dramatic as strategy or competition but, hold on, because Prahalad's preface starts with "a clean sheet of paper". No doing more of the same, as we do now, through aid, subsidies, NGOs, and so on, because it is not enough, he urges.

Let us `co-create' by merging the "investment capacity of large firms" and the "knowledge and commitment of NGOs", to do "what works", he exhorts, shaking off the "historical baggage" of phrases such as `poverty alleviation' so as to "convert poverty into an opportunity".

The book is not about BPO, but BOP, the bottom of the pyramid, in which the world's 4 billion poor live, "on far less than $2 a day". The real source of market promise, according to Prahalad, is not the wealthy few in the developing world, or even the emerging middle-income consumers. "It is the billions of aspiring poor who are joining the market economy for the first time."

They are the `latent market' for goods and services; and the author is hopeful that free and transparent private-sector competition, "unlike local village and shanty-town monopolies controlled by local slum lords", has the power to make consumers out of the poor. An accompanying CD with "35 minutes of video filmed on location" has stories from across the world to prove the point.

The `power of dominant logic' can trap you into assumptions such as that BOP is not critical for long-term growth of company, that the poor do not have use for products sold in developed countries, or that the cost structure does not allow servicing of the BOP.

"There is money at the BOP," writes the author. Here's how: Nine countries — China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa, and Thailand — collectively have a population of 3 billion — or about 50 per cent of the world tally. In dollar purchasing power parity (PPP) terms, "this group's GDP is $12.5 trillion, which represents 90 per cent of the developing world." Something "larger than the GDP of Japan, Germany, France, Italy, and the UK combined". Would you still want to ignore BOP?

No, who would? If you are, therefore, serious, Prahalad will advise you on the "twelve principles of innovation for BOP markets", exploding a few myths on the way. Create "a new price-performance envelope", he says, because "servicing BOP markets is not just about lower prices".

BOP markets are large and so your operations should be scalable. "Products must work in hostile environments. It is not just noise, dust, unsanitary conditions, and abuse that products must endure. Products must also be developed to accommodate the low quality of the infrastructure such as electricity and water." For instance, the PCs that ITC put in villages for E-Choupal programme had to work under voltage conditions that fluctuated between 90 and 350 volts.

Deskilling is a must in design, because the skill levels of BOP users are different. However, there can be surprises when interfaces are introduced. Would you believe that in rural agricultural kiosks, EID Parry found that its customers prefer "an English-language interface to their PCs" instead of Tamil? On friendly interfaces again, retailer Elektra in Mexico introduced fingerprint recognition as a basis for operating ATMs so that its BOP customers "need not remember their nine-digit ID codes." Wish city-dwellers had such a facility too.

The book brims with interesting facts and statistics. Check if you knew that the BOP market for detergent in India is 1 million tonnes, compared to less than a third for the top of the pyramid. The cost of a bypass operation in India is as low as $4,000, compared to $50,000 in the US.

There is an ATM in the lab of Dr Ashok Jhunjhunwala and it costs $600, versus the $16,000 that a normal ATM costs. India's 1-million-plus retail shops are tiny (300-400 square feet) but offer well over 4,000 stock-keeping units (SKUs).

Prahalad devotes a chapter on `reducing corruption'. Don't put that `c' tag on whatever you don't understand, cautions the author. "For example, the criticality of relationships in Japanese and Chinese business, opaque to the Western MNCs, can appear to be corruption. So will local customs and the act of mutual obligations in rural societies." Moral: "We must understand the difference between corruption and local practice."

A phrase that Prahalad introduces is `transaction governance capacity' (TGC), which is about "making the entire process as transparent as possible and consistently enforced." On the contrary, micro-regulations arising from "bureaucratic interpretation of the laws" can keep resources trapped.

That Peru enacts more than 28,000 pieces of legislation per year at the rate of more than 100 per day is an alarming quote from Hernando De Soto's The Mystery of Capital. When the system is opaque, opportunities for corruption increase.

The former Andhra Pradesh Chief Minister, Mr N. Chandrababu Naidu, might have lost the elections but his e-governance initiative gets kudos in the book. "It used to take a minimum of half a day for a worker to go to the Electricity Department and pay his or her monthly bill, and 3.5 million bills are paid per month in the city of Hyderabad alone," narrates Prahalad tracing the history of eSeva.

"If we compute the frictional cost at a meagre wage rate of Rs 50 per half day ($1) per person, it tots up to a staggering Rs 2.1 billion per year. The cost to the citizens of just paying electricity bills is a staggering collective wage loss of about $45 million in one city. There is also a host of other bills to be paid and services that require the citizen to go to government offices and wait." Add to this the speed money cost. There are also costs for those "outside the system", such as being "beholden to local politicians" and having "no legal recourse".

TGC can shift people from the informal to the formal sector, convincing them that it is cheaper to be within the system than outside it.

A top-quality read on BOP for companies that want to mop up profits lying at the bottom of the pyramid.

Economics@TheHindu.co.in

More Stories on : Books | Economics | E-Dimension

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Seoul mates

Compete or perish

ADB's Country Strategy and Programme 2005-07 — Infrastructure is the core focus

An officer on the trail of 20 vanishing shareholders

Don't let the higher value out

Clarity sacrificed for brevity

Annul the annual amendment activity

Sticklish issues

C.K. Prahalad is now a seeker at the bottom of the pyramid