Economist on CK Prahalad

For a change, a thoughtful article in the Economist. That's because it
is not written by their India stringer, and the intent is not to demean India or
Indians.

Prahalad seems to have latched on to a good thing. There is plenty of
money to be made by selling to the lower end of the market. He is the
inspiration behind the recent Tata Hotels venture, IndiOne, a Rs. 1000
business hotel chain, the first of which has come up in Bangalore.
Great idea. Indian hotels are among the most expensive in the world,
with big-city hotels costing upwards of $200 for rooms that are poor
value for the money. At sub-Rs. 1000, I believe demand will zoom. Just
as for the budget airlines.

The example of Bangladesh's Grameen Bank is also instructive

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Profits and poverty

Aug 19th 2004
From The Economist print edition

C.K. Prahalad thinks there can be a win-win relationship between
business and the poor

"IF WE stop thinking of the poor as victims or as a burden and start
recognising them as resilient and creative entrepreneurs and
value-conscious consumers, a whole new world of opportunity will open
up." That "simple proposition" begins a controversial new management
book that seems destined to be read not just in boardrooms but also in
government offices. "The Fortune at the Bottom of the Pyramid.
Eradicating Poverty Through Profits" (Wharton School Publishing), is
essentially a rallying cry for big business to put serving the world's
5 billion or so poorest people at the heart of their profit-making
strategies. It has already been praised by everyone from Bill Gates—"a
blueprint for fighting poverty"—to a former American secretary of
state, Madeleine Albright—"if you are looking for fresh thinking about
emerging markets, your search is ended."

Its author, C.K. Prahalad, is accustomed to rave reviews. (The C is
for Coimbatore, the Indian town of his birth, the K for Krishnarao,
his father's name.) After becoming a management professor at the
University of Michigan via a job at Union Carbide and study at the
Indian Institute of Management and Harvard, he wrote "Competing for
the Future" (Harvard Business School Press) with Gary Hamel in 1994.
This tome was regarded as perhaps the best business book of the
1990s—an accolade that, admittedly, may be less than it sounds, given
the amount of rubbish published by the business-book trade (see
article).

As the two gurus searched for their next hit, Mr Hamel stumbled across
Enron, a then-thriving energy conglomerate that he eulogised in
"Leading the Revolution" (Harvard Business School Press). Mr Prahalad,
by contrast, "after searching for a couple of years, saw that the big
idea was creating wealth at the bottom of the pyramid". He has been
evolving his ideas about how firms should focus on the bottom of the
pyramid—a phrase he shortens to BOP, to contrast with those wealthy
folk at the TOP—since 1997, despite a spell running Praja, a
business-activity-monitoring software firm that later had to be sold
when it could not raise the capital it needed in the aftermath of the
tech bubble. "Badly timed, but taught me a lot," claims Mr Prahalad.

... deleted

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.

BOP till you drop
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. Products will have to be made available in affordable
units—most sales of shampoo in India, for example, are of single
sachets. Distribution networks may need to be rethought, not least to
involve entrepreneurs from among the poor. Customers may need to be
educated in how to consume, and even why—about credit, say, or even
about the benefits of washed hands. The corruption now widespread in
poor countries must be tackled (about which Mr Prahalad has penned a
particularly useful chapter).

... deleted

Another challenge will be to persuade development experts to support a
profit-driven strategy. 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."