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 After one year assuming a concrete business development position at Prakti Design, around dissemination improved cookstoves, I found it useful to take some distance and read again texts and articles, in order to find some sense in this strange BOP universe!
I already spoke in this blog about an insightful survey about innovative model for this new type of market. I will start a serie of 10 (or more!) bullet points of major text and books. First is a very famous critic of Prahalad's Fortune at the Bottom of the Pyramid,by Karnani. Let start by the conclusion, you can read more by clicking on... read more! "Private companies should try to market to the poor. However, the profit opportunities are modest at best and I suggest a cautious approach. Large companies that require scale economies should be even more hesitant. The best opportunities exist when the firm reduces price significantly by innovatively changing the price-quality trade-off in a manner acceptable to the poor.
The private sector can help alleviate poverty by focusing on the poor as producers. One way to do this is to make markets more efficient such that the poor capture more of the value of their outputs. Certainly the best way for private firms to help eradicate poverty is to invest in upgrading the skills and productivity of the poor and to help create more employment opportunities for them. This is the win-win solution ; this is the real fortune at the bottom of the pyramid."
Simple, clear, and indeed, I myself faced these questions : what quality/price point, expensive cost of distribution in rural area, who are we really focusing, do we target enough the poorest? how can we make poor not only consumer but also producer?
You can download the full article in PDF here.
In 2007, Aneel Karnani published a critic of Prahalad’s Fortune at the Bottom of the Pyramid (2004) in California Management review. Qualifying Marketing to the Bottom at the Pyramid as a “Mirage”, he wonder how private sector can efficiently help alleviate poverty.
1) BOP market is smaller and less profitable than introducing by Prahalad, it is not a place where one can make fortune and they don’t lead to economies of scale
- It is difficult, if not impossible, to evaluate the number of poor in the world. A useable criterion is a purchasing power parity (PPP) of $2 per day, rates in 1990 prices. ‘At this level of poverty, basic needs of survival are met, but just barely’. Estimates vary from 4 billion people (Prahalad) to 2.7 (World Bank, 2001), some researchers even states 600 million
- Size of the market is more around $1.2 trillion, with an average consumption of $1.25 per day. And that is at a PPP rate. But MNC repatriated their profits at the financial market exchange rate, not PPP rate. Meaning global size of BOP is less than $0.3 trillion. It is more than 20 times less than USA market. A quite small market
- And also not a profitable market. Costs of serving the markets are high. Poor are geographically dispersed, culturally heterogeneous. Weak infrastructure increases the cost of doing business. Each transaction has a small size. And poor spend more than 80% of their income on food, clothing and fuel. Little space is left for luxuries!
- Examples given by Prahalad are either profitable because they sell to people well above the $2 per day poverty line, or are focusing on social impact but are not profitable
- Furthermore, these markets do not involve economies of scale. Products sold to the poor are less complex, they reduce the scale economies in technology and operations. Bicycles are less scale-intensive than motorcycles. They are also less marketing and brand-intensive. It is a market that suit more to local small or medium companies than MNCs.
2) Single Serve and Financial scheme are not a revolution! The only way to increase affordability is to reduce the price of the product. It can be done partly by reduction of profit and redesign to reduce cost. It has to be done also by volunteering and reduction of quality
- Single serve is illustrated by Unilever and P&G selling small packets of various products. First, it has been introduced first by an Indian start up, not by these MNC
- Small packages don’t create affordability. The only way to create affordability is to increase revenues. ‘By the BOP logic, an easy way to solve the problems of hunger and malnutrition would be to sell food in smaller packages’! And there is a negative environmental impact brought by these small package
- I add that there is a negative substitution impact, given by Gram Vikas in Orissa. People are substituting local plants and production for imported small package shampoo
- Financing products by loan is also not a way to improve affordability
- Finally, the BOP initiative could result in the poor spending money on products that would have been better spent on higher priority needs. Free market ideology taken to an extreme forget that the poor are vulnerable by virtue of lack of education, information and economic, cultural and social deprivations.
- There are very few micro level studies on the purchasing behavior of the poor. Banerjee and Duflo show that the poor “could easily save more without getting less nutrition by spending less on alcohol, tobacco and food items”. The poor in India spend about 3% of their household income on alcohol and tobacco. Poor have the right to spend as they like. Government should, as in developed market, put regulations and tax incentives.
- There are only 3 ways to reduce prices: reduce profits, reduce costs without reducing quality and reduce costs by reducing quality. Even if average profit margin is around 50%, and breaking local monopoly could reduce profits, but not enough. Unless all current producers are grossly inefficient, business process redesign will not reduce cost by over 50% without reducing quality
- An example: Aravind Eye Hospital. Looks like incredible, because has reduced the cost of a cataract operation to $25 to $300 compared to $3000 in US. Aravind is indeed a very efficient organization, but comparing to other private hospitals in India and if converted into PPP dollars, $300 is very comparable to US costs. Aravind also subsidizes the poor patients, but for that the surgeons and staff work grueling hours for pay comparable to government hospitals because they are highly dedicated to the cause. Still, retention is a problem.
- The real challenge is then to reduce quality in such a way that the cost-quality trade off is acceptable to poor consumers. And it can be done without huge R&D. A good example is the Nirma proposal, formulated by a lone chemist. Contrary to the BOP proposition, what is disrespectful is to impose our price quality trade off, not reducing quality. Trying to find a new quality cost point is the main realistic way.
- Quality is a relative concept and one can be analyzed through eight dimension: performance, features, reliability, conformance, durability, aesthetics and perceived quality (see David A. Garvin)
3) The only way to help the poor and alleviate poverty is to raise the real income of the poor
- Karnani argues for “the need to view the poor primarily as producers, not as consumers. By far, the best way to alleviate poverty is to raise the income of the poor and to emphasize buying from the poor rather than selling to the poor.”
- Regarding micro credit, less than 100 out of 7 000 organization claim financial self sufficiency. And the reality is that microcredit is beneficial, but only to a limited extent. The problem lies with the fact that not every poor is entrepreneur. Or he is entrepreneur in the sense that he raises the capital, manages the business and is the residual claimant of the earnings. But not in the sense of having a vision and creativity, converting new idea into new business model. The self-employed poor usually have no specialized skills and often practice multiple occupation. May of these businesses operate at too small a scale.
- In consequence, in order to raise the real income without considering all of them as entrepreneurs, “creating opportunities for steady employment at reasonable wages is the best way to eradicate poverty”.
- In that sense, India has a jobless growth, due to its focus on capital-intensive and skill-intensive sector. India needs to emphasize growth in labor-intensive, low-skill sectors such as light manufacturing, garments and tourism.
- Globally, rather than lending $200 to 500 women so that each can buy a sewing machine and set up a microenterprise manufacturing garments, it might be much better to lend $100 000 to an entrepreneur with managerial capabilities and business acumen and help her or him to set up a garment manufacturing business employing 500 people.
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