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Fighting Poverty Through Profits: C.K. Prahalad, in Memoriam

By: Shari Lifland
Last updated 2/23/2011

How do we react to the five billion poor people in the world? Some people throw their hands up in despair; some people reach for their checkbooks to help those they can; others don’t even notice. One man, C.K. Prahalad, devised a simple, yet visionary plan to attack poverty on a global level, by transforming the poorest of the poor—the people who live at the “Bottom of the Pyramid”—into consumers. He outlined this thesis in his book The Fortune at the Bottom of the Pyramid—Eradicating Poverty Through Profits (Wharton School Publishing, 2004).

 

AMA: The thesis of your new book, The Fortune at the Bottom of the Pyramid, is pretty revolutionary—that we stop thinking of the poor as victims or as a burden, and instead recognize them as a business opportunitya huge, untapped consumer market. How did you first come up with this idea?

 

CKP: Prahalad: Several ideas led me to this conclusion. The first is that we have tried for over 40 years, using all kinds of tools, to elevate the world’s poor people from poverty.  Yet, there are more poor people living today than before. They are concentrated in pockets throughout Africa, Latin America and Mexico, and in India, China and Southeast Asia. I thought: there must be a different way. 

 

I have a visceral feeling for poverty.  I didn’t grow up poor, but I saw it all around me in India. Wherever I travel—in India, Mexico, Brazil, China—I see poverty. However, I also find that poor people have to be extremely resilient and entrepreneurial, just to survive; and that aspect of their lives is never taken into account in thinking about solutions. I have seen 5- or 6-year-old kids trying to sell something—a bunch of flowers, cleaning a car—in search of a way to get by. So my second starting point was, what if we can focus the entrepreneurial energy, resilience, and perseverance of poor people into productive work?

 

My third starting point was that the poor want to participate in the good things in life.  I cannot imagine any person who does not want a better life for their children—better education, healthcare. In India, for example, the poorest people work three or four jobs as servants, putting away a significant portion of their income so they can send their children to private schools. When I see people making tremendous sacrifices so that their children can grow up to participate in the formal economy, it is very clear to me that if you just took half a step towards helping them, they would become good consumers. 

 

These ideas kept churning in my head for some time and finally one day, I put it all together. I wrote a paper outlining the strategies for the Bottom of the Pyramid

 

AMA: How did you come up with the phrase “Bottom of the Pyramid”?

 

CKP:  I didn’t want to use the words “poor” or “poverty,” because both carry so much baggage. There will always be a bottom of the pyramid. There is no negative association with being at the bottom; the real test is whether you have an opportunity to move up. 

 

Once companies start to recognize the world’s four-to-five billion poor people as potential consumers, these people at the bottom of the pyramid will acquire choice and they will gain respect. Because one thing is universal: everybody respects consumers.  If companies don’t respect them and cater to their whims, they don’t stay in business.

 

AMA: What are the keys to building a profitable win-win relationship between big business and the world’s poor? How do you convince a multi-national company that someone earning $2 a day should be its target customer?

 

CKP: Once you cross the big mental divide and start thinking of the people at the bottom of the pyramid as potential consumers, how to do it becomes very obvious. However, because of the way we are socialized, making that leap of thinking is the biggest impediment. 

 

Historically, we’ve seen that there is something magical about $600 or $700 per capita income, across the board, in any developing country. That is the point where people start buying radios, bicycles, better clothes, and so forth. Income has risen above $700 in China and now it’s becoming one of the most important markets in the world. The same thing will happen in India.

 

The greatest American companies—Singer Sewing Machine, Sears, Ford—did not become big global corporations on the backs of rich people. Singer’s original machine cost $100 dollars. Poor women couldn’t afford it. So Singer let them pay $5 each month and created a new class of consumers.

 

AMA: You write that the Bottom of the Pyramid market will force a new level of efficiency in multinational corporations. Can you explain why?

 

CKP:  It’s fairly straightforward:  you have to make things affordable, without sacrificing quality. In the book I use the example of shampoo being sold at one cent retail. It may be a single use size, but it’s the same shampoo we sell here. The one cent price means that companies have to figure out how to cover the costs of production, distribution, packaging and so on while at the same time making that purchase profitable. 

 

This carries over to innovations of all kinds—detergents that require less water, cataract operations for $30 or a prosthetic limb for $25, compared with $10,000 in the U.S. Once companies develop these innovations, these markets become more profitable, in terms of returns on capital, equity and investment, than the top of the pyramid in the same countries. You fundamentally rethink the entire business process, from product development, manufacturing and distribution, so that you find a different way of doing the same thing while still making a profit.

 

AMA:  You’ve spoken about the role of the Internet in empowering the individual.  I recently had an interesting experience while vacationing in Peru. Farmers in a small Andean town were plowing the fields with oxen, yet, the town had a small Internet café. How are those poor farmers empowered by access to the Internet?

 

CKP:  Quite simply, if you give people access to the Internet, it is very hard to keep them poor. It’s the new form of democratization. The picture on the cover of my book shows subsistence farmers, sitting on the floor, using a mouse to navigate the Internet to check the price of soybeans. Three months after being given a computer, they were looking up not only local prices, but prices on the Chicago Board of Trade!

 

The biggest impediment for people at the bottom of the pyramid is lack of information.  Before the Internet, they didn’t know what was possible. They didn’t know the market prices for their produce. It was easy for them to be controlled by others. So today, the most important infrastructure in developing countries is not roads—it’s connectivity. 

 

AMA:  How do you respond to the backlash against outsourcing—especially to India?

 

CKP:  The outsourcing issue is totally misunderstood. Outsourcing is not, as it is commonly regarded, greedy corporations going after cash and lower costs by setting up sweatshops abroad. It is a fundamental restructuring of global industries in search of cost, quality and new processes. Essentially, it’s a management innovation. When you have 30,000 GE people working in India, it helps GE prepare for the next 50 years on a global basis. Plus people forget that a GE call center in India uses Microsoft software, Dell computers, Carrier air conditioners, etc. That’s good for America.

 

America’s solution to this problem must be innovation, not protection. It is exactly the same debate we had in the 1980s when senators smashed Japanese TV sets in front of the Capitol building. Everyone said Japanese manufacturing would mean the demise of Intel, IBM, etc. What happened? Intel is still the most profitable company in the business. IBM is growing like crazy. People adjust and they innovate. America still creates a Microsoft, an Oracle, a Google, a Netscape, an eBay. There are very few countries in the world that can do that. We should start focusing on our strengths—global reach, global management, intercultural capabilities, and the capacity for innovation

 

AMA:  In your book you present case studies of 12 Bottom of the Pyramid success stories in a wide range of industries, from health care to financial services and agriculture. Do these organizations share a common denominator?

 

CKP:  The most important element is the commitment of the CEO. In the initial stages there are going to be a lot of skeptics; but once people understand that serving the Bottom of the Pyramid is doable and profitable, then there is no problem getting buy-in from senior and middle-level managers. The people who are most excited are young people just out of business and engineering schools. They see meaning in their lives doing something like this rather than coming up with yet another way to market coffee.  That’s one of the reasons I continue to teach; it’s very energizing to see the idealism in young people. I always say, “Appeal to the missionary, not the mercenary, in people.” 

About the Author(s)

Shari Lifland is Editorial Communications Manager for American Management Association.  She is editor of the eNewsletters "Moving Ahead," "Management Update," and "Administrative Excellence," and manages content for the Members-only section of AMA's Website.