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; some people don’t even notice. One man, C.K. Prahalad, has 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 explains how in his book The Fortune at the Bottom of the Pyramid—Eradicating Poverty Through Profits
(Wharton School Publishing).
Following is an abridged version of an interview with C.K. Prahalad that originally appeared in AMA’s management journal MWorld
Shari Lifland: 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 opportunity, as a huge, untapped consumer market. How did you first come up with this idea?
C.K. 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. But 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 toward 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.
SL: 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.
SL: What are the keys to building a profitable win-win relationship between big business and the world’s poor? How do you convince a multinational 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. But because of the way we are socialized, making that leap of thinking is the biggest impediment.
Look at the purchasing power of the world’s 10 largest countries—China, India, Brazil, Mexico and so on. While there is a lot of poverty there, they represent 13 trillion dollars in combined GDP. That’s more than the combined GDP of Germany, France, Italy, UK and Japan, in purchasing power parity dollars. Even in U.S. dollars, China already is a $1.4 trillion economy. India is approaching $700 billion. These are huge countries and there is a lot of economic activity taking place there. And it’s only likely to grow.
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 on. Income has risen above $700 in China and now it’s becoming one of the most important markets in the world. In five years 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.
SL: 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.
SL: How do you respond to the backlash against outsourcing—especially to India?
CKP: Outsourcing has very little to do with Bottom of the Pyramid. In India the people involved are the elite and are paid extremely well by local standards. In many cases the facilities are better than anything I’ve seen in the U.S.
Furthermore, 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 and so forth. That’s good for America.