BOP Issue Analysis-short version

8/7/2019 BOP Issue Analysis-short version

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Bottom of the PyramidStrategies:Exploitation or a Win-Win

Solution?March 14, 2007Matt EvansWiam HasanainLorin May Melissa Ong


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Overview

Defining the Bottom of thePyramid

The Great DebateOpportunitiesRisks & Challenges

Guidelines and Leading PracticesConclusionAppendix


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Defining the Bottom of thePyramid: A Visual

Representation

Source: Prahalad, C.K. and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy+business, Issue 26, f irst quarter 2002


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Source: Bonsall, Amy, et al., Turning Poverty Into Opportunity As A Means for Prosperity, DLN White Paper, November 2005

Defining the Bottom of thePyramid: Changing Attitudes

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Modern View Incorporates Both

HistoricView


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Overview


The Great DebateRisks & ChallengesOpportunities



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The Great Debate:Win-Win or Misguided

Strategy?Latent market forgoods and services

Large growthopportunity, due tosize of BOP

Catalyst foreconomicdevelopmentthrough providingaffordable productsand services

Poor lack income and jobs; should produce

before consume

Vulnerable to poorpurchasing decisions;income should be spenton shelter not ice cream.

Sale of MNC productsdoes not clearly improvesocial indicators

MNC profits flow abroad,do not help local

Win-WinWin-Win MisguideMisguidedd


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Case Study: BOP StrategyGone Wrong at NestleProject : In 1970s, Nestle began marketing infantformula to mothers in the developing world, with theargument that bottled milk is better for infantchildren.

Assumptions : Sterile water and bottles, no dilution.Impact : Babies using Nestles product in developingcountries were 25X more likely to die of diarrhea,and mothers developed an addiction to the productafter prolonged use stopped lactation.


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Case Study: BOP StrategyGone Wrong at Nestle

In addition to the incorrect assumption aboutsterile water, Nestle used questionable marketingtactics with BOP consumers:

Health agencies condemned Nestle formarketing instant infant formula in developingcountries.Nestles marketing implied that Western womensubstituted mothers milk with formula.Promoting infants milk as a product that wasmore beneficial to both mother and child thannatural breast milk.Clearly violated the WHO/UNICEFs InternationalCode of Marketing Breast-Milk Substitutes.


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Overview





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Risks & Challenges:

Exposure to newpolitical and economicrisksResources, capabilitiesand knowledge of the

complexities andsubtleties of sustainabledevelopment arerequired.Consumers cant afforddifferentiated productsCompeting with local

business can threatenthe existing powerstructure.

Market size unclear:estimates range from$0.3 trillion to $13trillion.

Prahalad uses purchasing power parityand assumes 4 billion BOP spending$4/day to estimate $13 trillion.Aneel uses financial exchange rates(that MNCs would use to expatriateprofits) and assumes 2.7 billion BOPspending $1.25/day to estimate $0.3trillion.

Low margin; high fixedcostsDistribution challengesHigh price sensitivityand per unittransaction costs

OperatingOperatingEnvironmentEnvironment

EconomicsEconomics


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Overview





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OpportunitiesBOP consumers suffera poverty penalty:

Lack of access tocompetitively and

efficiently-providedgoods and servicesHigher prices forsome goods andservices (i.e.manufacturedgoods, credit)Poorer qualitygoods and services

At the same time,BOP consumers:

Are brand-conscious

Have well-connectedcommunities(word-of-mouth)Readily acceptadvancedtechnologyCollectively havepurchasing powerAre always tryingto upgrade fromtheir existingcondition


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Opportunities

BOP consumers get cheaper products, access to technology, andopportunities to become entrepreneurs, and educate themselves.BOP markets present companies with a new source of:

Top-line revenue growthCost-savings and innovations that can influence existingbusiness models and management practices

But selling into BOP markets is difficult and even harder to doresponsibly.In order to market to the BOP in a way that brings real benefits toimpacted communities, companies should follow some importantguidelines and lessons from leaders in the industry.


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Overview

Defining the Bottom of the Pyramid The Great Debate

Risks & ChallengesOpportunitiesGuidelines and Leading PracticesConclusionAppendix

4 K U l ki BOP


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Source: Prahalad, C.K. and Stuart L. Hart, The Fortune at the Bottom of the Pyramid,strategy+business, Issue 26, first quarter 2002

4 Keys to Unlocking BOPMarkets to CorporateProducts


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Shape Aspirations: Engage the BOP as Joint Problem

SolversFocus on the poor as producers,not just consumers.

Upgrade skills and productivity toimprove lives and increasepurchasing power.

Channel resources back into localcommunities to improvestandards of living.


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Case Study: ITCEnables Market Pricing

Geography: R ural IndiaIndustry: Agricultural trading

Product: E-Choupals; internet-connected computersBackground:

Farmers sold grain to middlemenat below market prices.Lack of information led toexploitation of farmers.


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Case Study: ITCEnables Market Pricing

Innovation:ITC developed E-choupals; network of computers which provided web access inrural farming villages, each manned by a

literate host farmer to support illiteratefarmers.Farmers check trading price of theirproduce and sell directly to ITC.

Farmers also order raw material at anaggregate level, thereby saving money(economies of scale)

Impact: Farmers receive 2.5% higher price($6/ton).


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Tailor Local Solutions:Innovate from the BOP up

Reorient R&D efforts to create appropriatetechnologies and new products and servicesthat consider the unique needs of the poor, byregion and by country.Nurture local markets and cultures andleverage both local solutions and global bestpractices to meet identified needs.At the BOP, capital not labor is the scarce

resource, and focusing on that difference canlead to greater productivity and higher returns.


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Tailor Local Solutions:Reevaluate Price-Performance-Process Matrix

Incorporate local know-how.Rethink the entire business process from product development to production

to logistics with a focus on meetingfunctionality needs.By Prahalads estimates, BOPinnovations must achieve a drastic pricereduction (30 100x) in order to belocally competitive.


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Improve Access: IdentifyInnovative Distribution &

Communication StrategiesBOP communities are often physicallyand economically isolated.Create direct distribution and word-of-mouth mechanisms to educateconsumers and expand access andavailability.Add value by finishing productmanufacturing within the community.


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Improve Access: Create a Scalable Model

Design solutions for adaptability acrossmarkets.Scalability is key to profitability sinceBOP products tend to be low margin.BOP profits are driven by volume andcapital efficiency.


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Create Buying Power: Identify Innovative Financing

Schemes Provide financial services that focusnot only on access but buildingfinancial literacy and encouraging ahabit of savings.

Do not provide credit for luxurypurchases (note: definition of luxuryitems is controversial.)

Encourage investment inproductive assets (tools,agricultural materials, preventativehealth).

Community credit pooling with arevolving loan fund is one successfulstrategy proven to reduce defaultrisk.


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Build the CommercialInfrastructure: Develop

PartnershipsA companys product or serviceofferings are its corecompetency, but BOP strategiesrequire a higher level of engagement.

Develop partnerships withNGOs, local governments,financial institutions and localentrepreneurs to expandtraining, development, micro-finance and other expertise.

Building a base of local supportcan also help to establish

credibility within localcommunities, gain insight into acountrys culture, increase localknowledge and overcomeopposition when entering a newmarket.

BOP

NGOs &GovtsMNCs


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Overview





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Conclusion:For those combating

povertyIF corporations canwithout causing the verypoor to divert income frompressing needs,sell products that makepeople more productive,that are produced in a waythat create local jobs andincrease local human capital,without driving out localindustries,and reinvest locally insteadof repatriating profits,

THEN, they can be an importantpart of the solution to poverty,which is excellent CSR.


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Conclusion:For corporations interested

in BOPIF corporations cancreate low price, qualityproducts,that can be scaled acrossmany BOP markets andachieve high volume,while creating means for thecapital constrained poor tobuy,and building relationships andinfrastructure that allow themto reach poor consumers,and finally, follow thedirectives on the previous slide(at least enough to avoidbecoming a publicized badexample)

THEN, they can serve BOPmarkets profitably.

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BOP Issue Analysis-short version

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