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Sept. 2, 2004

 

Turning the poor into consumers creates huge growth markets

ANN ARBOR, Mich.—Four billion people around the world live on less than $2 a day, but these poorest of the poor represent the potential for one of the most vibrant growth markets in the world, says a University of Michigan Business School professor.

In his new book, "The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits," C.K. Prahalad argues that private-sector businesses can help alleviate poverty and, at the same time, make a profit by turning the poor—those at the bottom of the economic pyramid—into consumers and developing viable markets for innovative products and services in under-served and long-neglected areas.

"What is needed is a better way to help the poor," said Prahalad, professor of corporate strategy and international business. "A way that involves motivated participants on both ends and incorporates innovation to achieve sustainable win-win scenarios where the poor are empowered and the companies providing products and services to them make a profit."

Such a way, he says, already exists and has gone well past the idea stage as private enterprises have begun to successfully build markets at the bottom of the pyramid as a way of eradicating poverty.

In analyzing 50 years of failed efforts by governments, aid agencies, donor nations and others to solve the problem, Prahalad identifies and counters common misconceptions about the purchasing power; delivery infrastructure and buying habits of the poor that have discouraged companies from entering those lowest markets in the past.

"One dominant assumption is that the poor have no purchasing power and, therefore, do not represent a viable market," said Prahalad, who points out that, collectively, the countries of China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa and Thailand are home to about three billion people and a Gross Domestic Product in dollar purchasing power parity of $12.5 trillion.

"This represents 80 percent of the developing-world population and 90 percent of the developing-world GDP," he said. "The GDP of these nine countries, in terms of purchasing power parity, is larger than the combined GDP of Japan, Germany, France, the U.K. and Italy. This is not a market to be ignored."

While by virtue of their numbers, the poor represent a significant latent purchasing power, converting them into consumers requires intensive market development, Prahalad says. He outlines what he calls the "three A's" of affordability, access and availability, which are essential for the task.

He also identifies 12 principles that constitute the building blocks of a philosophy of innovation for these bottom of the pyramid markets. These include focusing on the price performance of products and services; making solutions scalable and transportable across countries, cultures and languages; rethinking the functionality of products; assessing potential customers; and educating buyers on the use of products.

"Getting the right combination of scale, technology, price, sustainability and usability requires that managers start with a zero-based view of innovations for bottom of the pyramid markets," Prahalad said. "They need a new philosophy of innovation and product and service delivery for those markets."

Taking the traditional approach that results in "fine-tuning" current products, services and management practices rather than creating new ones is a "recipe for failure," he says.

Although Prahalad's efforts to push the idea of the poor as a market and a source of innovations constitute a "long and lonely journey," a growing number of non-governmental organizations, academics and managers are beginning to respond. Many have started to discuss the need for an alternative approach to poverty alleviation and the important role of the private sector and entrepreneurship in that process.

"Bottom of the pyramid consumers get products and services at an affordable price, but more importantly, they get recognition, respect and fair treatment," Prahalad said. "Building self-esteem and empowerment is probably the most enduring contribution that the private sector can make."

 

Contact: Bernie DeGroat
Phone: (734) 936-1015 or 647-1847
E-mail: bernied@umich.edu