Finding Profit in Servicing the Poor

Thursday, October 18, 2007

If someone were to do a poll of the Top 10 breakthrough ideas in management in the decade gone by, the concept of the bottom of the pyramid (BOP) would without doubt be somewhere at the top of the list. The idea?that there is a huge untapped opportunity for companies in creating value for and serving the 4 billion people comprising the world’s poor?has captured the imagination of companies across the world. Overnight, multinationals like Unilever and SC Johnson launched initiatives in this direction.

A non-starter: Cut back to 1988 when this was just a germ of an idea in the minds of Stuart Hart, then at the UNC Kenan-Flagler Business School, and C K Prahalad, the Paul and Ruth McCracken Distinguished University Professor of Strategy at University of Michigan’s Ross School of Business. It met with scepticism. For three years, Harvard Business Review, often viewed as the crucible for new management ideas, neither rejected nor published Prahalad and Hart’s article that introduced the concept of BOP. Why? Because there weren’t any success stories to support their argument. Says Hart, “At that time we couldn’t cite a large MNC that had converted the idea of the BOP it into a multi-billion dollar business”.

Post 9/11, it became clear that more global interconnectedness means that both the good and the bad travels?there are repercussions for continuing widespread inequity, alienation and poverty. It was then in 2002, that the article caught the eye of another journal called Strategy+Business which published it in a special issue exploring the links between security and sustainability. The idea, also theme of Prahalad’s 2004 bestseller The Fortune at the Bottom of the Pyramid, has gained currency today. But there’s also a growing backlash. Recently, Aneel Karnani, professor at the Ross School of Business, lashed out against it saying that fortune at the base of the pyramid is just a mirage and that a lot of BOP initiatives exploit poor. How does Hart view the criticism? The initial attempts: “Whenever a new idea comes up there are early adopters and almost always some of them end up with arrows in their back,” says Hart rather philosophically. “The initial attempts at something are always flawed. You cannot start something new perfectly.” So what really are problems with BOP 1.0, as one may call it?

For one, companies have adopted a fairly structural approach to BOP. “It was such a different idea that it was very difficult for large incumbent MNCs to stretch too far away from what they currently do,” says Hart. Most MNCs saw this as some kind of a ’push distribution strategy’?”We’ve got a product and we are going to push it through”. “It’s natural if you begin with a product you have, modify it, take cost out of it, put it in affordable packaging sizes and sell it to people at lower income levels. All that is important to demonstrate business viability of serving lower income people,” says Hart. “That is a radical innovation.

Enter BOP 2.0: So what needs to change? The approach. Says Hart, “In entrepreneurship there are two approaches?discovery based and creation based.” The discovery approach assumes that problems and opportunities exist out there so you can do market research and use data to discover what the problem is. “People in big companies love this approach because it is quantifiable: you have to show the ’hockey stick curves’ before you put any money into it,” he laughs. “But the truth is, it is very high risk?it is very hands off, very alien in the sense that you are studying this from far, collecting market data and then saying, here’s the opportunity.”

Creation-based entrepreneurship has a different starting point. “The real entrepreneurial successes came from this approach. The entrepreneur doesn’t presume that there is an opportunity. He is a participant in the co-creation of that opportunity. Local indigenously grown ventures like Grameen Bank have been successful because they were deeply embedded in a place. It wasn’t just a deep understanding of the place, but also a deep partnership.” BOP 2.0 is based on this second process oriented approach.

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Source: The Times of India (link opens in a new window)