Tuesday, October 11, 2005

Even though Professor CK Prahalad pioneered the notion of companies targeting the lowest rungs of the market way back in the mid 1990s, it was after his book The Fortune at the Bottom of the Pyramid was published about a year back, that the concept gained increasing momentum.

His key argument: the so-called Bottom of the Pyramid (BOP) with an estimated 4 billion people who live on less than US$ 1,500 per annum, is a major market opportunity.

Not surprisingly, a number of Indian and overseas companies have tried to adopt this innovative business model. Hindustan Lever Ltd (HLL) has increased its market thrust behind Project Shakti, the low cost distribution model, which it already had, to target a wider base.

ICICI Bank has led a number of new initiatives to provide a host of banking services at affordable costs to the poor and lower middle class, including setting up a network of around 8,000 self-help groups.

ITC is banking a lot on its eChoupal system for targeting rural farmer-entrepreneurs aimed at improving the agricultural supply chain, cutting supply costs, upgrading the information base for farmers and doing e-commerce.

At last count, the initiative was estimated to target over 3 million farmers through 5,200 installations covering 31,000 villages across six states.

But, amidst this gathering interest in corporate India to target the BOP, many companies are also finding that exploring the vast uncharted rural territories is not an easy ride. First, break-even points are long.

ITC’s internal estimates suggest that break-even for the eChoupal initiative can be as long as seven years. Others in the beverages segment have had to cut back on their low cost marketing efforts.

Example: multinational beverage giants PepsiCo and Coca-Cola could not contain their attractive price point of Rs 5 for more than two years. HLL’s Project Shakti, on the other hand, grappled with the issue of bringing down distribution costs.

The company’s initial estimate suggests that targeting the BOP is at least 5-10 per cent costlier than selling in urban markets. Other key barriers for those targeting this segment include issues such as the wide geographical dispersion of villages, greater heterogeneity in demographics, resources and weak infrastructure.

Clearly then, there are many lessons for companies trying to grapple with the tough challenge of making this business model work. One, they must realise that the BOP market cannot be approached with the traditional marketing mindset. The business models are different.

Second, companies will best succeed if they can create teams that think innovatively, outside the company’s traditional logic. In many large traditional business groups and multinationals in India, that will not be an easy task.

Third, costs, price, packaging and innovative use of technology have to be developed to match BOP customer needs. Finally, there is the need to create effective partnerships with both public and private players, particularly in the areas of infrastructure and financing.

In the nineties, when Prof. Prahalad propounded the theory of core competency, it generated widespread debate whether, in an era of growing business opportunities, companies should in fact stick to their knitting.

This time round, the BOP theory is once again set to usher in a phase of intense corporate soul searching about how relevant it will be and to whom.

Source: Business Standard (link opens in a new window)