Rob Katz

The Prahalad Interview: Brazil’s Valor

The Brazilian economic journal Valor recently interviewed University of Michigan professor and The Next Practice founder C.K. Prahalad about business strategies for the base of the pyramid. The full interview, translated from the Portugese, follows below. (Translation credit: Alex Bloom).

C.K. Prahalad: We can take Brazil as an example. One of the largest sellers of electronics products is “Casas Bahia,” which primarily sells to poor people of S?o Paulo and Rio de Janeiro, most of whom live in slums. They take in about US $3.5 billion per year and are profitable. In the market of fast foods, “Habib’s” is growing fast and also targets consumption by low-income people. These examples are repeated in different parts of the world. The biggest developing countries – China, India, Brazil, Mexico, Turkey, Russia, Thailand, Indonesia and South Africa – concentrate a purchasing power on the order of US $12.5 trillion, which is more than Germany, England, France, Italy and Japan combined. It is a ready market to be explored, but that still does not receive due attention.

The secret to reaching these millions of consumers is to make them capable of consuming and accessing quality products. What happens is that we think that only people with good jobs and that live in developed areas have money. This is not true.

Valor: Companies need, then, to create a new market for these people, instead of trying to bring them into the existing markets?

Prahalad: Correct. Creating a new market is key, new areas where they can act. Not to create new needs for these consumers, but to find new ways to sell the same products and services in an innovative way.

Valor: The companies still did not search for this chance?

Prahalad: Most of the companies are focused on the models that function in the developed countries. Many multinationals – and great national companies in countries such as Brazil – are oriented only towards the sector of the population with greater purchasing power, because they can pay more, instead of exploring the possibility of great profits in the rest of the population. But already there are companies that have perceived this opportunity and are having enormous success. This proves that, if you venture to create a new model, there is the opportunity to make great profits. It is possible to create products of high quality with accessible prices.

Valor: What is the biggest challenge–to change the way as the company sees this sector of the population, or to change the approach and methodology towards this sector?

Prahalad: The problem is changing the way managers see these markets. So assume they will be able to see opportunity in the low income markets. The second thing is to start to think of how to develop new products and services that are compatible with this market. How do you develop affordable products and services, easy to be distributed and that, in the end, are still lucrative? There is proof that you guide this sector of the population and show them the way, the results will come.

Valor: How can a company find opportunities in this market? What are the steps a company should take to conquer the low income consumers?

Prahalad: Once a company has defined the poor as its strategic target, my suggestion is: take the small number of people controlling and directing research and development, and place them where you want to act. Proximity forces them to talk with people, to understand the needs and wants of these consumers. It’s imperative for managers to really understand the needs of this consumer. Later, it allows them to think about how to develop products that take care of these necessities. It’s necessary to create highly technological solutions, so that costs can be adjusted to this market and to keep the operation lucrative. This is the biggest challenge: for companies to associate high technology with low costs.

Valor: The managers fail to see these opportunities because they are too far from the low income people?

Prahalad: We live in a kind of isolation state. We are not connected to these consumers. The executives do not know as the people live. But they analyze data and statistics, and therefore they do not see the great potential that exists there.

Valor: To understand is the first step. How does one develop products that cost less and are lucrative?

Prahalad: The “Casas Bahia,” for example, have one of more advanced technological systems of sales and logistics in Brazil. Why create such a complex system to take care of poor people? Because it allows an incredible reduction in costs. This market needs high technology to be taken care of. So it is possible to develop products to a cost very low, that are affordable and, at the same time, profitable. It does not make sense to imagine that it is possible to take care of the poor sectors without making use of advanced technology–that’s nonsense. In this market, it is necessary to have more technology than when one works with the top of the pyramid.

Valor: It seems to be a paradoxical situation…

Prahalad: No, it is not paradoxical at all. You need to cut costs dramatically, but, at the same time, you need to produce products of high quality. Because, for your products not to be deceptive, these must be quality products. Then, the ultimate issue is: how to have quality products at accessible prices? In the first place, you must work with great volumes, to get scale. The use of high technology only allows to produce on a mass scale at a low cost, and still thus to be efficient.

Valor: It will not be easy…

Prahalad: Once you decide to enter in this market, it is not complicated. Everything depends on the focus. If the company really wants to succeed, it can be adapted to this sector in one year, in some cases.

Valor: But this all demands investment, time and strategic changes. Isn’t there a risk of failure?

Prahalad: If you look at for the market where the companies already act, failures are common. Many times the launching of a new product does not meet the expected success, and money is lost. The companies would have to adopt the same criteria of success or failure to act together to the poor people. I do not say that they must go immediately for this market, but that, yes, there is great potential and should not be ignored.

Valor: You say that the entrance of companies in this market can help to reduce poverty. How much of this statement is idealism?

Prahalad: It is not idealism. If you look at with an ideological prejudice, you might think this is utopian. But if you look at it with a practical method and objective, it is perfectly possible. For example, if I need to borrow money and no bank it wants to loan to me, I will have to go to a speculator and pay interest of, perhaps, 200%. But if there is a financial institution that will take care of me, I will pay 15% interest on the loan. The interest is still high, but I save 185%. The bank is, indirectly, increasing my income. What impresses me is that people criticize that a bank will loans money to me at 15% interest. But no one criticizes the speculator for charging 200% interest. The same thing happens with companies who sell goods to poor people. The “Casas Bahia” do this. Many people criticize them for charging high interest. But the interest would be even higher if its customers were to pay a financier, for example.

Valor: Wouldn’t it be better to teach the consumer to save up money, so as to be able to buy later, without interest?

Prahalad: What the “Casas Bahia” do is to discipline people to keep money, allowing them to acquire goods in several and small installments. Does this cost more? Clearly it does. But this allows these people to gain time.

Valor: There has always been a black market for the needs of low income people. Won’t encouraging a big company to enter this market mean the end of small companies, whose owners also are poor people? There will be more unemployment and, therefore, poverty will increase?

Prahalad: This is a preconception that worries many people, but is not the reality. Avon is a global company, but it has thousand of small entrepreneurs, many sufficiently poor, working for the company. Unilever is another global company, with thousand of small deliverers working for it. If you think about the system of egalitarian markets, a great company can not only create more entrepreneurship, but also support and form more direct action for the improvement of impoverished communities, and sow the seeds for new markets. Take for example the chicken producers in the south of Brazil. Today, they act in a global market because they sell its products to a great company. Without the support of this great company, that decided to invest in small farmers, the chicken they produce would not be being sold in supermarkets around the world.