6. Reaching the Base of the Pyramid

Now is the time for the leaders of multinational corporations (MNCs) to expand their conception of globalization and strategy.¹ For boards, senior executives, and business leaders with the audacity and desire to compete at the base of the world economic pyramid, the prospective rewards include growth, profits, and incalculable contributions to humankind. As we have seen, countries that are not encumbered by billions of dollars of sunk costs in centralized infrastructure are ideal incubators for environmentally sustainable technologies and products that might one day benefit the entire world. Furthermore, MNC investment at the base of the pyramid means lifting billions of people out of poverty and desperation—and averting the social decay, political chaos, terrorism, and environmental meltdown that is certain to result if the gap between rich and poor continues to widen.

As C. K. Prahalad and I have argued, doing business with the world’s four billion poorest people—two-thirds of the total population—will require radical innovations in both technology and business models. It will require MNCs to re-evaluate price-performance relationships for products and services. It will demand a new level of capital efficiency and new ways of measuring financial success. Companies will be forced to transform their understanding of scale from “bigger is better” to highly distributed small-scale operations married to world-scale capabilities.

In short, the poorest populations present a prodigious new managerial challenge for the world’s wealthiest companies. Indeed, over the past few years, it has become apparent that there is a large prospective market to be served in the BOP. It has also become clear that the prospect transcends mere market potential: The opportunity is to use commerce as a driving force for human betterment and environmental restoration—to literally raise the base of the pyramid. Attempts to adapt the top of the pyramid model for use at the base, however, appear destined to fail. Only through a concerted focus on the base of the pyramid will it be possible for large corporations to combine a humanitarian, even activist, orientation with the conventional motivations of growth and profitability.

BOP Pioneers

Hindustan Lever, Ltd. (HLL), a subsidiary of Great Britain’s Unilever PLC, has been a pioneer among MNCs exploring markets at the base of the pyramid. For more than 50 years, HLL served the small elite in India with the income to buy the MNC’s products. Then in the 1990s, HLL noted that an Indian firm, Nirma, Ltd., was offering detergent products for poor consumers; in fact, Nirma had created an entirely new business system designed to meet the needs of underserved consumers, mostly from poor, rural areas. This included a new product formulation, a low-cost manufacturing process, a wide distribution network, special packaging for daily purchasing, and pricing for consumers with limited means.

In typical MNC fashion, HLL initially dismissed Nirma’s strategy—it appeared, on the surface, to have no implications for HLL’s served market at the top of the pyramid. However, as Nirma rapidly grew, HLL could see that its local competitor was winning in a market it had foolishly disregarded. Furthermore, as Nirma grew, it began to migrate up-market from the strong base in the BOP; HLL finally saw its vulnerability—and its opportunity. In 1995, the company responded with its own offering for the BOP market, drastically altering its traditional business model.²

HLL’s new detergent product, Wheel, was reformulated to substantially reduce the ratio of oil to water, responding to the fact that the poor often wash clothes in rivers and other public water systems. Most raw materials were sourced from local suppliers. Production, marketing, and distribution were all decentralized to leverage the large labor pool in rural India, quickly creating selling channels through the thousands of small outlets where people at the base of the pyramid shop. HLL also changed the cost structure of its detergent business so it could introduce Wheel at a low price point.

Today Nirma and HLL are close competitors in the detergent market, with about 40 percent market share each, according to India Infoline.com, a business intelligence and market research service covering the Indian market. And the BOP accounts for more than half of HLL’s total revenues—and profits. Unilever’s own analysis of competition in the detergent business, however, reveals even more about the profit potential in the BOP marketplace (see Exhibit 6.1). Contrary to popular assumptions, the BOP can be a very profitable market, especially if MNCs change their business models.

Exhibit 6.1. Nirma Versus HLL in India’s Detergent Market (1999)

It’s the Business Model, Stupid

As Exhibit 6.1 makes clear, in the consumer goods industry, the BOP is not a market that allows for the traditional pursuit of high margins; instead, volume and capital efficiency are the name of this game. Margins are likely to be low (by current norms), but unit sales extremely high. Managers who focus on gross margins will miss the opportunity; managers who innovate and focus on economic profit will be rewarded.

Thus, getting the metrics right is critically important to success in the BOP: Imposing the established performance criteria from the top of the pyramid will almost certainly kill the opportunity. The decentralized nature of Unilever’s corporate structure enabled HLL to “fly under the radar” long enough to establish a successful new business model for the BOP. More centralized MNCs might not allow such latitude to experiment; yet without it, the BOP will almost certainly remain elusive.

Yet despite its early success in the market, Wheel’s introduction was far from perfect. Although it represented a considerable improvement over the low-cost but harsh formulation offered by Nirma, HLL’s detergent was phosphate-based, which meant that it still polluted public waterways. Wheel also introduced a new solid waste problem in the form of millions of spent sachet (single-use) packets. Only after HLL’s experiment in serving the poor was validated and supported by the parent company was it possible to connect Unilever’s corporate capability in environmental management and sustainability to HLL’s innovative approach to reaching the BOP market. Solving these environmental challenges in the BOP will clearly require the combination of corporate know-how and local knowledge.

As a direct result of business model innovation, first-mover Nirma is today one of the largest branded detergent makers in the world. Meanwhile, HLL, stimulated by its emergent rival and its changed business model, registered a 20 percent growth in revenues per year and a 25 percent growth in profits per year for 1995–2000. Over the same period, HLL’s market capitalization grew to $12 billion, a growth rate of 40 percent per year. HLL’s parent company, Unilever, has also benefited from its subsidiary’s experience in India. Unilever transported HLL’s business principles (not the product or the brand) to create a new detergent market among the poor in Brazil. The brand Ala has been a runaway success. Even more important, Unilever has adopted the base of the pyramid as a corporate strategic priority. Indeed, by 2004, the BOP accounted for nearly 20 percent of Unilever’s sales on a global basis.³

Recently, HLL launched another round of business model innovation. India has more than half a million villages, home to tens of millions of people who are inaccessible by traditional product distribution models. Through “Project Shakti,” the company has taken a page out of GrameenPhone’s book by seeking to develop a cadre of women microentrepreneurs at the village level.⁴ HLL has already trained more than 10,000 Shakti Entrepreneurs (SEs), with a goal of having more than 25,000 by the end of 2005. Ultimately, the company might build a network of a million or more SEs located throughout the rural villages of India. SEs are imparted basic selling and accounting skills to enable them to operate as micro-entrepreneurs earning a steady income from the sales of HLL’s products. In addition, the women are trained to be health and hygiene communicators in a bid to improve the standard of living of the community they operate in. SEs also serve as listening posts for future needs. If successful, Project Shakti’s unique win-win direct-distribution model may supplant the current complex and unwieldy approach to BOP distribution through thousands of small-scale distributors and small “mom and pop” shops.

Clearly, the base of the pyramid presents unique challenges for MNCs: It violates nearly every assumption associated with successfully serving the top of the pyramid. In point of fact, the biggest challenge for MNCs may have less to do with technology, intellectual property, or rule of law, even though these issues have dominated most of the work to date relating to emerging markets.⁵ Instead, the fundamental challenge may be one of business model innovation—breaking free of the established mindsets, systems, and metrics that constrain the imagination of incumbent firms.

As the Unilever case demonstrates, to identify needs and opportunities in the BOP, MNC managers must learn to look beyond their current served market. This can be done in several ways. First, MNCs can seek to identify and remove constraints that prevent the poor from taking control of their own futures. Second, through their business models, MNCs can seek to increase the earning power of the poor. Finally, MNCs can consciously look to create new economic and social potential at the base of the pyramid. We explore each of these in greater detail in the following sections.

Removing Constraints

Business exists to solve problems. Most material needs have already been provided for people at the top of the pyramid, which is why it is so difficult to identify successful new business strategies—customers are already quite well served. The reverse logic applies at the base of the pyramid—major needs remain unmet for massive numbers of people. Barriers, constraints, gaps, and snafus abound for the poor. What we need to realize as businesspeople is that learning to see these constraints from the point of view of the poor is the best way to identify new breakthrough business strategies that offer both profit and growth potential for the firm—and a significantly better life for those in the BOP.

As C. K. Prahalad and Al Hammond point out in their recent article in the Harvard Business Review, the poor—especially those in urban slums and shantytowns—live in high-cost economies.⁶ Their needs are typically not well met by local vendors. In fact, quite frequently, the poor are victims of active exploitation by local moneylenders, corrupt officials, and low-quality service providers. Prahalad and Hammond present data showing that the poor often pay anywhere from twice to 20 times as much as consumers at the top of the pyramid for basic goods and services such as water, food, medicine, phone service, and, as we have seen, access to credit. If we adjust for income level, these differentials become downright obscene. Thus, there is an enormous opportunity to create consumer surplus in the BOP, if we could only open our eyes to the reality on the ground.

We must learn to identify and remove the constraints—“unfreedoms,” according to Nobel Prize–winning economist, Amartya Sen⁷—that prevent those in the BOP from realizing their full potential. Unfreedoms mean that the poor often suffer from a systematic lack of opportunity, poor health, and even premature death. These constraints can come in many shapes and sizes: usurious interest rates for credit, poor-quality products, exorbitant prices, exploitive business models, or a total lack of problem recognition.

Cemex, Mexico’s largest cement company, provides a glimpse into how to go about constraint identification as a vehicle for reaching the BOP.⁸ The 1994 financial crisis in Mexico was a major blow to the company’s domestic business, which constituted nearly half of Cemex’s cement sales at the time. The construction sector, in particular, was one of the hardest hit in Mexico. However, Cemex executives noted that whereas revenues from upper- and middle-class customers dropped by half, cement sales to the poorest tier of the population were hardly affected. In fact, sales to the poor seemed to follow a completely different logic than those in the affluent market (it would later be recognized that the formal and informal economies do, indeed, follow completely different logics). Given that cement sales to the poor constituted 40 percent of Cemex’s Mexican business and that the company knew little about this customer segment, corporate leadership decided that it was worthy of further investigation.

In 1998, a team of Cemex employees began to explore this issue in greater depth. They began by issuing a “Declaration of Ignorance,” an open admission that the company knew virtually nothing about 40 percent of its Mexican market. They then resolved to learn all they could about the needs and problems of the people in the urban slums and shantytowns where demand for the company’s cement was the strongest. To accomplish this, the team lived in the shantytowns for six months. Their mission was to better understand the context in the BOP, not to sell more cement.

Initially the team, led by Hector Ureta, had a difficult time appreciating the situation.⁹ At first glance, the shantytowns appeared to be chaotic assemblages of half-built squatter homes stretching as far as the eye can see. Building materials lay around exposed to the elements—and theft. Partially constructed rooms with steel rebar rods reaching skyward formed the streetscape. It was easy to assume that the people must be ignorant or stupid to engage in such poorly planned and executed construction activity. But after spending several months living in this context, the team came to realize that the people were doing the best possible job that could be done, given the constraints and the circumstances.

Poor, do-it-yourself homebuilders in the shantytowns, they learned, often take 4 years to complete just one room and 13 years to finish a small four-room house. The reason is that banks and other businesses will not engage with poor residents of informal settlements where the legal status of their property ownership is murky. Haphazard design, combined with material theft and spoilage, conspire to make home construction a costly and risky proposition. Vendors prey upon the poor, selling them off-quality goods in quantities that are inappropriate because they have little bargaining power or ability to complain. The Cemex team came to realize that if these constraints could be removed, it might be possible for the poor to build much better-quality homes in less time, while also saving money on materials in the process. And, yes, they might also grow the cement business as well.

To accomplish this end, the team created a new business model. Through its program called Patrimonio Hoy, which, roughly translated, means “Equity Today,” Cemex formed savings clubs that allowed aspiring homebuilders to make weekly savings payments. These savings clubs built upon the already prevalent Tandas, community savings plans that had been common in the marginalized sectors in Mexico for decades. In exchange, Cemex provided material storage and architectural support so that homes could be well designed and built in sensible stages. Given its clout as a major buyer, Cemex could negotiate with material suppliers for the best possible prices and quality, something that the shantytown dwellers themselves were unable to do. Participants in the program built their houses three times faster, with higher-quality materials and designs, and at two-thirds the cost. Patrimonio Hoy has been growing 250 percent per year and has enrolled more than 20,000 poor families since its inception. The goal is to reach one million families in Mexico in five years.

The Patrimonio Hoy experience demonstrates how important it is to view the BOP through a new set of lenses to see the opportunity. Rather than assuming that poor people are irrational, stupid, or lazy, it behooves MNCs to instead assume that people in the BOP are doing the best they can under the circumstances. The key is to ask the question, why are they doing things this way? If we can gain a better understanding of the constraints that cause this behavior, we can construct new business models designed to remove these constraints—and profit in the process.

Increasing Earning Power

According to the International Labor Organization’s World Employment Report 2001, nearly a billion people—roughly one-third of the world’s work force—either are underemployed or have such menial jobs that it is not possible to support themselves or their families. The harsh realities of structural adjustment in many of the world’s poorest countries have made it all but impossible for those in the BOP to survive exclusively through self-provisioning, barter, and community exchange. Helping the world’s poor to elevate themselves above this desperation line by increasing earning power is thus a business opportunity to do well and do good simultaneously. Creating consumer surplus and generating income are crucial here. A few farsighted organizations have already begun to blaze this trail, with startlingly positive results.

As we saw in the case of Cemex’s Patrimonio Hoy program, it is possible, through business model innovation, to create significant consumer surplus for BOP customers while simultaneously making a healthy profit. Indeed, do-it-yourself homebuilders in Mexico’s shantytowns saved considerable time and money through the program, while Cemex realized significant incremental cement sales and profits. The creation of consumer surplus in the BOP is possible because, more often than not, the poor are badly served by local vendors. In some instances, particularly in rural areas, however, there are actual service vacuums.

This was the situation faced by Grameen Telecom, as discussed in detail in the last chapter. Because phone service was nonexistent in rural Bangladesh before the introduction of Grameen’s service, the relevant point of comparison was how much time and money villagers were spending to gain access to information such as crop prices and currency exchange rates. Although the phone service offered by Grameen was considered expensive by developed world standards, users still saved between 2.5 and 10 percent of household monthly income ($2.70–$10) with each call because the alternative to making the call was spending days traveling to secure the necessary information—an expensive and risky proposition.

Providing consumer surplus through innovative new products and services is important to increased earning power; saving the poor time and/or money frees up resources to be used more productively for other purposes. Procter & Gamble’s new clothes rinse product for the rural poor, for example, reduces by two-thirds the amount of water needed to rinse clothes after washing with detergent. It saves an enormous amount of time as well because, instead of finding and hauling as much water as before, people can engage in more productive activities.

Even more important than the provision of consumer surplus, however, is the actual generation of income in the BOP. Businesses that lead to income generation are therefore of special importance. Perhaps the quintessential example of such a business is the microcredit model introduced by Muhammad Yunus and the Grameen Bank. The loans made to the poor through the bank lead directly to income generation through microentrepreneurship and other forms of local enterprise development. In addition to providing credit, companies can develop new technologies to raise BOP incomes and start businesses.

One example of such a venture is Appropriate Technologies for Enterprise Creation (ApproTEC), founded by Dr. Martin Fisher in 1991.¹⁰ Begun as a non-profit, ApproTEC has helped to create thousands of jobs in Kenya and other parts of East Africa, where more than half the population lives on less than $1 per day, by developing enabling technologies and working with local entrepreneurs to launch businesses using those technologies. Profits from the new small-scale businesses enable thousands of poor families to escape poverty, educate their children, afford health care, and plan their futures.

ApproTEC’s best-selling technology is the leg-operated Moneymaker Micro-irrigation Pump. These simple but effective water pumps, which retail for less than $100, enable poor farmers to grow high-value fruits and vegetables year-round by supplying their crops with much-needed water. On average, these farmers earn an additional $1,200 profit per year, recovering their investment in three months, and increase overall farm income by a factor of 10. Since its inception in the early 1990s, ApproTEC has helped to create 35,000 new microenterprises in East Africa, with a total of $36 million per year in new profits. Revenues generated by these enterprises equal more than 0.5 percent of Kenya’s GDP. Today, more than 800 new businesses are being started every month using ApproTEC technology.

ApproTEC has recently teamed up with SC Johnson Company in Kenya to create more sustainable livelihoods for thousands of poor farmers dependent on growing pyrethrum for a living.¹¹ When SC Johnson launched its best-selling brand Raid^® in 1956 as the world’s first commercial aerosol insecticide, the company chose to use environmentally benign pyrethrum as the active ingredient. Pyrethrum is the fourth-largest export crop in Kenya, after tea, coffee, and horticultural plants. The Pyrethrum Board of Kenya (PBK) is a parastatal agency reporting to the Ministry of Agriculture that operates as a monopoly, controlling all aspects of Kenya’s pyrethrum production, processing, marketing, and export. PBK produces nearly 70 percent of the world’s supply of pyrethrum through a network of 200,000 subsistence farmers and their families (nearly 1 million people) organized into cooperatives and self-help groups throughout Kenya’s central highlands. SC Johnson has been its biggest customer by far since 1956.

Unfortunately, droughts in Kenya during the 1990s threatened the quality and stability of the natural pyrethrum supply. When Japanese giant Sumitomo developed a lower-cost synthetic alternative, SC Johnson was presented with a difficult choice: Either switch totally to the synthetic or work with the Kenyan producers to lower the cost, improve the quality, and ensure the long-term availability of the natural product. The company chose the latter strategy.

In a new partnership with SC Johnson and ApproTEC, PBK now monitors pyrethrum quality and quantity, and provides ongoing assistance to farmers in the form of access to higher-quality seed. A pilot project involving 600 farmers seeks to increase net household incomes on average from $100 to $750–$1,000 per year. Such a boost in income would enable poor farmers to dramatically improve food security, health, and nutrition. In addition, it is expected that pyrethrum production per acre will increase substantially, and quality will also improve, enabling the company to continue to source the natural botanical at a competitive price rather than switching to the synthetic chemical.

ApproTEC’s ability to generate income for the users of its technologies is beyond question. However, ApproTEC now faces the challenge of sustaining its own growth and development. It is clear that it cannot continue to rely exclusively on donor capital to fund the technology development work. Indeed, fundraising has now become the primary activity for the organization’s leaders. Accordingly, ApproTEC has embarked on a strategy to move a part of its operation toward a for-profit model, through direct distribution of its technology to end users. Indeed, the partnership with SC Johnson represents one way for it to achieve this end. Only by generating a surplus itself can ApproTEC continue to generate income for others.

Increasing earning power is of vital importance in the BOP, especially in a post-structural adjustment world where poor countries are increasingly dependent upon the cash economy and the generation of foreign currency to survive. MNCs can therefore identify opportunities to both create consumer surplus and generate income through innovative technologies and business models. As with removing constraints, opportunities to increase earning power provide a useful lens for identifying the best opportunities to reach the base of the pyramid.

Creating New Potential

Because BOP communities are often physically or economically isolated, better distribution systems and communication links are essential to sustainable development. Few poor countries have distribution systems that reach more than half the population—hence the continued dependence of the poorest consumers on often low-quality local products and services and exploitative moneylenders. MNCs can therefore create new potential in the BOP by enabling outreach (providing distribution channels for local products) and in-reach (providing access to affordable products, services, and information).

With regard to outreach, MNCs can play a key role in sourcing or distributing the products of BOP enterprises for use in top of the pyramid markets, giving BOP enterprises their first links to international markets. Indeed, it is possible through partnerships to leverage traditional knowledge bases to produce more sustainable—and, in some cases—superior products for consumption by affluent customers. Anita Roddick, CEO of the Body Shop International PLC, demonstrated the power of this strategy in the early 1990s through her company’s “trade, not aid” program of sourcing local raw material and products from indigenous people.

More recently, the Starbucks Corporation, in cooperation with Conservation International, has pioneered a program to source coffee directly from farmers in the Chiapas region of Mexico. These farms grow coffee organically using shade-grown practices, which preserve songbird habitat and prevent soil loss. Starbucks markets the product to U.S. consumers as a high-quality, premium coffee; the Mexican farmers benefit economically from the sourcing arrangement, which eliminates middlemen from the business model. This direct relationship also improves the local farmers’ understanding and knowledge of the market at the top of the pyramid and its customer expectations, making a steady transition from the informal to the formal economy possible.

Daimler-Chrysler has also been instrumental in the launch of an outreach-oriented alliance in Brazil called POEMA (Poverty and Environment in Amazonia Research and Development).¹² This alliance is focused on the development of natural fibers for use in the production of interior car parts. With financial and technical assistance from the company, POEMA pioneered the use of coconut fibers and latex sourced from the Amazon in the production of headrests, sun visors, and seat cushions in the Class A Mercedes-Benz model. After a successful pilot project, a for-profit enterprise, POEMAtec Amazon Natural Fibers, was created near the city of Belem in northeastern Brazil. Daimler-Chrysler has since signed a 10-year supply contract with the new company.

Before POEMAtec, coconut fibers were considered waste. Now they are a source of income. POEMAtec worked with the small landholders in the region to help them switch from slash-and-burn agriculture of single crops to a multicrop system that includes coconut palms, rubber, cacao, bananas, and Brazilian chestnut trees. Sourcing communities were set up with processing centers to extract the coconut fibers and produce the latex. These raw materials were then sold to POEMAtec for the manufacture of the final product. The parts produced by the alliance meet all Daimler-Chrysler’s stringent quality requirements and are also about 5 percent cheaper to produce than conventional plastic components. Approximately 4,000 new jobs have been created, including agricultural producers, processing plant workers, and POEMAtec employees. Average family income in the community has increased from about $36 per month to nearly $300 per month since the beginning of the alliance. The results of this BOP marketing outreach alliance in Brazil have also been transferred to South Africa and the Philippines.

With regard to in-reach, information technologies such as phones and Internet connections hold the potential to literally transform the way BOP communities view the world. Indeed, information poverty may be the single biggest roadblock to sustainable development. Through in-reach, it is possible to imagine, for the first time in history, a single, interconnected market uniting the world in the quest for a truly sustainable form of economic development. This process could transform the “digital divide” into a “digital dividend” for the companies willing to take the initiative.

New ventures such as N-Logue in India are developing information technology and business models suited to the particular requirements of the rural poor at the base of the pyramid. Through shared-access models (for example, Internet kiosks) and focused technology development, companies are dramatically reducing the cost of being connected. For example, IT connectivity typically costs $850–$2,800 per line in the developed world; the CorDECT (wireless local loop) technology employed by N-Logue has reduced this cost to less than $400 per line, with a goal of $100 per line, which would bring telecommunications within reach of virtually everyone in India.¹³

Recognizing the opportunity to create new economic potential, the Indian tobacco giant ITC has spawned a network of electronic meeting places in more than 4,000 rural villages in India dubbed e-choupals. ¹⁴ To address the obvious shortages—phone lines, electricity, and literate farmers—the company has provided satellite links, solar batteries, and carefully chosen microentrepreneurs to run the meeting places. As part of a diversification strategy into a broader range of agribusinesses, ITC (formerly the Imperial Tobacco Company) has made the e-choupal initiative an integral part of its rural development business strategy.

The traditional agricultural system was centered on mandis, the markets where farmers brought their produce to be auctioned. Given the obvious power asymmetries (that is, the auctioneers had better information about commodity prices than the farmers), small farmers were often paid far less than they deserved for their produce. To facilitate better information access, ITC created websites for the various crops covered: soya, wheat, coffee, and shrimp. This enabled farmers to level the playing field by gaining better access to market conditions, prices, and even other potential buyers. By eliminating the stranglehold of the mandis, ITC has been able to source agricultural commodities at more favorable prices, while at the same time increasing the bargaining power—and incomes—of the small farmers.¹⁵ Thus, two of the big roadblocks faced by rural economies are mitigated by e-choupals: Virtual aggregation provides bargaining power for even the smallest producers, and better information helps overcome uncertainty and isolation.

Once a virtual meeting place is established in a village, there is no shortage of other potential users: governments putting their services online, consumer goods firms that are otherwise unable to reach rural villages, microcredit providers, and so on. The possibilities are virtually limitless. Thus, rather than selling a defined end-product such as a consumer good, e-choupals create the potential for many new, perhaps unanticipated, economic activities to blossom, driven by local needs and capabilities.

ITC intends to reach 100,000 villages with its network in the next decade. The rural connectivity brought by initiatives such as e-choupal and N-Logue could literally transform the countryside in India. Ventures like this, which provide both in-reach and outreach, constitute the ultimate in creation of potential. For MNCs, therefore, identifying opportunities to create new potential constitutes another important vehicle for reaching the base of the pyramid.

Assessing Sustainability Impact

Identifying the opportunity is only the first step in successfully reaching the base of the pyramid. While serving a real need through the firm’s product or service is necessary for a successful strategy, it is not sufficient. It is equally important to evaluate the effect of the entire business system on the communities and environments where it is to be introduced. That means monitoring and assessing the triple bottom line (social, environmental, and economic) impact of the business system. This step is necessary because often the biggest impacts—positive and negative—are felt through the upstream (supply chain) or downstream (end use) effects of the company’s activities rather than directly through its immediate products or services. Provision of credit, for instance, may not appear to have much impact in itself; the activities enabled by credit, however, may have wide-scale impacts. Furthermore, an MNC’s entry into the BOP may have implications for existing organizations and institutions that play an important role in the community. Understanding these total system impacts is thus crucial to assessing whether a company’s activities enhance or inhibit sustainable development.

In assessing sustainability impact, managers need to recognize that any new business intervention has both positive and negative effects. The problems that a sustainable global enterprise solves should, of course, be more significant than the new ones it creates. Unfortunately, from a societal perspective, many new technologies and businesses do not pass this test; the problems they create are more significant than the problems they solve. Take, for example, the nuclear power industry. In its beginning stages, the industry was seen as the source of pollution-free electricity that was too cheap to meter. It was heralded as the salvation of the world: It would rescue us from dependence upon nonrenewable and polluting fuels such as coal, oil, and gas. However, as it turned out, the nuclear power industry created massive new problems: We had not fully thought through how to deal with the expensive process of decommissioning old nuclear facilities, nor had the disposal of high-level radioactive waste been adequately addressed.

The operation of the facilities themselves also proved to be problematic, with accidents raising public fears—and operating costs—to astronomical levels. In the end, new nuclear facilities became so expensive to build and engendered so much public resistance that it no longer made sense to construct them, at least in the United States. Today nuclear power is viable only where massive government subsidies make it so: France and Japan. Therefore, in evaluating the sustainability impact of a BOP business initiative, a comprehensive and continuous assessment of both the upside and the downside of the total business system is critical.

Village Phones: The Triple Bottom Line

Let us return to the case of Grameen Telecom, described in detail in Chapter 5, “The Great Leap Downward,” for an in-depth assessment of sustainability impacts. As you may recall, the venture was established as a nonprofit experiment in a few hundred villages before it was introduced on a widespread basis. This was done intentionally to allow time to test the model, identify problems, and make midcourse corrections prior to scale-up. Grameen enlisted the aid of local universities and NGOs in conducting the impact assessment, both to facilitate the work and to ensure the independence and legitimacy of the results.¹⁶

The results of the sustainability assessment for the village phones are summarized in Exhibit 6.2¹⁷ The diagram displays the triple bottom line (economic, social, and environmental) impacts associated with the introduction of mobile phone service in the 950 villages that constituted the pilot test in rural Bangladesh. Economically, the introduction of phone service was clearly a net positive. As we have seen, not only did the “phone ladies” themselves realize a significant increase in their income, but, more important, users of the service realized significant consumer surplus (each call saved 2.5–10 percent of household monthly income, equivalent to a savings of $2.70–$10 per call). In some cases, the phone service produced dramatic increases in income for users. For example, with better access to competitive agricultural prices, local farmers were able to get substantially better prices for their crops. Indeed, the efficiency of the village economies was significantly enhanced through more rapid and accurate information flow. In the words of Iqbal Quadir, “Connectivity is productivity.” Phone ladies and other local businesspeople also became more aware of and capable in the ways of the formal economy, increasing the prospects for further growth and development in the future.

Exhibit 6.2. Sustainability Assessment: Grameen Telecom

Socially, the introduction of the village phone gave the phone ladies status and visibility within their villages (if you wanted to make a phone call, you had to seek them out or come to their home). The incremental income these women contributed to their households also gave them a bigger voice in family decision-making. They spent most of the new income from the village phone on their children, in the form of tuition for schooling, clothes, and health care. This raised their standard of living and opened up opportunities for their children that would not have otherwise existed.

Environmentally, the availability of phone service meant that fewer trips to the city in inefficient and polluting buses and cars were necessary. Furthermore, by moving directly to wireless telecommunications, Grameen Telecom enabled poor villages to avoid the expensive, material-intensive, and environmentally destructive step of installing cables and phone lines. The village phone, in other words, enabled the poorest communities in rural Bangladesh to leap directly to the most modern and least-polluting technology available.

Although Grameen Telecom’s sustainability impact has been overwhelmingly positive, it has, predictably, created some new problems on each of the three dimensions. From the social perspective, in some cases, phone ladies’ newfound earning power introduced friction and even conflict within households that were previously dominated by the husbands. Some have even experienced increased physical abuse and violence. Not surprisingly, there are those who view this as being disruptive to local communities and cultural traditions. Others, however, including most of the phone ladies themselves, view it as a necessary step toward the emancipation of women throughout the world. It may also hold the key to stabilizing population growth because raising the status of poor women is now recognized as being one of the most effective ways of lowering fertility rates.

Other observers are concerned that the introduction of phone service into rural areas, with its attendant rise in income and economic activity, will lead to increased consumerism and environmental degradation. Although this is a legitimate concern, it would appear that the alternative—keeping the majority of people in the world isolated and without access to information—has even larger negative consequences. Indeed, through the Great Leap Downward, discussed in the previous chapter, we may be able to successfully incubate and launch the renewable and inherently clean technologies of tomorrow in the BOP.

Perhaps the most significant problem that has arisen has been the emergence of monopolistic practices by some of the phone ladies.¹⁸ As demand for rural phone services grew in the past half-dozen years, the initial business model of having a single phone operator in each village has proven problematic: With demand exceeding supply in many villages, prices rose and phone ladies’ incomes soared. Some phone ladies were becoming “rich” by village standards, with incomes grossly out of proportion to what they once were. To address this problem, the company removed its limit of one phone lady per village, creating a “free market” for phone service in the villages of Bangladesh. In short order, the number of phone ladies virtually doubled. With competition, prices came down and the new incomes returned to a more reasonable level. As noted in the last chapter, the company expects that, by the end of 2004, there will be 100,000 phone ladies in Bangladesh, each averaging $1,500–$2,000 in revenues (and roughly $500–$700 in profits) each year. The new problem has been translated into yet another opportunity.

The case of Grameen Telecom underscores the importance of tracking the sustainability impact of the entire business system. By starting with a nonprofit pilot experiment, Grameen was able to understand and document the economic, social, and environmental impacts of its business system from the beginning. It was also able to create a mechanism for continuously monitoring the triple bottom line performance of its business. By recognizing that any intervention will not only solve problems but also create new ones, Grameen Telecom has been able to identify and address new problems as they emerge through the continuous and creative adjustment of the business model.

The MNC Advantage

Multinationals have much to learn from the approach Grameen took in introducing its rural mobile phone service. In fact, even readers who are sympathetic to the argument so far may be wondering why MNCs should concern themselves with the BOP: Even if multinational managers are emotionally persuaded, it is not obvious that large corporations have real advantages over locally oriented firms and nonprofits such as Grameen Telecom. In addition, MNCs must overcome significant negative reputational equity, given the extractive nature of much of their past behavior in the traditional economy. However, there are several compelling reasons for MNCs to embark on this journey:

• Resources. Building a commercial infrastructure for the base of the pyramid is a resource- and management-intensive task. Developing environmentally sustainable products and services requires significant research. Distribution channels and communication networks require extensive effort to develop and sustain. Few local entrepreneurs have the managerial or technological resources to create this infrastructure.

• Convening of power. MNCs can be nodes for building the commercial infrastructure, providing access to knowledge, managerial imagination, and financial resources. Without MNCs as partners, well-intentioned NGOs, communities, local governments, entrepreneurs, and even multilateral development agencies will continue to flounder in their attempts to bring development to the base. MNCs are well positioned to unite the range of actors required to reach the BOP.

• Knowledge transfer. MNCs are able to transfer knowledge from one BOP market to another, such as from China to Brazil or India, as Unilever and others have demonstrated. Although practices and products have to be customized to serve local needs, MNCs, with their unique global knowledge base, have an advantage that is not easily accessible by local entrepreneurs.

• Upmarket migration. Not only can MNCs leverage learning across the base of the pyramid, but they also have the capacity to move innovations up-market all the way to the top of the pyramid. As we have seen, the BOP is a testing ground for disruptive innovations that enable a more sustainable way of living. Many of the innovations for the base can be adapted for use in the resource- and energy-intensive markets of the developed world.

A Common Cause

Recognizing the four billion people who comprise the base of the pyramid is a great opportunity for MNCs. It also represents a chance for business, government, and civil society to join together in a common cause. Indeed, pursuing strategies for the base of the pyramid may hold the potential to dissolve the conflict between proponents of free trade and global capitalism on the one hand, and adherents of environmental and social sustainability on the other.

However, the products and services currently offered at the top of the pyramid are not appropriate for the BOP, and reaching out to the base will require fundamentally different approaches than those even in the emerging markets of the developing world. Changes in technology, credit, cost, and distribution are critical prerequisites. Only large firms with global reach have the technological, managerial, and financial resources needed to realize this opportunity.

New commerce in the BOP will not be restricted to businesses serving such basic needs as food, textiles, and housing. The base of the pyramid is waiting for high-tech businesses such as financial services, cellular telecommunications, and affordable computers. In fact, as we have seen, for many emerging disruptive technologies (such as fuel cells, photovoltaics, satellite-based telecommunications, biotechnology, and nanotechnology), the base of the pyramid may prove to be the most attractive early market.

To date, however, NGOs and local businesses with far fewer resources than the MNCs have been more innovative and made more progress in developing these markets. It is tragic that as Western capitalists we have implicitly assumed that the rich will be served by the corporate sector (MNCs), while governments and NGOs will protect the poor and the environment. This division of labor is stronger than most realize. Managers in MNCs, public policymakers, and NGO activists all suffer from this historical divide. A huge opportunity lies in breaking this code, linking the entire human community in a seamless market organized around the concept of sustainable growth and development.

Collectively, MNCs have only begun to scratch the surface of this massive opportunity. Those in the private sector who commit their companies to strategies for the base of the pyramid can lead the movement toward a more inclusive capitalism. It is imperative, however, that managers recognize the nature of business leadership required in the BOP arena. Imagination, tolerance for ambiguity, stamina, passion, empathy, self-reflection, and courage may be as important as intelligence, analytical skill, and knowledge. And as the final section of the book shows, leaders need to develop a deeper understanding of the complexities and subtleties of sustainable development in the context of the BOP if they are to become truly indigenous.

Notes

¹ This introduction and other parts of this chapter are adapted from C. K. Prahalad and Stuart Hart, “The Fortune at the Bottom of the Pyramid,” Strategy+Business 26 (2002): 2–14,

² Brian Ellison, Dasha Moller, and Miguel Angel Rodriguez, Hindustan Lever: Reinventing the Wheel (Barcelona, Spain: IESE Business School, 2003).

³ Brian Ellison, Dasha Moller, and Miguel Angel Rodriguez, Hindustan Lever: Reinventing the Wheel (Barcelona, Spain: IESE Business School, 2003).

⁴ My thanks to Sharat Dhall, head of Project Shakti at HLL, for this information, which he presented at the Zurich Sustainability Forum in August 2004.

⁵ See, for example, R. Hoskisson, L. Eden, C. Lau, and M. Wright, “Strategy in Emerging Economies,” Academy of Management Journal 43(3) (2000): 249–267; and D. Arnold and J. Quelch, “New Strategies in Emerging Economies,” Sloan Management Review 40(1) (1998): 7–20.

⁶ C. K. Prahalad and Alan Hammond, “Serving the World’s Poor, Profitably,” Harvard Business Review 80(9) (2002): 48–57.

⁷ Amartya Sen, Development as Freedom (New York: Anchor Books, 1999).

⁸ Ruth Romo and Francisco Ballester, Cemex: Patrimonio Hoy and Contrumex (Mexico City: IPADE [English translation], 2004).

⁹ My thanks to Hector Ureta for his visit to Chapel Hill in April 2004 to tell the story of Patrimonio Hoy to the students in a class jointly taught by Ted London and me, called “Business Strategy for the Base of the Pyramid.”

¹⁰ Martin Fisher, ApproTEC: Kick Starting Economic Growth in Africa (San Francisco: ApproTEC report, 2004).

¹¹ My thanks to Scott Johnson at SC Johnson for this example.

¹² The description of this alliance is excerpted from Yerina Mugica and Ted London, Partnering for Mutual Success: Daimler-Chrysler-POEMAtec Alliance (Chapel Hill, NC: Kenan-Flagler Business School, 2004).

¹³ Joy Howard, Charis Simms, and Erik Simanis, Sustainable Deployment for Rural Conductivity: The N-Logue Model (Washington, D.C.: World Resources Institute, 2001).

¹⁴ For a full description of e-choupals, see The Economist, “Yogeth Deveshwar, The Boss of India’s Biggest Tobacco Firm, Is Putting Rural India Online,” 5 June (2004).

¹⁵ For more information on the e-choupals, see C. K. Prahalad, The Fortune at the Bottom of the Pyramid (University of Pennsylvania: Prentice Hall, 2005).

¹⁶ See D. Richardson, R. Ramirez, and M. Haq, Grameen Telecom’s Village Phone Programme in Rural Bangladesh (Geulph, Ontario: International Telecommunications Union, 2000).

¹⁷ This is my interpretation of the results, placed in the framework of the triple bottom line. My thanks to John Elkington for letting me borrow this concept. For details on this framework, see John Elkington, Cannibals with Forks: The Triple Bottom Line of 21st Century Business (Oxford: Capstone Publishing Ltd, 1997). For full text of the pilot study, see D. Richardson, R. Ramirez, and M. Haq, Grameen Telecom’s Village Phone Programme.

¹⁸ Personal communication with Muhammad Yunus, April 2004.