In 1932, the United States president, Franklin Delano Roosevelt, made a radio address titled “The Forgotten Man.” As part of his address he said, “These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power … that build from the bottom up and not from the top down, which put their faith once more in the forgotten man at the bottom of the economic pyramid.” This is the first known use of the term “bottom of the pyramid,” which has also been modified slightly to “base of the pyramid.”

That was close to 90 years ago, but today this term refers to the billions of people in the world living on less than US$2 per day. This was defined by the University of Michigan Professors C. K. Prahalad and Stuart L. Hart in 1998. They each wrote excellent books that thoroughly described the business model and its benefits. Prahalad published “The Fortune at the Bottom of the Pyramid” [1] in 2004, while Hart published “Capitalism at the Crossroads” [2] in 2005. Hart subsequently went to the University of North Carolina, then to Cornell University, and is currently at the University of Vermont.

Prahalad proposes that businesses, governments, and donor agencies stop thinking of the poor as victims and instead start seeing them as resilient and creative entrepreneurs as well as value-demanding consumers. He proposes that there are tremendous benefits to multinational companies (MNCs) who choose to serve these markets in ways responsive to their needs. After all, the poor of today are the middle-class of tomorrow. There are also poverty reducing benefits if multinationals work with civil society organizations and local governments to create new local business models. How can this business model be employed?

One of the major environmental issues today is climate change. The United Nations' Intergovernmental Panel on Climate Change (IPCC) in its 4th Assessment Report concluded “Most of the observed increase in global average temperature since the mid-twentieth century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations [3].” This has been confirmed by the IPCC in subsequent reports with the most recent in 2018 [4]. The big question now is what can we do about it? The obvious answer is to reduce the quantity of fossil fuels for energy by employing more efficient systems. But what else can we do?

Scientists and engineers have developed processes and products that are very innovative and utilize much less energy. In some cases, however, these products are not accepted by the major markets because they would destroy an existing system or infrastructure—thus creative destruction. An example is the auto industry, which along with electric power generation is the largest contributor to global warming.

The energy required to power an automobile is used primarily to move the vehicle itself, which accounts for about 95% of the total weight. This means that only 5% of the fuel is used to move the driver from one location to another. The simple answer is to manufacture lighter automobiles. Several years ago, the Rocky Mountain Institute [5] developed an automobile made from high-tech ultra-light materials, which are stronger than steel, and the resulting car can achieve over 100 miles per gallon. This technology has been rejected by Detroit because it would eliminate the assembly plants as they exist today. The investment in the auto assembly plants is too great to change to a new technology. Is there any alternative?

THE GREAT LEAP DOWNWARD

Economists have described the global economic pyramid as consisting of three layers as depicted in Figure 8.1. At the bottom, or base of the pyramid (BOP), are about 4.7 billion people earning less than US$1500 per year. In the center are the 2 billion people in the emerging middle class earning between US$1500 and US$15,000 per year. At the top of the pyramid are the one billion “wealthy” people earning over US$15,000 per year. Most manufacturing companies market their products to the top of the pyramid where the “wealthy” consumers exist. But should we be looking at the BOP?

Most companies market their new technologies to at the bottom of the top of the pyramid as this is the “wealthy” part of the global market. These technologies usually have costs associated with the development, marketing, and sale of the products that can only be accepted by the top of the pyramid. Reducing the cost of the product to reach the bottom of the pyramid will usually reduce the quality and make the product of little interest. Clay Christensen [6] talks about disruptive innovations, which are products and services that are not as good as those in the mainstream markets, and therefore are of interest only to some niche non-traditional markets.

Hart and Christensen talk about the great leap downward [7] (Fig. 8.2) as the BOP is the ideal target for new disruptive technologies for at least two reasons. The opportunities for a new technology to penetrate a low-income market are much greater just based on the size of the market. In addition, by marketing to the BOP, a company can provide a market or service that would not otherwise be available.

An excellent example is that of the business started by Soichiro Honda of Japan [8]. In 1946, he started Honda Technical Research Laboratory and his first project was to make use of war surplus Tohatsu and Mikuni generator motors. With bicycles being the primary mode of transportation in Japan and other countries, he attached them to bicycles in order to provide basic transportation for this war-torn nation. Recognizing the diminishing supply of surplus motors, Honda formed Honda Motor Company, Ltd. in Hamamatsu in 1948. The company's first headquarters was a 12 ft × 18 ft shed that housed 13 employees. The company built the “A” model bicycle, the “B” model tricycle, and then the “C” model motorcycle. The company then made larger motorcycle engines and by 1955 was the largest motorcycle manufacturer in Japan. Within four years, the company became the largest motorcycle manufacturer in the world.

Honda's vision was to become an international company and that included selling its products in the United States. However, the US market for motorcycles was dominated by Harley Davidson, which made much larger motorcycles. In addition, the market was not that large compared to the US population. In 1965, Honda produced its first automobile and four years later imported its N600 sedan to the United States. Thus, Honda went from adding motors to bicycles, and then to manufacturing motorbikes for the BOP, to selling automobiles to the entire world population.

Another example of this great leap downward is from a Chinese company called Galanz. It was formed in 1978 to sell duck feathers and subsequently became a textile manufacturer. In 1993, it entered into an agreement to manufacture microwave ovens for Toshiba. The company started slowly and only manufactured 10,000 units per year. At that time, only 2% of the Chinese households owned a microwave oven. Using Chinese materials and Chinese labor, Galanz developed and manufactured an energy-efficient microwave that was affordable to the large middle and lower-middle class families in China. With the volume increasing, the average price of the unit started to decrease and became affordable to more families. As a result, Galanz's domestic market share increased from 2% in 1993 to 76% by 2000 when the market was even much larger. Employing the “great leap downward” model, it started selling its products worldwide, and by 2002 it enjoyed a 35% share of the global market. Today, it produces over 15 million microwaves per year and has a 40% share of the world market [9].

ELECTRIFY THE BOTTOM OF THE PYRAMID

There are about 1.1 billion people who live without electricity [10], and they are at the bottom of the pyramid. Extending the grid is not always practical, and in many cases it is almost impossible due to logistics and high costs. One answer may be distributive generation where there is local, self-contained power generation and storage systems.

The importance of providing electrical generation can be explained in Figure 8.3 [11]. It correlates per capita electricity consumption with the human development index, which is a very general measure of well-being by looking at life expectancy, literacy, education, and standard of living. Of course, as the electricity consumption of a country increases, the well-being of the people increases. Electricity provides lights, which, in turn, allow children to study in the evening, refrigeration, pumping of water into the home, power for computers and charging mobile phones, and many other benefits that enhance the people's well-being.

To provide this electricity to the bottom of the pyramid would normally require the development and installation of an electrical grid as well as the generation of the electricity. The latter could be accomplished by a coal-fired power plant, a nuclear power plant, or diesel powered generators. For remote villages, this is not the most efficient means of delivering electricity even if there was no concern with carbon emissions from the coal power plant or any safety concerns with the nuclear power plant. Stand-alone power generation systems using renewable sources like solar, wind, biomass, geothermal, or hydroelectric would make more sense given the ability to store the energy to eliminate intermittent generation when the sun is not shining or the wind is not blowing. The critical aspect of this system is storage of the energy.

The US Department of Energy, through its Advanced Research Projects Agency, continues to invest in battery research in order to develop higher-efficiency batteries at significantly lower costs. Successful development of these batteries, while primarily targeted to increase the range of electric vehicles, will create a larger market at the bottom of the pyramid. This huge market will reduce the cost of the batteries and make them available to more people. Eventually, this technology could then leap up to the top of the pyramid and develop a distributive generation system for the developing countries as proposed by Jeremy Rifkin [12].

HINDUSTAN LEVER AND NIRMA

This is an interesting case study of two companies that focused on different levels of the economic pyramid. Hindustan Lever, Ltd. (HLL), a subsidiary of Unilever, the large international British company, was serving the people at the top of the pyramid [2]. This company noted that in the 1990s, a small Indian firm, Nirma, Ltd., was offering detergent products for the BOP. Nirma had develop a business model to serve the underserved by providing 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. The Nirma price was Rs 3 per kilogram, while the HLL price for their detergent was Rs 13 per kilogram [13].

While HLL was content in serving the top of the pyramid, Nirma grew rapidly in a market completely ignored by HLL. As Nirma grew, it started to move up the pyramid as a result of its strong base at the bottom of the pyramid. HLL saw the growth of Nirma and in 1995 responded by developing its own business model for the BOP market, and diverging from its traditional business model.

HLL introduced a new detergent product called Wheel, which was reformulated for the poor people that wash their clothes in rivers and other public water systems. The company revised its production, marketing, and distribution to reach the large number of people living in the rural areas that comprise the BOP. In addition to all of these marketing changes, it also reduced the price in order to be attractive to the BOP.

Today, Nirma and HLL are still competing as they are splitting evenly about 80% of the detergent market in India. It was a very wise move for HLL to make that leap downward as the BOP market accounts for over 50% of HLL's total revenues and profits. It is even a better market for Nirma.

BOP PROTOCOL

Stuart Hart started developing the BOP strategy while a professor at the University of Michigan. He then joined the faculty at the University of North Carolina Kenan-Flagler Business School where he and other faculty formed the BOP Learning Laboratory [14]. Working with Dan Vermeer, a member of Coca-Cola's strategic “think tank,” they looked at the use of anthropological approaches to understanding the needs of people living at the BOP. They determined that a systematic approach, desired by companies such as Coca-Cola, could be used to understand the needs and opportunities at the BOP. In subsequent conversations, Hart and Vermeer fleshed out the broad contours of what would become the BOP protocol project that is now housed at Cornell University.

This project moved forward by engaging five different institutions:

• Johnson Graduate School of Management at Cornell University
• Stephen Ross School of Business at the University of Michigan
• World Resources Institute
• William Davidson Institute
• S. C. Johnson Foundation and the Wingspread Conference Facility

and four partner companies:

• DuPont
• Hewlett Packard
• S. C. Johnson, Inc.
• Tetra Pak

This BOP Protocol continues to move forward with projects in India with Solae Company and in Kenya with S. C. Johnson. Because the people at the bottom of pyramid can be found in almost any country, the BOP Protocol even developed a project in the United States. The project was initiated in 2008 by seeking to innovate and develop new grassroots enterprises focused on improving the health and/or health care of Flint and Genesee County in the State of Michigan. By working with community resources, local partners, and poor and vulnerable families and individuals, this multi-year project would follow the BOP Protocol's participatory business innovation process to co-create and implement sustainable, community entrepreneur-led businesses.

INITIATIVES BY THE WORLD RESOURCES INSTITUTE

The World Resources Institute (WRI) is a global environmental think tank that goes beyond research to put ideas into action. It works with governments, companies, and civil society to build solutions to urgent environmental challenges. WRI's transformative ideas protect the earth and promote development because sustainability is essential to meeting human needs and fulfilling human aspirations in the future. The organization's efforts are directed to:

• Climate, energy, and transport
• Governance and access
• Markets and enterprise
• People and ecosystems

It applies various sustainable strategies to accomplish its goals in these various areas. One of the strategies that WRI applies is the BOP.

Jamshyd N. Godrej, a member of the WRI board of directors, was interested in bringing electrical energy to the village of Rupahi in Bihar, India, which is too isolated to be connected to the grid [15]. For energy, the residents rely on whatever is available to them—kerosene, firewood, dung, or diesel generators, all of which left their houses dim and full of smoke. Installed at the community level, small hydro and biomass gasification can supply electricity to an area not covered by the grid, and solar lanterns and energy-efficient stoves can replaced “dirty” fuels like kerosene and wood. In Rupahi, villagers now get their power from Husk Power Systems (HPS), a company that converts rice husk into electricity via 35–100 kW mini power plants. HPS provides villages in the country's rice belt, like Rupahi, with cost-effective and environmentally friendly electricity. Providing electrical energy to the rural poor people of India has been estimated to be a US$2.1 billion per year market.

WRI also believes that there are investment opportunities within the BOP. Impact investing [16] is gaining increasing traction among a wide range of debt and equity investors, including pension funds, family offices, private wealth managers, foundations, individuals, commercial banks, and development finance institutions. Many impact investors choose to focus either in emerging markets or in developed markets. Part of the reason for this specialization is the significant regional differences that require local expertise. But another driver is investors' value sets: some prefer to help the world's poorest in emerging economies; others prioritize their local neighbors in need.

Within the developing world, the growing suite of impact investors is focusing on particular regions and sectors. Gatsby Charitable Trust and the Bill & Melinda Gates Foundation direct some of their investment capital to impact positively the lives of smallholder farmers in sub-Saharan Africa. Gray Ghost Ventures, Acumen Fund, and Omidyar Network all have programs that actively invest in alleviating poverty by financing innovations directed at India's low-income populations. In a report by The Rockefeller Foundation [17], it estimates the value of this emerging impact investing sector to be between US$400 billion and US$1 trillion, with profit potential between US$183 billion and US$667 billion over the next decade.

DEVELOPING THE BOTTOM OF THE PYRAMID

In Capitalism at the Crossroads, Hart describes the pathway to developing the BOP. Companies must move beyond greening and look at technological change and leapfrog to clean technologies that could result in disruptive business models. One of the challenges is to become indigenous and learn to co-develop technologies, products, and services with nature and local people. In this manner, the Multi-National Companies {MNCs} can become native to these regions.

The MNCs have been ingrained to develop strategies that take a top-down approach, and this must be altered if they wish to develop a strong market presence in the BOP. This was exemplified by HLL until it learned from Nirma. Nike also demonstrated its problems when it attempted to market the World Shoe. It was attempting to market the product to the BOP, but it was still employing top-down marketing.

In many cases with respect to marketing to the BOP, companies must think in terms of creative destruction rather than continuous improvement. Companies may have developed technologies that were never introduced because they would disrupt a current situation. However, at the base of pyramid, these same technologies could have an application as the potentially disruptive market doesn't exist. Introducing light emitting diode (LED) light bulbs to the developing countries had been very slow as the incandescent and compact fluorescent bulbs had dominated the market. However, combining LED bulbs with inexpensive solar battery chargers can provide light to areas that are not on the electrical grid.

In Nike's World Shoe project, one of the failures was due to the pricing structure. The company failed to reduce the cost because it employed the same overhead as its standard products. China's Galanz was successful because it used local materials, local labor, and sold to local markets. Its cost structure was such that it was able to achieve a 75% market share in its own market.

Most MNCs think about large scale projects with large capital investments if they are going to make an impact. However, when looking at the base of pyramid, companies must consider starting at a smaller scale working with the smaller markets and growing organically as the markets respond. Disruptive technologies are typically smaller in scale and more distributive in scale.

Because the BOP presents many significant opportunities, there continues to be entrepreneurs with technological ideas for projects. CNBC has presented 10 technologies for the BOP [18].One of the more interesting ones is from Embrace, which has developed an infant warmer resembling a mini-sleeping bag [19]. This portable incubator reduces the risk of hypothermia for newborns by providing a constant temperature for up to six hours without a continuous electricity source. The warmer contains phase-change material, a wax-like substance that can be heated using a hot water heating unit. Once heated, it slowly releases warmth over time. The cost is about 1% that of traditional incubators.

Another interesting technology was developed by Ann Makosinski. It is a Hollow Flashlight [20] powered solely by body heat based on the idea of Peltier tiles, where energy is created when one side is heated and the other side is cooled. Inside the flashlight air acts as a cooling agent; once the hand generates enough heat on the outside, the temperature achieves the necessary duality.

In summary, it is critical that the company must align the organization that will be pursuing the BOP project. Everyone involved in the project must buy into the elements of the organizational infrastructure. A misalignment can be fatal to a project as was demonstrated by Nike's World Shoe endeavor. The elements and alignment can be summarized as:

• Vision/mission—Setting the sustainability goal
• Goals—Establishing measuring targets
• Strategy—Identifying the sustainable value portfolio
• Structure—Creating separate experiments, ventures, and funding
• Systems—Designing new measurement, rewards, and project-evaluation tools
• Processes—Enabling new technology, product, market-development approaches
• People—Integrating sustainability into recruiting, leadership development, and performance evaluation

In order to assure success, aligning these elements of organizational infrastructure should not be underestimated.

IS THE BASE OF THE PYRAMID A MIRAGE?

Before a company decides to adopt the BOP strategy, it should carefully assess the market opportunity. Although this BOP strategy was initially developed at the University of Michigan, another professor at the same school, Aneel Karnani, questioned the validity of this strategy. He didn't believe that it could be adopted successfully and even harms the poor people in two ways. “First, it results in too little emphasis on legal, regulatory, and social mechanisms to protect the poor who are vulnerable consumers. Second, it results in overemphasis on microcredit and under-emphasis on fostering modern enterprises that would provide employment opportunities for the poor. More importantly, the libertarian proposition grossly under-emphasizes the critical role and responsibility of the state for poverty reduction [21].”

The developers of the BOP set the market size at US$13–15 trillion, whereas Karnani believes it is really US$360 billion. The major attraction of the BOP is this huge untapped purchasing power. The poor, however, may not really have the ability to save any money so their purchasing power may be limited. The BOP strategy relies on decent margins so the company can operate profitably. The company, on the other hand, may not be able to make a profit as the BOP market is very price sensitive and the cost of serving this market can be high. In addition, the poor spend 80% of their money on food, clothing, and fuel and really don't have much remaining to purchase a “technology” product that is planned for development through the BOP. Technology products may be the only sector that could be developed at the BOP because other products would result in reduced quality if the price is reduced. Karnani also believes that small to medium-sized companies are better suited to exploit the BOP rather than the large MNCs.

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