From the Horse's Mouth
The Base of the Pyramid and Seventeen Years on
The “bottom of the Pyramid” was conceptualised by Stuart L. Hart and C.K. Prahalad. For about four years, academic journals rejected their idea that 4 billion people living on less than $1 per day could be “an unprecedented opportunity to create and share in prosperity” for businesses. Having convinced academics, multi-national corporations (MNC) and development experts, finally, in 2005, the UNDP coined the term “inclusive business” to differentiate between philanthropic and commercial business activities targeting the BoP. In January 2019, Deepa Prahalad reviewed the progress made since the 2002 publication of “The Fortune of the Bottom of the Pyramid" by his father C.K Prahalad and his colleague Stuart L. Hart in “Strategy + Business”. He observes that their concept is still topic in vibrant discussions today as it appeals to managers and consumers alike. Not only are development interventions being carried out by businesses but public funded development organisations are partners, sponsors and brokers of businesses investing into the “base of the pyramid”, as it is called now.
The Base of the Pyramid (BoP) describes a large part of the world's population being excluded from actively participating in the consumption and generation of wealth due to their low income. Rather than defining them by their income as “The Poor”, the BoP views them as potential consumers, employees, and suppliers. This concept reflects the ability of the poor to actively collaborate for the improvement of their living standards. For MNCs it promises rewards such as growth and profits. Prahalad's and Harts 2002 warnings of the potential effects of neglecting this opportunity, echo in today's news:
... averting the social decay, political chaos, terrorism, and environmental meltdown that is certain to continue if the gap between rich and poor countries continues to widen.
In our previous post, we discussed the challenges inherent in operating an inclusive business model “by producing and distributing products and services in culturally sensitive, environmentally sustainable, and economically profitable ways.”
The Forth Tier
Based on U.N. World Development reports available in 2002, Prahalad and Hard divided the world population into income tiers. Tier 1 was made up by 75 – 100 million affluent consumers mainly living in developed countries. Tier 2 and 3 constituted largely the poorer consumers, middle class in developed and more affluent consumers in developing nations, which were 1.5- 1.75 billion people. Tier 2 and 3 have been targeted by MNCs to grow their markets. At the time, the average annual individual income of over 4 billion Tier 4 consumers was less than $1500 regarded as necessary for sustaining a decent life. They cited UN figures, according to which 20 percent of the world population earned 85% of the income in 2000 of which only 1.1% was earned by the world's poorest. On two accounts, perceptions fail to acknowledge the potential at the BoP: the low individual income does not allow them to participate in the global economy and the unaccountable but substantial contribution of the informal economy.
Prahalad and Hard pointed out that this opportunity has been invisible to the many MNCs mainly based in developed countries, home to many of the tier 1 consumers. “Perception of market opportunity is a function of the way many managers are socialized to think and the analytical tools they use.” As a consequence of quantifying the market potential for products and services sold to their current customer base, the potential of the BoP is dismissed. These perceptions lead managers to assume that they cannot profitably compete given their current cost structure, the poor cannot afford, have no use for their products and are not interested in the latest technology, they are better left to development aid interventions, and managers and employees would not be excited about the inherent challenges. Rather like a motivation expert, Prahalad and Hart urged MNCs to view the challenges as opportunities and drivers of innovations.
In their 2002 article, Prahalad and Hard recommended a cooperation between governments, NGOs, local communities and the private sector to address 4 elements that are critical for a successfully unlocking the market potential of the BoP:
Increasing buying power through access to credit and improvement of the earning potential of the poor
Shaping aspirations through sustainable product innovations and consumer education
Improving access through distribution and communication systems
Adapting to introduce local solutions: “An effective combination of local and global knowledge is needed, not a replication of the Western system.”
The remainder of the 2002 article contains practical advice and examples of organisations addressing these elements. It concludes:
In a very real sense, the fortune at the bottom of the pyramid represents the loftiest of our global goals.
Down the Road in 2019
Deepa Prahalad observes three fundamental shifts in the discussions and perceptions about the BoP:
Developments in the pyramid: while extreme poverty has been reduced, inequality of income distribution has widened. The 2018 published Credit Suisse Global Wealth Report reveals that while Tier 4 income population fell to 3.6 billion, the worlds richest 8.6% now own 86.3% of global wealth.
Access to Technology has dramatically improved, accelerating learning and enabling growth for consumers and businesses. Some technology companies like China's Xiaomi exclusively cater for this market. With the increased number of BoP consumers using cell-phones, the availability of Big Data for market information has improved. Mobile payment solutions facilitate transactions at a fraction of the costs of traditional payment systems. Deepa also urges to look at the type of companies that are most valuable in developing countries to discover that “purchases among the poor are a reflection of aspiration rather than pure need.”
Increased expectation of businesses to make the world a better place: consumers and employees prefer companies who have social causes and use innovations for making the world a better place to live.
While economic growth has driven progress in some areas, Deepa also cautions that it has brought challenges in other areas, such as the prevalence of hunger and diabetes at the same time. Increased consumer aspirations to consume has added more pressure on sustainability and environmental concerns.
“I believe the impact of the bottom-of-the-pyramid idea was that it injected both pragmatism and optimism into the debate, thereby helping to direct the innovative capacity of business in places where it was needed the most.”