Karnani CMR prepdf su07 The Mirage of Marketing to the Bottom of the Pyramid: HOW THE PRIVATE SECTOR CAN HELP ALLEVIATE POVERTY CALIFORNIA MANAGEMENT REVIEW VOL. 49, NO. 4 SUMMER 200790 Aneel Karnani...

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Karnani CMR prepdf su07 The Mirage of Marketing to the Bottom of the Pyramid: HOW THE PRIVATE SECTOR CAN HELP ALLEVIATE POVERTY CALIFORNIA MANAGEMENT REVIEW VOL. 49, NO. 4 SUMMER 200790 Aneel Karnani W idespread poverty is an economic, social, political, and moralproblem. Eradicating, or at least alleviating, poverty is anurgent challenge. For many decades, various institutionshave tried to address this challenge: local governments, developed country governments, international organizations (such as the World Bank and the United Nations), aid foundations, and non-governmental organi- zations. So far, the intellectual discourse has been largely in the fields of public policy and development economics. More recently, management experts and business schools have entered this arena. C.K. Prahalad has been one of the pioneers of this movement, and he is certainly the most visible and prolific writer in this field. This article focuses on his 2004 book, Fortune at the Bottom of the Pyramid: Eradicating Poverty through Prof- its, as the most visible work incorporating the ideas about “the bottom of the pyramid” (BOP).1 The BOP proposition can be summarized as follows: ▪ There is much untapped purchasing power at the bottom of the pyramid. Private companies can make significant profits by selling to the poor. ▪ By selling to the poor, private companies can bring prosperity to the poor, and thus can help eradicate poverty. ▪ Large multinational companies (MNCs) should play the leading role in this process of selling to the poor. I thank my friends Gautam Ahuja, Gunter Dufey, Pierre Dussauge, Sendil Ethiraj, Rob Kazanjian, Linda Lim, my wife, Felicia Karnani, and two anonymous reviewers for their constructive comments that improved the logic and smoothed the rough edges of earlier versions of the article, and I absolve them of any responsibility for the views presented here. Prahalad argues that selling to the poor can simultaneously be profitable and eradicate poverty. This is, of course, a very appealing proposition and has drawn much attention from senior managers, large companies, and business schools. The BOP proposition is indeed too good to be true. It is seductively appealing, but it is riddled with fallacies. There is little glory or fortune at the bottom of the pyramid—unfortunately, it is (almost) all a mirage. This article argues that the BOP proposition is both logically flawed and inconsistent with the evidence. This analysis has serious implications for both company strategies and public policy. This article proposes an alternative perspective on how the private sector can help alleviate poverty. Rather than viewing the poor primarily as consumers, an alternative approach is to focus on the poor as producers and to emphasize buying from the poor. The only way to alleviate poverty is to raise the real income of the poor. Target Market Poverty is a matter of degrees and involves subjective judgments. Praha- lad uses the criterion of $2 per day at purchasing power parity (PPP) rates in 1990 prices (equivalent to $3.10 in 2006 prices).2 At this level of poverty, the basic needs of survival are met, but just barely. I use the same definition of poverty in this article.3 Prahalad states that there are more than 4 billion people with per capita income below $2 per day at PPP rates.4 The World Bank estimates the number at 2.7 billion in 2001. Many researchers contend that the World Bank already over-estimates the number of poor people,5 with some researchers estimating the poor at 600 million.6 Surprisingly, Prahalad even claims that “the poor as a market are 5 billion strong.”7 Prahalad also claims that the BOP potential market is $13 trillion at PPP. This grossly over-estimates the BOP market size. The average consumption of poor people is $1.25 per day.8 Assuming there are 2.7 billion poor people, this implies a BOP market size of $1.2 trillion, at PPP in 2002.9 Even this is an overestimate. From the perspective of a multi-national com- pany from a developed country, profits will be repatriated at the financial market exchange rates, not at PPP rates. In that case, the global BOP market is less than $0.3 tril- lion, compared to the $11 trillion economy in the USA alone, making the BOP a difficult place to look for a fortune.10 No Fortune Not only is the BOP market quite small, it is unlikely to be very profitable, especially for a large company. The costs of serving the markets at the bottom of the pyramid can be very high. The poor are often geographically dispersed (except for the urban poor concentrated into slums) and culturally heteroge- neous. This dispersion of the rural poor increases distribution and marketing The Mirage of Marketing to the Bottom of the Pyramid CALIFORNIA MANAGEMENT REVIEW VOL. 49, NO. 4 SUMMER 2007 91 Aneel Karnani is an Associate Professor of Strategy at the Ross School of Business at the University of Michigan. costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases the cost of doing business. Another factor leading to high costs is the small size of each transaction. Poor people are, of course, price sensitive. “Companies assume that poor people spend only on basic needs like food and shelter.” Prahalad and Hammond disagree, stating that “such assumptions reflect a narrow and largely outdated view of the developing world. . . . In fact, the poor often do buy ‘luxury’ items.”11 The poor spend about 80% of their meager income on food, clothing, and fuel alone.12 This clearly does not leave much room for luxuries. Companies following the BOP proposition often fail because they over- estimate the purchasing power of poor people and set prices too high. Virtually none of the examples cited by BOP proponents support the recommendation that companies can make a fortune by selling to the poor (see Table 1 for an assessment of the nine case studies presented by Prahalad). Several of the examples that apparently support the BOP proposition involve companies that are profitable by selling to people well above the $2/day poverty line, although even these consumers seem poor to a Western researcher. Casas Bahia The case of Casas Bahia has been cited as an illustration supporting the BOP concept.13 The firm has become a large retailer in Brazil by “converting the BOP into consumers. . . . Casas Bahia carries and sells top-quality brands: Sony, Toshiba, JVC, and Brastemp (Whirlpool). There is a misconception that because customers are poor they do not desire quality products.”14 Now, it is undeniably true that poor people desire quality products; the problem is that they cannot afford such products. As mentioned earlier, Prahalad defines the BOP to be income below $2 per day. However, he also states that the Casas Bahia custom- ers have an “average monthly income twice the minimum wage (R$400),” that is, equivalent to income of $800 per month at PPP.15 Even assuming only one earner per household and four people in a household, this implies per capita income of $6.66 per day, well above the $2 per day poverty line.16 The company is a big, profitable retailer but it has little to do with the BOP proposition if the poverty line is defined as Prahalad does. Iodized Salt Iodized salt is an effective and inexpensive way to prevent iodine defi- ciency, especially in developing countries. Iodine deficiency is a leading cause of mental disorders; it also adversely affects the entire body, and causes growth retardation. A problem is that some of the iodine in salt is lost in the process of storage, transportation, and cooking. Hindustan Lever Limited (HLL), the Indian subsidiary of Unilever, has developed a proprietary micro-encapsulation technol- ogy to stabilize the iodine content in salt. Prahalad cites the case of Annapurna salt marketed to the bottom of the pyramid by HLL. The Mirage of Marketing to the Bottom of the Pyramid UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 49, NO. 4 SUMMER 200792 The Mirage of Marketing to the Bottom of the Pyramid CALIFORNIA MANAGEMENT REVIEW VOL. 49, NO. 4 SUMMER 2007 93 TABLE 1. Assessment of Case Studies Presented in Prahalad’s Fortune at the Bottom of the Pyramid Case Study Product/ Service Target Market Profitability Organization Type Casas Bahia Retailer of electronics, appliances, and furniture. Provides financial credit to customers. Above $6/day, and maybe even above $16/day, at PPP. Very profitable. Large Brazilian company. Cemex Patrimonio Hoy Cement. Patrimonio Hoy program provides credit to customers. Above US$5/day (equivalent to $7/day at PPP). “Not as high as for Cemex corporate.” “Too early to use profits as measure of success.”. Large MNC. Annapurna Salt Iodized salt. Above BOP. Sells at a price premium of 275%. No data. Probably profitable. Large MNC. HLL & Soap Market Soap. BOP. No data on HLL’s profits from this project. Government and civil society scaling back their involvement. MNC partnering with government and civil society. Jaipur Foot Prosthetic foot. BOP. Not profitable by design. Not-for-profit. Aravind Eye Care System Eye care and surgery. BOP and more affluent people. Financially self- supporting. More affluent customers cross-subsidize the BOP customers. Not-for-profit. ICICI and Microfinance Microfinance. BOP. But it is debatable whether microcredit significantly helps alleviate poverty. No data on ICICI’s microfinance business. Most microfinance organizations are not profitable. Large Indian com- pany partnering with NGOs. e-Choupal Procurement of soybeans. BOP. No data in Prahalad. Not yet profitable, according to CEO of parent company. Division of a large Indian company. Voxiva Surveillance of emerging public health crisis. Clients are government and large public health organizations in both rich and poor countries. No data. Probably profitable. Small private company; capital raised about $10 million. However, the fact is that the penetration of Annapurna salt among the poor is miniscule.17 Annapurna salt is priced at Rs. 7.5/kg (equivalent to $0.85/kg at PPP), the same as the market leader Tata salt; whereas numerous small regional producers sell iodized salt at Rs. 2/kg.18 At a price premium of 275%, not too many poor people see it as a bargain. Annapurna may be a prof- itable business based on a good product embodying a valuable technology, but it is not an example supporting the BOP proposition. Coca-Cola Balakrishna and Sidharth applauded Coca-Cola in India for launching in 2003 its low-price, affordability strategy, which hinged on raising the overall consumer base by offering carbonated soft drinks in smaller pack sizes of 200 ml at Rs. 5, which is equivalent to $0.57 (at PPP).19 People living on less than $2/day do not find this to be
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Answer To: Karnani CMR prepdf su07 The Mirage of Marketing to the Bottom of the Pyramid: HOW THE PRIVATE SECTOR...

Swati answered on Apr 02 2022
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HOW THE PRIVATE SECTOR CAN HELP ALLEVIATE POVERTY
Traditionally the international aid agencies and
government has taken the responsibility of offering solutions for global poverty. But private sector increasingly has been singled out as a vital player to achieve this task. There seem many ways by which the private sector may help like job creation, education enhancement for the production of services and goods used by ones in poverty but as such governments must be seeking for fostering the business environment by which the private sector’s benefits may be harvested. Also, one major problem is that across much of the...
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