C.K. Prahalad News & Articles

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Foreign Policy, May/June 2004

Searching for new customerseager to buy your products? Forget Tokyo’s schoolgirls and Milan’sfashionistas. Instead, try the world’s 4 billion poor people, the largestuntapped consumer market on Earth. To reach them, CEOs must shed old conceptsof marketing, distribution, and research. Getting it right can both generatebig profits and help end economic isolation throughout the developing world.

When the Indian industrial and technology conglomerate ITC started buildinga network of Internet-connected computers called “e-Choupalsâ€? in farmingvillages in India’s rural state of Madhya Pradesh in 2001, soy farmers weresuddenly able to check fair market prices for their crops. Some farmers begantracking soy futures on the Chicago Board of Trade, and soon most of them werebypassing local auction markets and selling their crops directly to ITC forabout $6 more per ton than they previously received. The same ITC networkenables farmers to buy seeds, fertilizers, and other materials directly, atconsiderable savings, as well as to purchase formerly unavailable soil-testingservices. Today, the growing e-Choupal network reaches 1.8 million farmers, andITC is receiving demands from rural farmers for new products and services—thebeginnings of consumer market power at the poorest level of Indian society.

The ITC network is one example of how access to information can increaseproductivity and raise incomes. It also reveals what happens when largebusinesses stop regarding the world’s 4 billion poor people as victims andstart eyeing them as consumers. For decades, corporate executives at theworld’s largest companies—and their counterparts running wealthygovernments—have thought of poor people as powerless and desperately in need ofhandouts. But turning the poor into customers and consumers is a far moreeffective way of reducing poverty.

Why hasn’t the business world caught on? The explanations are well known:Infrastructure in the developing world is often poor or nonexistent, creatingthe need for substantial upfront investment. Illiteracy tends to be high,requiring nontraditional marketing approaches. Tribal, racial, and religioustensions, as well as rampant crime, complicate hiring and business operations.Governments—especially local and provincial authorities—often do not functioneffectively or transparently. Corruption is widespread.

Yet many multinational companies already overcome such problems to servemiddle-class customers in developing countries. The fundamental barriers toserving poor customers in low-income nations exist within companies andgovernments in rich nations, where leaders have uncritically accepted the myththat the poor have no money. In reality, low-income households collectivelypossess most of the buying power in many developing countries, including suchemerging economies as China and India. If businesses ignore the bottom of theeconomic pyramid, they miss most of the market. Another myth is that the poorresist new products and services, when in truth poor consumers are rarely offeredproducts designed for their lifestyles and circumstances, leaving them unableto interact with the global economy. Perhaps the greatest misperception of allis that selling to the poor is not profitable or, worse yet, exploitative.Selling to the world’s poorest people can be very lucrative and a key source ofgrowth for global companies, even while this interaction benefits and empowerspoor consumers.

The market for goods and services among the world’s poor—families with anannual household income of less than $6,000—is enormous. The 18 largestemerging and transition countries include 680 million such households, with atotal annual income of $1.7 trillion—roughly equal to Germany’s annual grossdomestic product. Brazil’s poorest citizens comprise nearly 25 millionhouseholds with a total annual income of $73 billion. India has 171 millionpoor households with a combined $378 billion in income. China’s poor residentsaccount for 286 million households with a combined annual income of $691billion. Surveys show that poor households spend most of their income onhousing, food, healthcare, education, finance charges, communications, andconsumer goods. Multinational corporations have largely failed to tap thismarket, even though the rewards for doing so could be substantial.

In poor countries, the distribution of households by income level is heavilyskewed toward the bottom rungs of the economy. With the bulk of thepopulation—and buying power—residing in the low-income segments of poornations, smart companies need to start concentrating their efforts there, wheredemand is high and competition is sparse. Governments, too, should take note.Poor people are asking why they should not share the benefits of globalization,and there is growing awareness that traditional development solutions have notworked. The private sector can and must do better.

BUSINESS SCHOOL BASICS

Markets in the developing world can nurture global business through theirsheer size, rate of growth, and consumer demands. Consider three examples: cellphones, table salt, and cosmetics.

Cellular technology was originally developed as a luxury for the rich, buttoday poor countries drive the explosion in wireless communications.Sub-Saharan Africa is now a leading region in percentage growth of cell phoneusage, expanding 37 percent during 2003. India boasts 22 million cellularcustomers and is adding around 1.5 million new customers every month. By 2005,China, India, and Brazil will have a combined 500 million cell phone users,compared to 150 million in the United States. The sheer size of these marketswill necessarily change the dynamics of the business—shifting to the poor thepower to determine both the preferred features of cell phones and theirtechnological makeup. The pacesetting customers will no longer be found inTokyo and Rome, but rather in Xian and Bangalore.

The cellular industry proves that if companies wish to engage poorermarkets, they must shed traditional business models developed with wealthyconsumers in mind. Prepaid phone cards are now the dominant business model forthe cell phone market worldwide. Such cards crush the perception that businesswith the poor is risky; prepaid cards eliminate phone companies’ collectioncosts and debt, and firms are paid before they connect a call. Yet even withprepaid cards, some companies initially misjudged the nature and depth of themarket. In Venezuela in 1995, for example, U.S.-based BellSouth Internationalstarted selling $10 and $20 phone cards, largely aimed at the middle class.

Today the company sells enormously popular $4 phone cards at more than30,000 retail outlets, reaching even Venezuela’s poorest citizens and, becauseof the lower unit price, reaching a far larger market. By forcing corporationsto rethink costs, business models, and industry standards, poor consumers areinitiating a revolution in cellular communications.

Selling to poor consumers also requires innovative research and development.In rural India, for example, only four out of 10 households use iodized tablesalt, even though iodized salt provides a critical and convenient nutritionalsupplement. Due to India’s environmental conditions, much of the iodine in saltis lost during transport and storage. The remainder often disappears in theIndian cooking process. To overcome this problem, Hindustan Lever Ltd., asubsidiary of Europe’s Unilever Corp., has developed a way to encapsulateiodine, protecting it from transportation, storage, and cooking, and releasingthe iodine only when salted food is ingested. The new salt required HindustanLever to invest in two years of advanced research and development, but if itssalt sells successfully, the company could sharply reduce iodine deficiencydisorder, a disease that affects more than 70 million people in India and isthe country’s leading cause of mental retardation. The lesson: Successfulproduct development requires a deep understanding of local circumstances, sothat critical features and functionality—salt with protected iodine—can beincorporated into the product’s design.

Modernizing distribution channels is also crucial for companies hoping toreach low-income markets in the developing world. “Person-to-personâ€? cosmeticgiants Amway Corp. and Avon Products, Inc. use direct-distribution strategies inIndia and Brazil, respectively, to sell beauty products among a wider circle ofcustomers—increasing the corporations’ reach and employing poor people asentrepreneurs. Amway, for example, has enlisted around 600,000 self-employedindividual distributors in India. Hindustan Lever is mimicking the approachwith a direct-distribution system for personal-care products. The companyexpects to sign on more than 500,000 self-employed Indian distributors withinfive years.

Similar transformations in business models, research and development, andproduct distribution are underway or imminent in healthcare, education,finance, agriculture, building materials, and other goods and services. Butthese changes will only lead to a true business revolution if corporateperceptions regarding the world’s poor shift dramatically. Managers inmultinational corporations are conditioned to think mainly of rich consumers.

They are prisoners of their own logic. Poor consumers challenge virtuallyevery preconception parroted by business schools and marketing seminars. Yet,thanks in part to role models such as Brazilian entrepreneur Samuel Klein, thenumber of firms doing well by doing good is growing. Klein started Casas Bahia,a successful retail chain, when he fled Europe’s Holocaust and started sellinginexpensive linens and blankets to poor Brazilians. Klein learned quickly thatthe poor are willing to pay but they are often unable to afford lump sums forpurchases. Allowing customers to pay in installments was the obvious solution.What started as a one-man blanket operation has grown into a business with morethan $2 billion in sales last year. Casas Bahia employs more than 22,000people, operates over 350 stores with 10 million customers, and the company’scredit system has one of the lowest default rates in Brazil.

POWER TO THE POOR

When multinational corporations attempt to penetrate new markets in thedeveloping world, critics sometimes condemn them for preaching the gospel ofconsumer culture to the poor, for exploiting the poor as cheap labor, and forextracting and despoiling natural resources without fairly compensating locals.In truth, some multinationals have been guilty on all these counts. But theprivate sector may do more harm by ignoring poor consumers than by engagingthem. After all, if the poor can’t participate in global markets, they can’tbenefit from them either.

Poor families benefit in several ways when large companies target them asconsumers. Access to new products, expanded choices, and increased purchasingpower improves one’s quality of life. New services and information that improveefficiency help increase productivity and raise incomes among poor citizens.Processes that are fair to the consumer and treat poor customers withrespect—as when ITC uses electronic scales that give accurate weights for grainand offers a farmer a chair to sit in while the sale is completed—buildsloyalty and trust in the company and in the global economic system. And theexercising of collective consumer market power forces attention to the needs ofpoor people.

When a retail chain in Mexico started selling chicken parts instead of wholechickens in its outlets a few years ago, sales quadrupled. Smaller unitpackages—enough for a single, immediate use—enable poor consumers to buy aproduct that they otherwise could not afford, thus unlocking their purchasingpower. The same principle applies to personal-care products. In India,Hindustan Lever, Procter & Gamble, and most of their competitors make“single-servingâ€? versions of their products, from detergents to shampoo. Morethan 60 percent of the value of the shampoo market and 95 percent of allshampoo units sold in India are now single-serve. Many are designed explicitlyfor the poor and do not even require hot water. Because of these efforts,nearly all Indians now enjoy access to shampoo. Companies selling small unitsizes at affordable prices make money, expand markets, and generate broaderaccess to goods and services that improve people’s quality of life.

Nowhere are the benefits of access to new services more evident than inbanking and the Internet. Prodem FFP, a Bolivian financial organization thattargets low-income customers, installs automatic teller machines that recognizefingerprints, communicate via text-to-speech technology in three localdialects, and display a color-coded touch screen that illiterate customers canuse. Prodem has expanded its market, and now more Bolivians have access toprofessional, secure banking services. On the other side of the world, inIndia, the wireless Internet service company n-Logue found that its customersin rural villages were slow to appreciate e-mail (many villagers do notnormally communicate in writing) but quick to accept e-mail photos and videoconferencing. N-Logue’s customers found value in sharing a photo of a new babywith distant relatives or sending a photo of a sick cow to a governmentagricultural agent for quick advice. Even in traditional business sectors suchas construction materials, Mexico’s Cemex is expanding its market by combininga “pay as you goâ€? system with delivery of materials and instructions as needed,enabling the poor to build better quality housing.

Beyond such benefits as higher standards of living and greater purchasingpower, poor consumers find real value in dignity and choice. In part, lack ofchoice is what being poor is all about. In India, a young woman working as asweeper outdoors in the hot sun recently expressed pride in being able to use afashion product—Fair and Lovely cream, which is part sunscreen, partmoisturizer, and part skin-lightener—because, she says, her hard labor willtake less of a toll on her skin than it did on her parents’. She has a choiceand feels empowered because of an affordable consumer product formulated forher needs.

Likewise, Amul, a large Indian dairy cooperative, found an instant market in2001 when it introduced ice cream, a luxury in tropical India, at affordableprices (2 cents per serving). Poor people want to buy their children ice creamevery bit as much middle-class families, but before Amul targeted the poor asconsumers, they lacked that option.

GLOBALIZATION’S NEW FRONTIER

In 2003, Thailand’s Information and Communications Technology MinisterSurapong Suebwonglee was looking for ways to extend the benefits of technologyto the masses. So he challenged Thailand’s computer industry to come up with a$260 personal computer and a $450 laptop. In return, Suebwonglee guaranteed amarket of at least 500,000 machines. The Thai computer industry met that price.But to do so, it had to omit Microsoft’s widely used (and costly) Windows andOffice operating software and offer the open-source Linux operating systeminstead. Not wanting to be left out, Microsoft cut the price for its softwareto a total of $38 in Thailand, dramatically below normal retail prices.

The “people’s PCsâ€? are now selling briskly (most with Linux, some withWindows) throughout Thailand. Nearly 300,000 computers were sold through earlyfall of 2003, with projected first-year sales of 1 million machines. In March2004, Microsoft announced plans for a “tailored and limitedâ€? Thai-languageversion of its Windows XP Home software at reduced prices.

The Thai example shows that the global economy is open to both innovationand consumer market power originating in poor countries. Consumers indeveloping nations are increasingly willing to exercise that power, not leastof all by rejecting trade or investment deals they see as unfair. Just lastyear in Bolivia, for example, popular discontent with the terms of foreigninvestment in a new pipeline to carry natural gas to global markets, includingthe United States, triggered protests and unrest that ultimately brought downthe government of President Gonzalo Sánchez de Lozada. The president’ssuccessor, Carlos Mesa, quickly canceled the deal.

The message for the private sector is clear: Ignore poor consumers at yourperil. Blocs of poor consumers increasingly have the power to reject what amultinational corporation wants to buy or sell; via their governments, they canalso empower a nontraditional competitor. It may not be wise for corporationsto wait for governments to smooth the path of globalization, or to dependsolely on formal trade talks to make developing markets safe for their products.Businesses must learn to serve poor markets by overcoming those markets’ uniqueconstraints as well as their own antiquated business models and misconceptionsabout the developing world.

Ending the economic isolation of poor populations and bringing them withinthe formal global economy will ensure that they also have the opportunity tobenefit from globalization. That is the world’s new entrepreneurial frontier.

Developing nations offer multinational corporations a vast, untapped market.But consumers, even poor ones, often associate particular brands with unsavorybusiness practices. Increasingly, corporations seek moral and ethicallegitimacy—and try to avoid charges of exploitation—when marketing their goodsand services to the poor. “Customers are searching for organizations that theycan trust,� explains Raoul Pinnell, vice president of global brands andcommunications at Shell International.

Multilateral initiatives aimed at improving corporate behavior and boostingconsumer acceptance, such as the United Nations Global Compact or the CauxRound Table’s Principles for Business, have met with mixed results.Alternatively, some corporations that work in poor markets are undertakinginnovative and transparent self-regulation projects, sometimes with assistancefrom governments in the developing world. In 1993, when Avon sent an army ofdirect-selling cosmetics merchants paddling up Amazon tributaries to sellperfumes and makeup to miners and prostitutes, Avon ladies answered only tothemselves. Today, direct sellers arriving to “Avon-gelizeâ€? remote Indianvillages are subject to sanctioning by an Indian judge—effectively a corporateombudsman—if they break a code of ethics formulated by the Indian DirectSelling Association. (The code aims to weed out “fraudulent elementsâ€? amongdirect sellers and prevent pyramid schemes.) “It’s protection for the company,the consumer, and the sales force,â€? says David Gosling, Avon India’s managingdirector.

Similarly, the Switzerland-based Nestlé Group, a longtime target of humanrights advocates for their marketing of baby formula over mother’s milk in poorcountries, appointed an ombudsman in 2002 to expose any unethical promotionalactivities. Coca-Cola India is attempting to, in their words, regain public trustand credibility after allegations of pesticide contamination incited angryconsumers in Bombay to smash thousands of Coke bottles in 2003. The companyrecently formed an advisory board—led by former Indian Cabinet Secretary NareshChandra—that will oversee Coca-Cola’s practices in India. The company alsoappointed former chief justice of the Indian Supreme Court B.N. Kirpal to leadan advisory body called the India Environment Council, which will guideCoca-Cola India’s social-responsibility practices.

Allen L. Hammond is vice president for innovation anddirector of the digital dividends project at the World Resources Institute.

C.K. Prahalad is Harvey C. Fruehauf professor ofbusiness administraion at the University of Michigan Business School and authorof The Fortune at the Bottom of the Pyramid: Eradicating Poverty ThroughProfit (Philadelphia: Wharton School Publishing, 2004). He is a member ofthe board of directors of Hindustan Lever Ltd.