CHOLLERU, India–With its open sewers and mud-walled homes, this impoverished farming village of 2,200 in southern India did not look like fertile territory for an entrepreneur. But Srilatha Kadem was undeterred. Oblivious to the midday heat, she marched briskly along the unpaved streets, her cloth bag filled with soaps and shampoos and her heart with vaulting ambition.

She stopped at a tile-roofed house, where a gray-haired woman in a green sari lounged in the shade of the small verandah. “You’re charging the same as the shops,'’ the woman said grumpily.

“There is a difference in quality,'’ replied Kadem, a cheerful woman with silver toe rings and a fifth-grade education who works as a saleswoman for Hindustan Lever Ltd., the Indian subsidiary of the Dutch consumer products giant Unilever. “What you buy on the streets, it doesn’t come from a good company. These products which I brought are from a good company.'’

Consumer culture, spurred by rapid economic growth, is spreading to the vast rural hinterlands where two-thirds of India’s 1.1 billion people still live. The trend is creating new opportunities not just for big business, which has long focused on the urban middle class, but also for some of India’s poorest citizens.

A 30-year-old mother of two, Kadem is part of a novel Hindustan Lever initiative that enlists about 20,000 poor and mostly illiterate women to peddle such products as Lifebuoy soap and Pepsodent toothpaste in villages once considered too small, too destitute and too far from normal distribution channels to warrant attention.

Started in late 2000, Project Shakti has extended Hindustan Lever’s reach into 80,000 of India’s 638,000 villages, on top of about 100,000 served by conventional distribution methods, according to Dalip Sehgal, the company’s director of new ventures. The project accounts for nearly 15 percent of rural sales. The women typically earn between $16 and $22 per month, often doubling their household income, and tend to use the extra money to educate their children.

“At the end of the day, we’re in business,'’ Sehgal said in a telephone interview from company headquarters in Bombay. “But if by doing business we can do something positive, it’s a great win-win model.'’

Hindustan Lever is not alone in recognizing the vast potential for profits in rural India. As urban markets become saturated, more businesses are retooling their marketing strategies, and in many cases their products, to target rural consumers with tiny incomes but rising aspirations fueled by the media and other forces, according to experts.

Companies are offering many products, from single-use shampoo packets that sell for less than a penny to $340 motor scooters available for monthly payments as low as $4.50. Banks are targeting first-time customers with $10-minimum-deposit savings accounts. Cellular phone companies are upgrading rural networks while offering monthly plans for as little as $3.40.

“In four to five years the rural market will be a major sector that is well beyond anyone’s imagination,'’ said Rajesh Shukla, principal economist for the National Council of Applied Economic Research in New Delhi. “Nobody was expecting this was going to happen.'’

Still, the economic boom reflected in India’s 8 percent annual growth is primarily an urban phenomenon, driven by service industries such as outsourcing. It has largely bypassed rural India, where malnutrition rates are sharply higher than in sub-Saharan Africa and most people still earn their living from farming that depends on monsoon rains. Poor roads and inadequate electricity deter many businesses from seeking new customers and opportunities outside cities and larger towns.

But some are taking a fresh look at rural India, where spending power has risen modestly thanks to villagers who migrate to cities for work and send earnings home, according to V. Kasturi Rangan, a Harvard Business School professor who studies emerging markets.

Corporate interest also has been piqued by the success of microcredit initiatives that began two decades ago in Bangladesh and have been widely embraced in India and other developing countries. Run by nonprofit groups or commercial banks, microcredit programs typically provide poor women with tiny loans, which can be used for income-generating activities that start with the purchase of a milk cow, for example, or a handloom.

With lower default rates than conventional loans, microcredit programs have lent credence to the idea that small-scale entrepreneurship can play an important role in alleviating poverty, as well as create opportunities for big business. In his book “The Fortune at the Bottom of the Pyramid,'’ C.K. Prahalad, a University of Michigan Business School professor, cites numerous examples of companies that have generated wealth for the poor and profits for themselves by focusing on underserved rural markets.

Hindustan Lever has long recognized the potential of rural India, where even now only 15 percent of the population uses shampoo–leaving 85 percent as potential customers, said Sehgal, the company official. The market had languished because the company could not figure out a way to profitably distribute its products in small villages.

That changed with the proliferation of women’s self-help groups that use microloans to buy such items as mobile phones that can be used to do business in villages without landlines. Reasoning that a similar model could apply to selling soap and face powder, the company launched Project Shakti, which recruits its sales force from the groups.

“We are not too fussed about whether they are educated,'’ Sehgal said, “because the inputs we give them are things they can learn,'’ such as simple bookkeeping.

Women are considered a better bet than men, he added, because “they are far more honest.'’ The company plans to employ about 100,000 women by 2010, enough to sell its products in about 500,000 Indian villages.

Special correspondent Muneeza Naqvi contributed to this report.

Execution is the obvious answer. But two well-known strategists, Gary Hamel and C.K. Prahalad, plead the contemporary case for strategy in Competing For The Future (Harvard Business School Press, $24.95).

Most companies have operational strategies to help increase profits and market share, and achieve cost reductions. Xerox, according to the authors, learned how to reduce costs, improve quality, and satisfy customers by the early 1990s. But pursuing quality, customer satisfaction and operating efficiencies did not help much against Canon. What’s more, Xerox’s pioneering roles in laser printing,

networking, icon-based computing, and the laptop computer failed to help it create substantial new businesses outside copiers.

Xerox left money on the table, write Hamel and Prahalad, by getting “better without getting different.”

The two authors, both management professors and consultants, are well known for their work in redefining competitiveness and strategic intent. They consult widely and have published articles and videos. Their first book is a thoughtful amalgam of seventeen years collaborating. As such, its ideas are fully developed and represent an evolution of modern strategic thinking for large firms.

Beyond reengineering, the authors write, top managers must know how to reinvent their entire industries, a la CNN, Wal-Mart, Service Corporation International, Motorola. These pathbreaker organizations recognized their core competencies and developed strategies to reshape industry structures around the most competitive of their core competencies.

Here are some ideas from the book managers can use:

Industry foresight. Get your employees to feel a sense of urgency about the future, that they can make a difference. Avoid being hostage to existing markets. And develop foresight to create the future, not just in your company, but in your entire industry.

Core competencies. Identify the most highly-evolved core competencies which can be leveraged for the future. Sony pioneered transistor radios, but isn’t still making them. Its core competency of miniaturization enables it to continually amaze consumers, in pioneering new things to miniaturize.

Look to strategy for a broad agenda. Komatsu’s policy of “encircling” Caterpillar, as the latter entered Komatsu’s home market in the 1960’s, resulted in improving their base business of small bulldozers, intercepting Cat’s technology, and successfully attacking its more vulnerable markets. NEC recognized, in the late 1960s and early 1970s, that communications and computers were converging. As a result, they built up their competencies in systems and digital manufacturing. Recognizing the relationship of telecommunications, computer systems, and components businesses may be old hat today, but in 1977 it represented foresight tied to a broad agenda on NEC’s part.

Rebuild leadership before you need to. In 1992, EDS committed itself to rebuilding industry leadership in the face of new competition ranging from Andersen Consulting to AMR Corporation. The company adopted a top-to-bottom challenge of its existing assumptions, involving less-than-senior managers, to achieve its current strategic architecture, summed up in the words “globalize, informationalize, and individualize.”

With every admonition to re-model strategic thinking, Hamel and Prahalad give necessary caveats about making irreversible decisions under uncertainty. “Getting to the future is a process of successive approximation,” they write. Commitments must be based on knowing the limits of what can be known, to avoid investing badly. Timing of future developments is difficult to assess at best.

The authors’ freshest perspective comes with driving strategy to all levels of employees through a consensus of “strategic intent” about where the company is going. Employees need to see how their jobs link up with attainment of a goal. Like Ford did in the early 1980’s with its quality campaign, managers must make every employee aware that without their help, the company will not regain or increase its competitiveness. Employees should challenge standard operating procedures, workflow design, and the bureaucracy itself, if it serves the company’s strategic intent for the future.

Some of these ideas pertain more to large companies than the nimble ones which act instinctively without deep thought. Large companies may have more resources, but the future will go to whoever leverages resources the best. Sony and Yamaha, for example, leverage resources through their “banner” brands which, omnipresent on all products, present consumers with the least brand confusion. The trendiest way to leverage resources is to look for coalitions with other companies as has been done in the interactive TV and personal communications industries.

Alliances and coalitions can be guided by a firm’s core competencies, which form the roots of its competitiveness. At Federal Express and Wal-Mart, the high-level core competencies are logistics management. At EDS, systems integration is a core competence; at Charles Schwab, marketing and distribution. Core competencies, solid as they sound, can become useless. U.S. military contractors are finding that their ability to deal with the Department of Defense, once a core competency, now has little value in commercial markets.

Core competencies can also be lent to other companies, as Marriott does with catering and facilities management, and AMR does with reservation systems and information technology. IBM has widened its market aperture beyond its own distribution channels to sell components and modules to all comers. Core competencies must be the central subject of corporate strategy, believe Hamel and Prahalad. They must be deployed behind new market opportunities with as much velocity as capital is allocated to new projects.

The book’s discussion of marketing and strategy on a global level is not as strong as the material on core competencies and strategic intent. Plus, this book has some of the faults (as well as the virtues) of the best-selling Reengineering The Corporation: too general and conceptual most of the time.

Its best use is as a primer on strategy for the 1990s. Hamel and Prahalad demonstrate here that discontinuous thinking is not the only creative way to the future. A linear approach can be strong and effective as long as it has direction.

In an era of downsizing, why not get rid of the strategists? Is implementation of process change more important? Or does strategy, like economic forecasting, seem to not matter much to hte bottom line?

Most companies have something they call marketing strategy, sales strategy, and manufacturing strategy, each geared to the needs of the strategic business unit, which has its products and existing markets. Market share, cost reduction, and profit opportunities are generally the goals of these SBU strategists.

While many strategies of a company are hard-wired into existing structures, Gary Hamel and C.K. Prahalad believe that core competencies can be soft-wired into the firm to provide more competitive opportunities and success in its future.

Strategic planning has always seemed a province of senior managers, who project their companies’ destinies with the past- and what has worked for them, firmly in mind. Now comes a pair of strategic consultants who say that companies must be capable of doing more than downsizing and improving quality.

Companies must be capable of “getting different,” according to Gary Hamel and C.K. Prahalad in Competing For The Future (Harvard Business School Press, ). Xerox is a good example of a company, they say, which left money on the table by getting “better without getting different.” They learned how to reduce costs, improve quality, and satisfy customers by the early 1990s. But this did not help recapture much market share from competitors like Canon. And its pioneering roles in laser printing, networking, icon-based computing, and the laptop computer failed to help it create substantial new businesses outside copiers.

Beyond reengineering a firm, top managers must know how to reengineer their entire industries, a la CNN, Wal-Mart, and Service Corporation International. Pathbreakers all, they recognized their core competencies and developed strategies to reshape industry structures around their competitive competencies.

But what does it mean to be “strategic?” Traditional managers leave it to CEOs and planners; Hamel and Prahalad want everyone in a company to stretch themselves in an effort to participate directly in the company’s future, not only planning but also executing strategies.

Pioneering is a dangerously approximate endeavor, as the authors point out. It can’t be done with numbers in mind, but neither can it be done without a profitable anticipated route to the future. The risk of approximating leads companies to play it safe. Hamel and Prahalad suggesting using part of the past as a “pivot” to the future, and shedding the past’s excess baggage. It’s easier said than done because managers value the past they have built and its concomitant achievements. They are tempted to preserve the past, no matter how little value it may have today.

Motorola successfully skirted this temptation in the 1980s and remains a world leader in wireless businesses- pagers, two-way mobile radios, and cellular telephones- in the 1990s. Getting employees to feel a sense of urgency about the future is a start. Developing industry foresight is the next step. But it is one thing to have “skunkworks” produce amazing products such as the IBM PC, and quite another to have the foresight behind such developments survive the headquarters mentality.

At headquarters, managers are focused on the markets already being served, not the potential markets of the future. When this happens, the company is hostage to existing markets, even though it may possess highly-evolved core competencies which can be leveraged for the future. Sony pioneered transistor radios, but it’s not selling radios; it sells the core competency of miniaturization. And right up to the invention of the Walkman, Sony fits into this paradigm of the authors: “Companies that create the future do more than satisfy customers, they constantly amaze them.”

Amazement is sometimes achieved (especially with consumers) through smoke and mirrors. But technology is a potent tool for pushing product boundaries. Hamel and Prahalad say that companies should match the most advanced technology with the “world’s most sophisticated and demanding customers.”

Their discussion of strategic architecture will help managers map their future capabilities. Specifically, information architectures should address who communicates, what they communicate about, how often, and in what ways. Social architectures address values, expected behavior, and types of employees. Financial architectures address the balance of debt and equity, the financing of acquisitions and disposals, the criteria for capital allocations, etc. The result should be a broad agenda, such as Komatsu’s policy of “encircling” Caterpillar as the latter entered Komatsu’s home market in the 1960’s. They improved their base business of small buldozers, they intercepted Cat’s technology, and went after its more vulnerable markets. NEC recognized, in the late 1960s and early 1970s, that communications and computer were converging. As a result, they built up their competencies in systems and digital manufacturing. Recognizing the relationship of telecommunications, computer systems, and components businesses may be old hat today, but in 1977 it represented foresight on NEC’s part.

In 1992, as EDS recorded its thirtieth consecutive year of record earnings, observers are still in awe. But internally, EDS committed itself to rebuilding industry leadership in the face of new competition ranging from Andersen Consulting to AMR Corporation. EDS adopted a top-to-bottom challenge of the company’s assumptions, involving less-than-senior managers, to achieve its current strategic architecture, summed up in the words “globalize, informationalize, and individualize.”

With every admonition to re-model strategic thinking, Hamel and Prahalad give necessary caveats about making irreversible decisions under uncertainty. “Getting to the future is a process of successive approximation,” they write. Commitments must be based on knowing the limits of what can be known, to avoid taking an expensive wrong turn with investments. Timing of future developments is difficult to assess at best. Wireless personal communications are almost sure to be ubiquitous in our future, but when? The same for electronic banking, gene therapy- sure things at some point in the future by today’s measures of progress- but when?

It’s always a matter of opinion, and that’s where “strategic intent” comes in, write the authors. What unique direction with the company take, and will it have an edge of discovery and destiny? Strategic intent must contain pathos and passion, they write. Employees “don’t get interested in a game if there’s no scoreboard.” Profits and shareholder returns exert little pull on employees several levels below top management. Thus not only do customers have to be amazed to the compete for the future, but employees must be excited.

Excitement is manifested strategically by employees seeing how their jobs link up with attainment of a goal. The new strategic intent presents a challenge, and engages employees’ intellectual energy. Like Ford did in the early 1980’s with its quality campaign, managers must make every employee aware that without their help, the company will not regain or increase its competitiveness. And not only do managers want employees to do what they say, they should also want them to challenge standard operating procedures, workflow design, and the bureaucracy itself, if it means getting to the desired future faster.

With all the talk about strategy, what about resources? Large companies have seemingly unlimited resources, newer companies never have enough. Each company’s strategy will be different, but the authors argue that the winner will be the one whose resources are best leveraged. The smaller company may be more willing the “reinvent the industry,” or change the rules of the game. It would be readier to do more with less. It might be able to reach a strategic consensus faster.

In perspective, Hamel and Prahalad see that ambition preempts resources. Finding less resource-intensive measures is one way of leveraging expendable resources. Thus, a strategic intent should meet the test of providing the best resource leverage. For example, Sony and Yamaha each focus their advertising resources on a “banner” brand which, omnipresent on its products, present consumers with the least brand confusion.

How to best position oneself against competitors? Have a point of view about the most likely route to the future, the most likely time frame for reaching it, and which complementary capabilities to develop. Look for coalitions with other companies such as those in the interactive TV and personal communications industries.

And finally, identify and build core competencies, the roots of competitiveness. These are gateways to new businesses, which unleash skills and technologies to “amaze” customers and exploit new market opportunities. At Federal Express and Wal-Mart, the high-level core competencies are logistics management. At EDS, systems integration is a core competence; at Charles Schwab, marketing and distribution.

How to distinguish non-core capabilities from core competence? In the broadest terms, a company many have 40 or more primary skills, but only 5-15 core competencies. Senior management has to focus on which competencies are at the center of their business. Or to look at it another way, how each competency contributes to customer vallue, competitor differentiation, and extendability to tomorrow’s markets. In the example of Intel, much of its semiconductor profits arise from intellectual property rights and installed base, neither of which the authors believe are core competencies. Eventually, Intel will need its own design, manufacturing and distribution competencies to compete.

Core competencies, solid as they sound, can migrate. U.S. military contractors are now finding their ability to deal with the Department of Defense, once a core competency, now have little value in commercial markets.

They can also be sold to other companies, as Marriott does with catering and facilities management, and AMR does with reservation systems and information technology. IBM has widened its market aperture beyond its own distribution channels to sell components and modules to all comers. Inside the firm, sales and marketing staff are likely to be disturbed, but Hamel and Prahalad write, “the greater the angst of sales and marketing managers over the decision to sell core products to outsiders, the more likely it is that the firm’s in-house channels are less efficient than alternate distribution channels.” They even go so far as to suggest that if selling to outsiders doesn’t work, maybe the firm’s core competencies are not that competitive. Core competencies must be the central subject of corporate strategy, they believe. They must be deployed behind new market opportunities with as much velocity as capital is allocated to new projects.

Of all the material in this book, chapter 11 on expeditionary marketing and global preemption are the least original and seem to be tacked-on discussions of contemporary branding and marketing issues. New product development should not be discouraged, they write, citing examples such as IBM’s first disastrous foray in home computing with the PCjr., which discouraged the company from trying again for another 7 years. The other main point is that banner brands from global corporations such as Sony have an inherent advantage in their ready acceptance and reduced marketing cost.

Open source means computer program source code that is open to users, explained moderator Georg von Krogh, Director, Institute of Management, University of St Gallen, Switzerland. The idea is that users know their own needs and know best how to improve the code. “The question is, how do we tap into this and could this be a way to rethink innovation in our own companies? How can we give incentive to people to contribute their intellectual property? This is a social phenomenon and economically very interesting,” von Krogh added, noting that 760,000 contributions have been registered as open source to date.

Henning Kagermann, Chairman and Chief Executive Officer, SAP, Germany, stated that “open source is the result of frustration” among software engineers. But what if accountants have problems, he asked. “The engineers wouldn’t be interested in their problems and the accountants can’t program,” he quipped. Kagermann said every company developing business applications should be obliged to pay attention to its customers although “you don’t develop especially for one customer or two, but for clients as a category.” As companies cannot afford to over-engineer, they need to remain practical.

Larry Page, Co-Founder and President, Products, Google, USA, a Global Leader for Tomorrow 2002, said that he has used numerous systems and examined various open source programs. What works, he noted, are things that aren’t particularly innovative. Most programs are clones of existing ones. He said that those contributing to open source software teams are “geo-distributed” across the world, so they care and remain related through the software. Page said that the open source programs tend to be good for back-end software, especially Linux. “You can install it on just about everything including our iPAQs,” he said. He noted that programmers wishing to link to the Google Web API (access protocol programs) can add something on top of the standard Google, such as a verification system. However, many such programs lack polish or are just functional, while others may be sophisticated but not at all intuitive. Page thought it would be beneficial to have better models for open source, given that protocols (the way to use or connect to the Internet) are also open. The problem, he said is that these were developed before the Web by universities, which forgot to add two or three lines of code for authentication. “So we have all this spam,” he said. Page argued that although transparency may represent a social good, what matters is the interest it provokes among users.

Richard A. Jefferson, Chairman and Chief Executive Officer, CAMBIA, Australia, a Social Entrepreneur, develops policies and technologies that enable many new and low-margin applications. “It is a process for the democratization of innovation,” he said, noting that farming represents such a technology. There are parallels between open source software and all levels of the innovative process, he commented. Instead of developing and patenting thousands of processes, as giant biotech companies do, why not harness the creative talents of two billion of the earth’s people? he proposed. “They are the owners of skills like animal husbandry, bee keeping or farming,” he remarked. “The key is human creativity, and using technology and wise policy to nurture the innate problem-solving capacity within all people.” Owners have no motivation to corrupt, he added. Systems that work better are a benefit. Even poor farmers in rural India who face risk can understand that and are willing to dedicate tiny portions of their tiny lots to experiment.

C. K. Prahalad, Professor of Business Administration, University of Michigan Business School, USA, asked, “Do we really understand the cost of ownership? Interoperability? Security? And who owns the intellectual property?” This is a debate which is not about technology, but about the nature of society, he declared. “I believe all people are looking for higher levels of access – in government, hospitals or IT. We’re talking about access to all people and free.” The critical issue is not whether something is open or proprietary, but how to provide access, whether free or not, to as many people as possible. Prahalad noted that communities of common interest can be mobilized quickly, resulting in growing numbers of self-regulating groups capable of making their own rules regardless of government regulations. “People are intelligent enough to know what they are getting and not getting,” he said. There is always “value” in a society and “poor people cannot afford to buy the wrong things.” Open source is about how to build a system for the world’s people.

C.K. Prahalad: We can take Brazil as an example. One of the largest sellers of electronics products is Casas Bahia which primarily sells to poor people of São Paulo and Rio de Janeiro, most of whom live in slums. They take in about US $3.5 billion per year and are profitable. In the market of fast foods, “Habib’s” is growing fast and also targets consumption by low-income people. These examples are repeated in different parts of the world. The biggest developing countries - China, India, Brazil, Mexico, Turkey, Russia, Thailand, Indonesia and South Africa - concentrate a purchasing power on the order of US $12.5 trillion, which is more than Germany, England, France, Italy and Japan combined. It is a ready market to be explored, but that still does not receive due attention.

The secret to reaching these millions of consumers is to make them capable of consuming and accessing quality products. What happens is that we think that only people with good jobs and that live in developed areas have money. This is not true.

Valor: Companies need, then, to create a new market for these people, instead of trying to bring them into the existing markets?

Prahalad: Correct. Creating a new market is key, new areas where they can act. Not to create new needs for these consumers, but to find new ways to sell the same products and services in an innovative way.

Valor: The companies still did not search for this chance?

Prahalad: Most of the companies are focused on the models that function in the developed countries. Many multinationals - and great national companies in countries such as Brazil - are oriented only towards the sector of the population with greater purchasing power, because they can pay more, instead of exploring the possibility of great profits in the rest of the population. But already there are companies that have perceived this opportunity and are having enormous success. This proves that, if you venture to create a new model, there is the opportunity to make great profits. It is possible to create products of high quality with accessible prices.

Valor: What is the biggest challenge–to change the way as the company sees this sector of the population, or to change the approach and methodology towards this sector?

Prahalad: The problem is changing the way managers see these markets. So assume they will be able to see opportunity in the low income markets. The second thing is to start to think of how to develop new products and services that are compatible with this market. How do you develop affordable products and services, easy to be distributed and that, in the end, are still lucrative? There is proof that you guide this sector of the population and show them the way, the results will come.

Valor: How can a company find opportunities in this market? What are the steps a company should take to conquer the low income consumers?

Prahalad: Once a company has defined the poor as its strategic target, my suggestion is: take the small number of people controlling and directing research and development, and place them where you want to act. Proximity forces them to talk with people, to understand the needs and wants of these consumers. It’s imperative for managers to really understand the needs of this consumer. Later, it allows them to think about how to develop products that take care of these necessities. It’s necessary to create highly technological solutions, so that costs can be adjusted to this market and to keep the operation lucrative. This is the biggest challenge: for companies to associate high technology with low costs.

Valor: The managers fail to see these opportunities because they are too far from the low income people?

Prahalad: We live in a kind of isolation state. We are not connected to these consumers. The executives do not know as the people live. But they analyze data and statistics, and therefore they do not see the great potential that exists there.

Valor: To understand is the first step. How does one develop products that cost less and are lucrative?

Prahalad: The “Casas Bahia,” for example, have one of more advanced technological systems of sales and logistics in Brazil. Why create such a complex system to take care of poor people? Because it allows an incredible reduction in costs. This market needs high technology to be taken care of. So it is possible to develop products to a cost very low, that are affordable and, at the same time, profitable. It does not make sense to imagine that it is possible to take care of the poor sectors without making use of advanced technology–that’s nonsense. In this market, it is necessary to have more technology than when one works with the top of the pyramid.

Valor: It seems to be a paradoxical situation…

Prahalad: No, it is not paradoxical at all. You need to cut costs dramatically, but, at the same time, you need to produce products of high quality. Because, for your products not to be deceptive, these must be quality products. Then, the ultimate issue is: how to have quality products at accessible prices? In the first place, you must work with great volumes, to get scale. The use of high technology only allows to produce on a mass scale at a low cost, and still thus to be efficient.

Valor: It will not be easy…

Prahalad: Once you decide to enter in this market, it is not complicated. Everything depends on the focus. If the company really wants to succeed, it can be adapted to this sector in one year, in some cases.

Valor: But this all demands investment, time and strategic changes. Isn’t there a risk of failure?

Prahalad: If you look at for the market where the companies already act, failures are common. Many times the launching of a new product does not meet the expected success, and money is lost. The companies would have to adopt the same criteria of success or failure to act together to the poor people. I do not say that they must go immediately for this market, but that, yes, there is great potential and should not be ignored.

Valor: You say that the entrance of companies in this market can help to reduce poverty. How much of this statement is idealism?

Prahalad: It is not idealism. If you look at with an ideological prejudice, you might think this is utopian. But if you look at it with a practical method and objective, it is perfectly possible. For example, if I need to borrow money and no bank it wants to loan to me, I will have to go to a speculator and pay interest of, perhaps, 200%. But if there is a financial institution that will take care of me, I will pay 15% interest on the loan. The interest is still high, but I save 185%. The bank is, indirectly, increasing my income. What impresses me is that people criticize that a bank will loans money to me at 15% interest. But no one criticizes the speculator for charging 200% interest. The same thing happens with companies who sell goods to poor people. The “Casas Bahia” do this. Many people criticize them for charging high interest. But the interest would be even higher if its customers were to pay a financier, for example.

Valor: Wouldn’t it be better to teach the consumer to save up money, so as to be able to buy later, without interest?

Prahalad: What the “Casas Bahia” do is to discipline people to keep money, allowing them to acquire goods in several and small installments. Does this cost more? Clearly it does. But this allows these people to gain time.

Valor: There has always been a black market for the needs of low income people. Won’t encouraging a big company to enter this market mean the end of small companies, whose owners also are poor people? There will be more unemployment and, therefore, poverty will increase?

Prahalad: This is a preconception that worries many people, but is not the reality. Avon is a global company, but it has thousand of small entrepreneurs, many sufficiently poor, working for the company. Unilever is another global company, with thousand of small deliverers working for it. If you think about the system of egalitarian markets, a great company can not only create more entrepreneurship, but also support and form more direct action for the improvement of impoverished communities, and sow the seeds for new markets. Take for example the chicken producers in the south of Brazil. Today, they act in a global market because they sell its products to a great company. Without the support of this great company, that decided to invest in small farmers, the chicken they produce would not be being sold in supermarkets around the world.

Take a cab ride through Bombay, and these are the scenes that will likely strike you first: raggedly dressed homeless families sprawled on blankets amid shacks. Traffic hopelessly clogged with every manner of soot-belching vehicle and wooden cart. Gaunt hawkers and beggars tapping on your window at red lights. For foreign visitors, such jarring images of poverty and desperation are hard to shake.

View those same streets through the eyes of C.K. Prahalad, however, and they become a beehive of entrepreneurialism and creativity. “I see the positives inside the muck,” says Prahalad as he settles his stocky frame into the back of a hired Tata Indica sedan to conduct a quick tour of Bombay. As the car crawls through congested Mohamed Ali Road, he notes that virtually every individual is engaged in a business of some kind — whether it is selling single cloves of garlic, squeezing sugar cane juice for pennies a glass, or hauling TVs.

On every block he points out the intriguing enterprises tucked into the nooks and crannies. With the world’s cheapest telecom rates, “all you need here is a phone and a $20 card to start a business,” he explains in his measured baritone. He notices a busy closet-sized shop charging a few pennies per page to send faxes. “That guy probably started with a single phone and then added a fax and printer. Now he has a self-contained communications center offering extremely low prices.” Such entrepreneurs, he contends, pioneered cheap pay-per-use services long before they became a fad in the West. The car stops at a small dry-goods shop. Prahalad bounds out and asks the owner to let him behind the counter. Tiny 5 cents single-serve containers of shampoo, soap, toothpaste, and other household goods dangle from the walls and ceiling. He notes the brands: Head & Shoulders, Lifebuoy, Pears, Colgate, Lux. “Low quality won’t sell,” he says.

By the end of an hour it’s hard to look at Bombay and its impoverished citizens in the same way. That’s exactly what Prahalad, 64, intended. The University of Michigan professor’s knack for being able to change people’s perceptions of the world around them has made Prahalad an incredibly influential corporate strategist. He has built a lucrative consulting career helping such multinationals as Citibank, Philips, and Philip Morris break out of ingrained mind-sets and craft new business models. Prahalad and colleague Gary Hamel helped spark a management revolution in the 1990s with their idea of “core competence,” which says that companies must identify and focus on their competitive strengths. Their 1994 book, Competing for the Future, is regarded as a classic. A decade later he co-wrote The Future of Competition, which argued that the traditional “company-centric” approach to product innovation is giving way to a world in which companies “co-create” products with consumers. That book gave Prahalad a reputation among designers. At the same time, he has been working to convince executives that today’s needy masses, so often dismissed as subsisting largely outside of the global economy, are actually its future. Prahalad’s 2004 work on that topic, The Fortune at the Bottom of the Pyramid, has been hailed as one of the most important business books in recent years and turned Prahalad into a celebrity in the field of international development.

Street-smart innovation
Now one of the management world’s most creative thinkers has an even more radical idea: He believes that the entrepreneurial ingenuity at work amid such poverty, where success depends on squeezing the most out of minimal resources to furnish quality products at rock-bottom prices, has cosmic implications for executives and consumers everywhere. Some of the most interesting companies of the future won’t emerge from Silicon Valley or other places of abundant means, he says. They will come from places many executives don’t even think about because they have been considered too marginal. They won’t have that excuse for much longer, though.

In the world according to C.K. — short for Coimbatore Krishnarao — poor nations are incubating new business models and innovative uses of technology that in the coming decade will begin to transform the competitive landscape of entire global industries, from financial and telecom services to health care and carmaking. Globalization, outsourcing, the Internet, and the spread of cheap wireless telecom are accelerating dramatic change. Few Western corporations fully harness these forces, Prahalad warns. And that puts them in danger of being usurped by a new breed of supercompetitive multinationals completely off their radar, just as American industrial icons such as Xerox (), General Motors (), and RCA were blindsided in the ’70s and ’80s by nimbler Japanese upstarts including Canon (), Toyota, () and Sony ().

For his next book, due in fall, 2006, Prahalad is assembling case studies of Indian companies that could spawn entirely new ways to think about conducting business. Fast-growing telecom operators such as Bharti, Reliance, and Tata, for example, are profitably selling cellular service for as little as 2 cents a minute “even though they must buy the same hardware as Western companies,” he says. Now they’re preparing to launch broadband TV, data, and voice for around $30 a month — about a third of the cost of such packages in the U.S. Bangalore’s Narayana Hrudayalaya hospital charges a flat fee of only $1,500 for heart bypass surgery that would cost 50 times that in the U.S. and operates on hundreds of infants each year for free. Yet it is highly profitable, has no debt, and claims a higher success rate than most U.S. hospitals. Narayana also profitably insures 2.5 million poor Indians against serious illness for 11 cents a month per person.

Low wages alone can’t account for such price gaps with the West, Prahalad contends. The real secret is ingenious cost-cutting practices, such as extreme reliance on outsourcing, novel use of technology, and making the most of capital investment. “These are radical innovations,” Prahalad says, many of which can be adapted to the U.S. Just look at the info tech industry: Long dominated by giants IBM (), EDS (), and Accenture (), it has already been transformed by Indian companies such as Infosys () and Wipro () that supply top-quality services at lower prices. That, says Prahalad, is just the beginning of the revolution.

How seriously should we take Prahalad? His theories naturally draw skeptics. For instance, bottom-of-the-pyramid efforts don’t always help the bottom line, notes Microsoft Corp. () Chief Technology Officer Craig J. Mundie. Prahalad’s work has reinforced Microsoft’s view that it must develop software using different pricing, payment systems, and technologies in developing nations. “But even if you can execute a plan to sell to the poor, it’s not clear you can make money,” Mundie says. “Many companies in many industries have struggled to make a go of it, frankly.” In response, Prahalad notes that many once argued a sub-$500 PC was impossible. Now they cost as little as $100.

Prahalad hasn’t always had the Midas touch himself. A San Diego software firm he co-founded in 2000 struggled and was eventually sold. Of that experience, Prahalad said he at least gained some insight into his own management style. “I get extremely energized when there is an extremely complex problem to be solved,” he says. “But management is a lot of blocking and tackling.”

Evolving insights
Prahalad has been developing his worldview for decades. Born in India’s southern Tamil Nadu province, he acquired his inquisitiveness from his father, a prominent judge who was a voracious scholar of philosophy and literature. At age 19, in between earning a bachelor’s degree in physics and a management degree at the Indian Institute of Management, C.K. worked as a manager of a Union Carbide () battery plant. Later, while at Harvard Business School, he and classmate Yves L. Doz won attention with their 1975 doctoral thesis on multinationals, one of the first studies to argue that corporations need new structures to project global strategies while adapting to local needs. He also began nurturing concepts he would build on later in his career: that entrepreneurs should not let limited resources constrain their ambitions or let deeply ingrained biases blind them to revolutionary change.

Prahalad’s broad curiosity means his business insights tend to be fresh and ever-evolving. He consumes tomes on the rise and fall of nations, the spread of languages, and the history of such commodities as salt, tobacco, and cod. He is fascinated by historical maps and bird migratory patterns, which offer clues of the world’s shifting ecology. Prahalad lives with Gayatri, his wife of 35 years, in a sprawling home in San Diego’s posh Rancho Santa Fe district but spends about 40% of his time on the road. While traveling he does his own case studies of new business models and pumps everyone — cab drivers, factory workers, university kitchen staff — for insights. Ask him to tell a joke, though, and he’s stumped. “I have to admit, I am not very fun at parties,” he admits.

Prahalad built his following among CEOs as a blunt and demanding corporate adviser. Rather than operate with a retinue of junior staff, he likes to arrive alone with his Toshiba () laptop, fully armed after doing his own analysis of the company’s competitive strengths and weaknesses. He then proposes practical ways to correct management flaws. “The best way to describe C.K. is, he’s an out-of-the-box guy who is pragmatic,” says Hewlett-Packard Co. () CEO Mark V. Hurd, who ran NCR Corp. () until March. Prahalad has been on NCR’s board since 1997. “It’s quite an art to get a board filled with past and current CEOs to think of the world in a different way.”

As a consultant, Prahalad begins by trying to force managers to shake free of their “dominant logic.” The stunt Prahalad pulled with the top brass of Royal Philips Electronics in 1991 is legendary. The Dutch electronics conglomerate, losing market share fast in consumer appliances, hired Prahalad for a weekend brainstorming session. He started the Saturday morning meeting by reading a small item he said he had seen in the Financial Times. Philips was heading into bankruptcy, the article speculated, and bankers wanted to know management’s game plan. “Forget what we are supposed to talk about. There is a major crisis,” Prahalad warned. “You had better figure out what you are going to do about it.” He broke the stunned executives into two groups. They returned several hours later with ideas for radical restructuring involving up to 50,000 layoffs. Then Prahalad admitted he made the article up.

But he got their attention. Then-CEO Jan Timmer soon launched a restructuring program with Prahalad supervising a series of meetings with 100 managers from each business unit. “His style was to apply all of the pressure he could,” recalls Jan Oosterveld, a retired top executive at Philips who now teaches entrepreneurship at Barcelona’s IESE Business School. “His style can be mean but effective.” Philips has since turned itself around through major asset sales, layoffs, better product design, and a keener focus on core technologies.

When Prahalad started working with Indian conglomerates in 1994, “he was so sharp in his criticisms that it was like a punch in the gut,” says CEO K. Vaman Kamath of ICICI Bank. “We thought we were leaders. He taught us that Indian banking was a complacent mess and that we would soon be competing with no abilities at all.” Now ICICI exemplifies the kind of company Prahalad sees as the wave of the future. Developing financial software in-house to slash costs, it deployed 2,000 ATMs in urban neighborhoods and villages around the country. Taking a cue from microcredit agencies, ICICI organized thousands of self-help groups that provide loans of as little as $100 to poor women for starting businesses. Today, ICICI ranks as India’s dominant consumer bank, having boosted its customer base sevenfold, to 15 million, in six years, while pushing 75% of all transactions online. And ICICI’s $150 million microcredit business is profitable and expanding fast. ICICI hopes to use its low cost base to expand in Canada and elsewhere.

Prahalad thinks U.S. financial institutions can learn from ICICI and microlenders in Latin America. “Some 45 million people in this country don’t have or don’t use bank accounts or ATMs because they are too expensive. So they use check-cashing services, bond brokers, and other alternatives,” Prahalad explains. “If the financial industry can bring the poor into the organized sector, there is a tremendous opportunity.”

Developing nations are at the forefront of cost reduction in other industries. Among the reasons Bharti can offer telecom service so cheaply, Prahalad says, is that it keeps capital costs down by outsourcing everything from its network infrastructure to IT systems and promotes use of prepaid cards that generate cash up front. By making service affordable to the masses, Bharti can lure millions more subscribers, gaining economies of scale, and entice them to rely on cell phones instead of PCs for Internet access. “Somebody will eventually clean up these business models and bring them to the U.S.,” Prahalad predicts. “If high-tech and credit-card companies aren’t following these trends, they will get hit.”

Prahalad sees big changes ahead in manufacturing as well. GM, Ford (), and other auto makers increasingly outsource design and computer-simulated parts testing to Indian engineering-services firms. India also is rich in microelectronics design and high-quality precision auto-parts makers specializing in small-batch production. Before long, Prahalad predicts, Indian firms will be creating entire systems for Detroit — such as dashboards and chassis — that will cut development times and costs. “Many companies don’t understand yet that outsourcing isn’t about exporting jobs. It’s about importing innovation,” he says.

Healthier health care?
Prahalad thinks globalization also can help rein in America’s soaring health-care costs. That’s one reason he is studying Indian hospitals such as Narayana Hrudayalaya, founded by cardiac surgeon Dr. Devi Shetty. Some reasons for its low costs can’t be easily replicated elsewhere. The land was owned by Shetty’s family. The hospital’s 25 foreign-trained surgeons earn half what they could in the U.S. Outsize malpractice awards are rare in India, so insurance costs are low. But the hospital also operates for free on anyone who cannot pay and on any infant younger than one month. For the rural poor, it runs 39 remote clinics and mobile-testing labs with satellite links that so far have treated 17,000 patients.

Some the of the biggest savings come from its business model. In the U.S., the chief surgeon manages the entire patient process, from testing and diagnosis to supervising the operating room, recuperation, and billing. Narayana works more like an assembly line: The surgeons perform only surgery.

That may seem like a recipe for shoddy care. But Shetty asserts it actually translates into fewer mistakes because specialists focus on what they do best. The 1.35% mortality rate for coronary bypasses and 2.7% rate for aortic valve replacements reported by Narayana are roughly half the average of U.S. hospitals, according to federal statistics, though those aren’t the only measures of quality care. “The importance of volume isn’t well understood in our industry,” Shetty says. “A surgeon doing three or four operations a day does much better work than one doing three or four in a week.” The factory approach also leads to economies of scale. The hospital uses all of its expensive CAT scanners and X-ray and magnetic-resonance machines to the max. “In the U.S., a lot of this infrastructure is used five days a week,” says Shetty. “We use ours 14 hours a day, 7 days a week.”

This raises intriguing questions. If Indian doctors can effectively diagnose and treat heart conditions in farmers in distant villages, why can’t American consumers use videoconferencing to consult offshore specialists 24/7? Why can’t an enterprising hospital chain bring Narayana’s model to the U.S., or at least set up hospitals in Mexico or the Caribbean charging a fraction of U.S. prices? There are plenty of reasons this seems unlikely: Few Americans would tolerate the inability to collect big damages for mistakes, and it seems far-fetched that the U.S. medical Establishment would back sweeping liberalization to license offshore doctors to prescribe treatments. Or does such change seem impossible only because we are blinded by our “dominant logic”? Prahalad is confident that superior business models will eventually prevail. Just gaze into the kaleidoscope, give it a twist, and the implausible in the 21st century global economy becomes more realistic than you might ever imagine.

In the early 1980s, Michael Porter gave us Competitive Strategy and told us what fueled the engines of corporate growth. A decade later, C.K. Prahalad and Gary Hamel told us to mind our “core competencies.” In the years since, however, there hasn’t been a whole lot of shaking going on in the world of corporate strategy. As one consultant put it, “There have been several great eras in strategy. This is not one of them.”
One reason, of course, has been the seasick economy. Companies busily battening down the hatches and tossing employees over the gunwales weren’t exactly interested in charting innovative courses for growth. Another problem was guru-fication. Too many experts quit doing the hard research and instead hit the speaking circuit armed only with derivative sequels to their previous groundbreaking works, plus plenty of charm.

But there are signs of spring in the land of strategy. Quietly, minus all the hoopla, a few innovative thinkers have been doing the work of finding new strategies to succeed in a tough environment. Ram Charan has a new book out this spring; C.K. Prahalad does, too; Mercer Management Consulting’s Adrian Slywotzky and Monitor Group’s Bhaskar Chakravorti turned out books of case studies last year; and Porter is working on a new strategy tome for next year.

The true test of a strategy, of course, is whether it has any traction in the real corporate world. We wanted to know who out there on the front lines of business has been putting smart ideas into action, seeking to grow in saturated markets, hunting for talent in new places, and navigating a fully globalized environment. And so, with input from several of these thinkers, we offer these five tales of strategic innovation–not as it’s pondered or promoted, but as it’s practiced.
Create demand by solving problems
Robert Walter, Cardinal Health

Life used to be a lot simpler for companies, says Adrian Slywotzky, vice president at Mercer Management Consulting Inc. You invented some great products, bought up smaller competitors, and kept getting bigger. But now, says the coauthor of How to Grow When Markets Don’t (Warner Books, 2003), things are much tougher. “Product markets are saturated; the good acquisitions are done already.”

One way to grow in that world, Slywotzky says, is to innovate your own demand. That’s what Cardinal Health Inc., a Dublin, Ohio-based health-care-services company, is doing. Cardinal uses its unique access to both drug manufacturers and hospital chains to figure out where the problems are in the pharmaceutical business. Cardinal then creates new products to solve those problems, save customers money, and produce a tidy profit for itself. “They grow by figuring out how to improve their customers’ economics,” Slywotzky says.

Take the thorny issue of delivering medicines to patients in hospitals. Messy, handwritten prescriptions, a growing shortage of nurses and pharmacists, and pills lost during the dispensing process all add up to a dangerous and expensive problem. Incorrectly dispensed drugs can injure or kill patients and cost hospitals millions in lost medications or lawsuits.

Cardinal CEO Robert Walter smelled an opportunity. “We were already delivering products to the loading dock,” he says. “Why not manage delivery all the way to the bedside?” Walter bought a company called Pyxis, which makes ATM-style machines that are prestocked with the most commonly used medications. Approved prescriptions are loaded into the machines’ memory; nurses gain access via their fingerprints. Pyxis cuts down on mistakes and requires fewer personnel to dispense medications, improving safety and cutting costs. For Cardinal, which has deployed the machines into about 90% of U.S. hospitals, it means a steady new source of revenue plus a boost to its drug distribution business: Hospitals with Pyxis machines are more likely to buy their drugs from Cardinal.

Cardinal also found a problem it could solve for its suppliers: how to keep supply-chain costs down–a big challenge drug companies face when one of their patents expires and a once-hot product becomes a commodity. Walter’s solution? “I bought a packaging business, so we can bottle and box drugs for the big pharma companies,” he says. Drug companies can now cheaply outsource the manufacturing, packaging, and distribution of drugs to Cardinal while focusing their own efforts on developing the next blockbuster. With revenue that grew from $1.9 billion in 1993 to $51 billion in 2003 and operating earnings that ballooned from $60 million to $2.5 billion, it looks as if Walter’s strategy is sound medicine.
Customer experience is the brand
Sally Jewel, REI

Sally Jewel knows there are a thousand other places where outdoor enthusiasts can buy trail boots, maybe even at a better price. But Jewel, the CEO of outdoor-gear retailer Recreational Equipment Inc., also knows there’s simply nowhere else hikers will find the REI experience: testing boots on an indoor mountain to see how much their toes hurt when they tromp downhill, or trying them on a climbing wall to check traction. At REI’s flagship store in Seattle, hikers do just that, and at REIs across the country, shoppers also test gas stoves, practice setting up tents, and ask real explorers–who happen to be store clerks–which sleeping bags they would use on a mountain trek.

The in-store learning works both ways. When women shoppers looking to get active began flooding stores in recent years, REI responded with a new line of products based on what they asked for: tops with built-in bras for hiking and sleeping bags with extra room at the hips and extra warmth at the feet. When its staff heard complaints from shoppers about being pressed for time, REI responded with more gear for activities that can be done in a day, instead of focusing only on multiday adventures.

In a world where customer service is routinely terrible, REI has created a customer experience that is unique in retail. “We used to be product-driven–assuming we have the experience in gear and relying on customers to trust us to pick the right products,” Jewel says. “Our breakthrough four years ago was to shift to being market-driven–paying attention to who these customers are and how we can adapt to the way they want to recreate.”

If indoor mountains and climbing walls sound gimmicky, don’t be fooled. It’s not the individual pieces but the combined effect that’s important. In his most recent book, The Future of Competition (Harvard Business School Press, 2004), University of Michigan professor C.K. Prahalad writes that developing brand value by increasing the quality, not just the frequency, of interactions with customers, is a strategic imperative in a market overcrowded with too many brands for customers to care about. No longer content with the emotional imagery of advertising campaigns, shoppers now demand experiences in exchange for brand loyalty. As Prahalad puts it, “Experience is the brand.”

The REI experience extends beyond its store walls. REI’s Web site stocks thousands of products; customers can access it from kiosks in stores, and clerks can use it to place orders at checkout. The site was profitable in its second year and contributed $84 million in revenue in 2003. That successful multichannel strategy, with seamless click-and-mortar operations, is a part of REI’s success. So too is its effective vertical integration as both a manufacturer of original products and reseller of other brands, which kept overall sales growth at 9% during a tough retail year. And so is its active base of co-op members who pushed the company to nearly double its stores to 70 since 1996. But in the end, perhaps REI’s success relates back to Prahalad’s insight. Says Kate Delhagen, who follows retailing for Forrester Research: “People care about the REI experience.”
Competitors can be partners
Chet Huber, OnStar

OnStar’s president, Chet Huber, had a simple measure of success in the early days: a bulls-eye target on the wall of his office with a big “50″ in the middle. Every time the company notched 50 new customers in a single day, Huber celebrated. “That was the home run we were looking for,” he says. “Now, of course, we’re doing about 1.5 million new customers in a year. We’ve had some days when we get 15,000 customers.”

It took some doing to get there. Launched in 1996, the General Motors “telematics” service monitors users’ cars and provides 24-hour emergency communications. Huber’s initial hope for OnStar was simply to create a recurring source of revenue for GM–something to ensure a continual flow of money between car purchases. But its costs were steep: OnStar needed call centers nationwide and partnerships with emergency and roadside services in order to deliver on its “safety, security, and peace of mind” promise. With relatively few customers, it was hard to see how OnStar could make money.

So Huber made the move that changed OnStar’s fate. He approached GM’s board of directors and said he wanted to install OnStar in non-GM cars, too. Within the industry, Huber’s idea sounded like sleeping with the enemy: GM was giving away a proprietary techno-logy it had spent millions to develop. “Launching a new innovative technology and service is an accomplishment in itself, but actually selling this to competitors is unheard of,” says Thilo Koslowski, vice president and lead automotive analyst at research firm GartnerG2. There were risks for those competitors, too: OnStar would collect information about their customers when it signed up drivers, and would be getting an early look at their new car models.

Huber argued that OnStar could turn competitors into partners, to the benefit of both, and keep competitive information secure. GM would realize significant economies of scale by signing up additional customers. Rivals would get a way to add customer value and enhance brand loyalty without having to take an enormous hit to their own bottom lines by developing their own systems. “Huber has created a unique partnership between the new business and the existing parent company, GM, which allows OnStar unpre-cedented autonomy to reach out to competitors and broaden its customer base,” says Adrian Slywotzky of Mercer Management Consulting Inc.

Huber’s mold-breaking strategy worked. Today, OnStar provides its service to Lexus, Audi, Isuzu, Acura, Volkswagen, and Subaru cars, in addition to GM’s own lines. OnStar now controls 70% of the market. Ford folded its competing telematics business, outsourcing it to OnStar’s distant competitor, ATX Technologies Inc. GM’s service now has 2.5 million customers, and 2003 revenues were estimated at nearly $1 billion. “We are proud of our partnerships because it obviously means we’ve delivered on what we promised,” Huber says.
Talent is wherever you find it
Andrew House, Sony

When the Sony PlayStation burst onto the scene in 1994, it almost instantly grabbed 70% of the market from two well-entrenched incumbents, Nintendo and Sega. It was, by any measure, a remarkable debut, and it stemmed from a single insight: If the best and most exciting games were being developed for Sony’s console, the gamers would surely follow. Seems obvious enough. But how to make sure those games were created for Sony? Nintendo and Sega leaned heavily on the internal development of games by staffers and on refurbished old hits. From the beginning, Sony wanted to be open to the best ideas, wherever they came from. So it used outside developers to produce most of its games, and even reached out to gamers themselves. “We didn’t want outside developers to be peripheral to our business model,” says Andrew House, an early PlayStation team member and executive vice president of Sony Computer Entertainment America. “We knew that the widest variety of content possible was the best way to build the largest consumer base possible.”

C.K. Prahalad, professor at the University of Michigan, calls the strategy a “transformation of the value-creation process.” In increasingly competitive environments, it’s not enough to seek talent in the usual channels. Especially in the gaming industry, where users know what they like to play and often have the skills to create what they want, it’s a strategic advantage to reach out to them for innovation.

Soon, the company was searching high and low for talent. In 1997, it launched a developer kit aimed at hobbyists. “We sent it to budding college developers who wanted to try their hands,” House says. Ideas from those amateurs made their way into commercial games in Japan. Meanwhile, externally developed titles like Final Fantasy, Madden NFL Football, and Grand Theft Auto helped put Sony’s second-generation console, the PlayStation 2, at the top of the heap in 2001. Sony also launched a Linux developer kit for just $199 in 2002. “It’s our way of feeding the market for the future. Some of the first great games were developed by people at home in their garages. If we’re not getting people involved and looking for opportunities very early on, we really are missing out,” says House. The payoff for all this reaching out? In 2003, PS2 titles generated $80 million in revenue and included 9 of the top-10 U.S. games in December–all but one of them developed by outsiders.
It’s not always the customer
Rudy Schlais, General Motors China

China is the pot of gold for companies with global aspirations. Its billion-customer market and seemingly endless supply of cheap labor beckon seductively, yet the market seems always out of reach. Many have failed by trying to entice Chinese customers with brands to which they cannot relate, or with products they simply do not want. As a result, most foreign companies have turned simply to exploiting the cheap sourcing possibilities, exporting their finished goods right back to the West.

The Boston Consulting Group senior vice president George Stalk says that’s a huge mistake. “If companies don’t take advantage of developing the emerging local market, people will take the training and technology and simply become their biggest competitors,” he says. “They’ll be cannibalized by local versions of their very own products.”

Stalk’s Shanghai-based partner Jim Hemerling identifies General Motors as one company to avoid this trap by establishing its Buick cars as a coveted premium brand in China, then quickly moving to introduce successful mid-range and entry-level vehicles. Though GM currently controls just 10% of the Chinese market, ranking second among foreign automakers behind Volkswagen (with 30%), it has gotten there in just five years, while VW has played in the Chinese market for two decades.

How did GM succeed where so many others failed? “They have been recognized as a company with shrewd government relations right from the initial negotiations to choose GM over Ford for the first joint venture plant in Shanghai,” Hemerling says. Rudy Schlais, the man tapped to lead GM into the Chinese market in 1994, recognized that it was not nearly as important to court the end customer as it was to seek the aid of the Chinese government.

So when presented with the opportunity to meet with a Chinese vice premier in 1994, Schlais leaped at the chance. “I sat down with him and asked, ‘GM is late coming to China, what do we have to do to really win?’ ” Schlais recalls. The official said it was vital to create employment for locals and to help China develop a world-class automotive industry (instead of using the local market as a dumping ground for outdated vehicles and technologies). That insight helped GM win the competition with Ford and Toyota for the coveted right to create a joint venture.

To establish Buick’s premium brand image, Shanghai GM again courted the government, selling 35% of its early output as official vehicles. GM’s good governmental ties haven’t insulated it from all woes in China, including the piracy of one of its Chevrolet models this year. But in 2003, GM China sold nearly 387,000 cars, an astonishing 46% rise over its sales in 2002.

C.K. Prahalad thinks there can be a win-win relationship between business and the poor

“IF WE stop thinking of the poor as victims or as a burden and start recognising them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up.” That “simple proposition” begins a controversial new management book that seems destined to be read not just in boardrooms but also in government offices. “The Fortune at the Bottom of the Pyramid. Eradicating Poverty Through Profits” (Wharton School Publishing), is essentially a rallying cry for big business to put serving the world’s 5 billion or so poorest people at the heart of their profit-making strategies. It has already been praised by everyone from Bill Gates—“a blueprint for fighting poverty”—to a former American secretary of state, Madeleine Albright—“if you are looking for fresh thinking about emerging markets, your search is ended.”

Its author, C.K. Prahalad, is accustomed to rave reviews. (The C is for Coimbatore, the Indian town of his birth, the K for Krishnarao, his father’s name.) After becoming a management professor at the University of Michigan via a job at Union Carbide and study at the Indian Institute of Management and Harvard, he wrote “Competing for the Future” (Harvard Business School Press) with Gary Hamel in 1994. This tome was regarded as perhaps the best business book of the 1990s—an accolade that, admittedly, may be less than it sounds, given the amount of rubbish published by the business-book trade (see article).

As the two gurus searched for their next hit, Mr Hamel stumbled across Enron, a then-thriving energy conglomerate that he eulogised in “Leading the Revolution” (Harvard Business School Press). Mr Prahalad, by contrast, “after searching for a couple of years, saw that the big idea was creating wealth at the bottom of the pyramid”. He has been evolving his ideas about how firms should focus on the bottom of the pyramid—a phrase he shortens to BOP, to contrast with those wealthy folk at the TOP—since 1997, despite a spell running Praja, a business-activity-monitoring software firm that later had to be sold when it could not raise the capital it needed in the aftermath of the tech bubble. “Badly timed, but taught me a lot,” claims Mr Prahalad.

He is a fierce critic of traditional top-down thinking on aid, by governments and non-governmental organisations alike. They tend to see the poor as victims to be helped, he says, not as people who can be part of the solution—and so their help often creates dependency. Nor does he pin much hope on the “corporate social responsibility” (CSR) programmes of many large companies. If you want serious commitment from a firm, he says, its involvement with the poor “can’t be based on philanthropy or CSR”. The involvement of big business is crucial to eradicating poverty, he believes, but BOP markets must “become integral to the success of the firm in order to command senior management attention and sustained resource allocation.”

Mr Prahalad reckons that there are huge potential profits to be made from serving the 4 billion-5 billion people on under $2 a day—an economic opportunity he values globally at $13 trillion a year. The win for the poor of being served by big business includes, he says, being empowered by choice and being freed from having to pay the currently widespread “poverty penalty”. In shanty towns near Mumbai, for example, the poor pay a premium on everything from rice to credit—often five to 25 times what the rich pay for the same services. Driving down these premiums can make serving the BOP more profitable than serving the top, he argues, and points to a growing number of leading firms—from Unilever in India to Cemex in Mexico and Casas Bahia in Brazil—that are profiting by doing precisely that.

But to be profitable, firms cannot simply edge down market fine-tuning the products they already sell to rich customers. Instead, they must thoroughly re-engineer products to reflect the very different economics of BOP: small unit packages, low margin per unit, high volume. Big business needs to swap its usual incremental approach for an entrepreneurial mindset, because BOP markets need to be built not simply entered. Products will have to be made available in affordable units—most sales of shampoo in India, for example, are of single sachets. Distribution networks may need to be rethought, not least to involve entrepreneurs from among the poor. Customers may need to be educated in how to consume, and even why—about credit, say, or even about the benefits of washed hands. The corruption now widespread in poor countries must be tackled (about which Mr Prahalad has penned a particularly useful chapter).

There are plenty of sceptics. Are the opportunities for profitable product re-engineering really as common as Mr Prahalad thinks? How much can private firms accomplish given inept or corrupt governments in many poor countries? “There is much less scepticism now than when I first started talking about the BOP,” retorts Mr Prahalad. What the leading firms are grappling with now, he says, is not whether there are profits to be made, but how to serve the BOP on a big enough scale, and how to transfer what works from one part of the world to another.

Another challenge will be to persuade development experts to support a profit-driven strategy. Mr Prahalad worries that firms may be deterred from BOP strategies by fear of attracting criticism from activists. If a large international bank were to start lending to the poor at interest rates, reflecting higher risks and start-up costs, of say 20% (compared with around 10% in rich countries), “the whole anti-globalisation lobby would probably be against it. Yet the alternative is for the poor to borrow at 500% from a money lender. Whose side are the activists on?” If you are on the side of the poor, he says, “surely you need to help get rates down from 500% to 20%. After that, you can work on getting them from 20% to 10% like in the rich world.”

Prahalad read a book about the history of the potato and how its eventual spread transformed the world. Somehow, it made him think differently about the Internet. Just as international trade had fostered the potato’s growth, the Internet would foster the global diffusion of individual power — and that would transform the world. The connection is perhaps obvious only to Prahalad. But that’s his way. “If you want new ideas, you have to push yourself into the periphery,” he says.Prahalad’s periphery is a nondescript office in San Diego overlooking a parking lot and a dusty dry canyon. Since April 2000, the 60-year-old has been chairman of a small, profitless high-technology company called Praja Inc. And he is doing what many executives of small, profitless high-technology companies do these days: He’s working the phones, offering to fly up to the home of a GM executive (a potential customer) for a quick meeting. He’s crisscrossing the globe in search of funding. He’s agonizing over layoffs. And, oh yeah, one other thing: With this modest, 30-plus-person company, he is also trying to change the world.This is the story of a man who had it all and decided that it wasn’t enough. Instead of slowly lowering the flame on a white-hot career, Prahalad has lit an entirely new flame. He has taken a leave from Michigan, dramatically scaled back his consulting work, put up several million dollars to get Praja going, and moved his family to San Diego. “He’s taking financial risk, professional risk, reputational risk, and personal risk,” says B. Joseph White, dean of the University of Michigan Business School. And yet, adds White, “it’s totally in character.”

What Prahalad wanted was a new, huge challenge. Not incidentally, he also wanted to create a laboratory for the application of the ideas that he had been preaching to others.

This is a personal test, the latest step in a search for self-knowledge that has defined Prahalad’s life. “I was in a very good zone of comfort,” he says. “And I felt that this opportunity was so large that I needed to experiment with it myself. What we’re selling is a new way to run a business. Our ultimate motivation is to make a difference.”

The collapsing economy has made that job tougher than Prahalad had ever imagined when he abandoned his life in Ann Arbor. Yet now he appears more committed than ever to Praja’s ideals and technology. “You have to have faith,” he says. “You cannot lead if you don’t believe.”

“Consumers do not have much share of a voice. Now they do.” What’s in a name? In Sanskrit, praja means “common people.” Prahalad and cofounder Ramesh Jain, the company’s 52-year-old CEO, say that it is the inverse of the word raja, which means “nobility.” It is not, they insist, a play on Prahalad and Jain, despite employee jokes to the contrary. At its most basic, Praja is a high-technology company that allows people to personalize their own experiences on the Internet — whether as a sports fan, a student, a data analyst, or a farmer. Its platform, ExperienceWare, organizes data by context, rather than by time or written words, sorting such information as text, video, audio, and sensory data. Prahalad and Jain think the implications of the process are cosmic.

“The problem so far has been data as information,” says Prahalad. “We are still operating as if we never left Gutenberg. If you look at keyword searches, the document is still going to be the organizing idea. But now the metaphor is not going to be the document — it’s going to be the experience.”Prahalad, a mustachioed, bespectacled, slightly round man, fills the room when he speaks. He is a contagiously high-energy guy. His language, while complex and academic, is sprinkled with expressions meant to draw in the listener. “Is it not?” he asks often. “Okay?”

Prahalad says that Praja will facilitate the most profound impact of the Internet: the empowerment of the individual. The Internet is rapidly democratizing information, and the effects are mind-boggling — from the rise of global antibusiness activism to the organized cells of consumers everywhere. “Consumers did not have much share of voice,” he says. “Now they do. There is a fundamental transition that is taking place — from a firm-centric society to a consumer-centric society.”

In a consumer-centric society, says Prahalad, everyone — even the poorest of the poor — can gain more control over their own life. “Why don’t people have economic opportunities? Because there’s no information. You don’t know what the price of fish is in the next village. The large-company Internet business models, the Internet poor, the new business models — they’re one big circle. They all interact with one another. But we have to make this a business issue.” And that is exactly what Prahalad has signed on to do.”What is the next challenge in life?”

One of the few decorations in Prahalad’s sparse office is a beautifully illustrated old map — a gift from friend and collaborator Gary Hamel. “Can you tell me what country that is, Jennifer?” booms Prahalad, always the professor. I’m stumped, as I tend to be continuously with this man. He smiles broadly and turns the map around. Then I see that it is a map of India, tilted at a 90-degree angle. This, I realize, is Prahalad in a nutshell. Turn an idea sideways. It’s the theme of his life. It’s how you get from potato to Praja.One of nine children of a well-known Madras judge and Sanskrit scholar who wrote and edited 40 books, Prahalad (that’s his first name, actually; C.K. stands for Coimbatore Krishnarao, the names of his town and of his father, respectively) was born to study. But early in his career, he managed people. A brilliant student of physics, he was recruited by the manager of the local Union Carbide battery plant. He promised his father he’d try it for a year, then return to school to get his PhD.

Only 19 at the time, Prahalad turned the factory sideways. One day, after noticing that many temporary workers were using old or torn gloves (managers doled out new gloves according to seniority), Prahalad had a thought: Why not distribute new gloves to the workers who handled the most dangerous stuff instead? Impressed, Prahalad’s boss decided to mentor the young upstart, often bringing him management books to read and quizzing him about them later. Prahalad calls his Union Carbide experience a major inflection point in his life, and he still cherishes the gold chain that his workers bought for him when he left — four years later. “I learned about the extraordinary wisdom of ordinary people,” he says.

Prahalad then went to the Indian Institute of Management (IIM), where he fell in love with Gayatri, a young psychology student at a nearby university. After five years spent trying to win their families’ approval (the union went against tradition), the couple married and left for Harvard, where Prahalad wrote a PhD thesis on multinational management in just two and a half years. They then returned to India, where he taught at the IIM. But this was the 1970s, and the fervently nationalistic India had little use for a globally oriented thinker. With his ideas under constant political attack, Prahalad decided he had no choice but to return to the United States. The Prahalads arrived in Ann Arbor with $18.

Maybe because he had nothing to lose, Prahalad didn’t play it safe. He became known on the Michigan campus as a maverick who avoided publishing in the traditional journals in favor of venues that he thought would have more of an impact. He ruffled feathers. As an assistant professor, he was approached by a major company with an invitation to consult — an opportunity that every young business academic yearns for, especially if he has two young kids. He agreed, but he demanded $1,000 a day. Shocked, the client withdrew the offer. Gayatri was horrified. “We need the money,” she gasped. But for Prahalad, it was a matter of getting the respect that he felt he deserved. A month and a half later, another company sought his services. This time, he asked for $3,000 a day. And he got it.

In 1981, Prahalad met Gary Hamel, then a young student in international business. Their relationship, which would become a remarkable, decade-long collaboration, was much like Felix and Oscar on intellectual crack. Prahalad preferred a full-bodied cabernet and a good book in his study to working a crowd. Hamel was the voluble one, and the two became known around the university for knockdown, drag-out intellectual-sparring sessions that lasted long into
dinner.

Much of their most influential work appeared in the Harvard Business Review. Their May 1990 article, “The Core Competence of the Corporation,” became one of HBR’s most widely reprinted pieces ever. A subsequent book, Competing for the Future (Harvard Business School Press, 1994), was heralded as one of the great business books of the 1990s. The work lifted both men into the top ranks of business thinkers, earning them millions in royalties and speaking fees. Soon after, Prahalad had his potato epiphany. The timing coincided, more or less, with an invitation from his friend Jain, an entrepreneur and former Michigan professor who, at the time, was teaching at the University of California at San Diego. Jain, who was experimenting with sports television, asked Prahalad to look at his artificial-intelligence technology. The software allowed viewers to watch the Super Bowl from any perspective, even those not actually filmed by the network’s cameras. Prahalad had no interest in sports, but the experience enthralled him. “The technology eliminated the tyranny of the few over the many,” he says.

Prahalad had put money into Jain’s first two companies, Imageware and Virage Inc. Now he was sinking the first installment of an investment that eventually totaled at least $3 million into the newly formed Praja. Jain became CEO. But, he says now, “it was very clear that there were lots of business issues that I didn’t understand as well as I could have.” Eventually, he asked Prahalad to help him run Praja. “If you want to build the company the way that we want it,” he told Prahalad, “the leadership should come from you and me.” To his colleague’s surprise, Prahalad said yes. “After he decided,” Jain recalls, “I said, ‘As a friend, I want to know why you are doing this.’ He said, ‘Ramesh, neither you nor I need a company to maintain our current lifestyle. But what is the next challenge in life?’ “

“What would happen if this power became commonplace?” For Prahalad, Praja’s challenge — and so, his — is twofold. One: Make it through the tough times, build a successful business, and use the technology invented by Jain in a transformational way. Two: See what it’s like to take your own management medicine.

At its simplest, Praja’s technology offers a very quick way to build applications and to organize all kinds of information, from sensory data to video to text to audio information. Praja is focusing on two areas: knowledge sharing and data analysis. Analysts at General Motors, for example, are using the company’s technology to compare sales data from different countries and time periods. Need to contrast, say, Saab sales and Ford Explorer sales in Brazil in March? That’s just the sort of calculation that GM used to spend weeks on. With ExperienceWare, it’s instantaneous.

Meanwhile, Praja is experimenting with knowledge management at Zurich Financial Services, where it has created a virtual, cross-cultural learning community that brings together senior executives from all over the planet. Participants can use video, text, or other information to compare projects or management problems, untethered by place, time, or even language. “It is still a work in progress, but it has been very well received,” says Gunnar Stokholm, head of business development at Zurich Financial Services.

It is one thing, of course, to enable an online executive confab — and quite another to build something that touches the world. But it is the broadest implications of this concept that get Prahalad excited. In a world where information is available to everyone and not segmented by language or even literacy, Praja’s technology could be used to help not just executives but also
the rural poor. Strategies for containing breakouts of contagious diseases could be shared, globally and in real time, across languages and technologies. Says Jain: “A lot of things that we are going to be developing will be revolutionizing in different ways. We’re making language irrelevant.” This is the vision — one of bringing the power of information to everyone — that drives both Prahalad and Jain. “This company was started with the basic assumption that we would empower people to be themselves, to experience life on their terms,” says Prahalad. “Then you take the next step and ask, ‘What would happen if this power became commonplace, rather than only for the wealthy?’ The moment you ask that question, staring in your face are 4.5 billion people. How do you help ordinary people understand how to exercise their power? More interestingly, how do you get large companies to understand that if they don’t, they’ll have no social legitimacy left?”

Just before joining Praja, Prahalad and fellow professor Stuart Hart, from the UNC Kenan-Flagler Business School, circulated a draft of a paper called “Raising the Bottom of the Pyramid: Strategies for Sustainable Growth.” They argued that the 4 billion poor people at the bottom of the economic structure represented a valid, vibrant market for goods and services — and that large multinational companies could make big profits by meeting their needs. “The challenge for managers is to visualize an active market when what exists is abject poverty,” they wrote. “With all due respect to the importance of wetlands, it is like visualizing a theme park where you see only swamp.”It’s kind of a contrarian idea. Until now, the rural poor have been considered unable to sustain a market, unlikely ever to get enough disposable income to buy anything that a big western company would want to sell. But in India, Prahalad found companies making money hand over fist by selling to the poor. The idea that informed capitalism could help the world’s downtrodden got him really, really excited. “It brought a fire and a passion to C.K. that goes beyond what I’d seen before,” says Hart.

This is, in ways not yet completely clear to anyone, Praja’s future. But it’s not the present. These days, Praja is marketing exclusively to big companies. Prahalad and Jain are scrambling for a third round of funding. (Together with board members, the two recently kicked in $3 million to keep the company going until the fall.) But Prahalad’s grand vision must wait. “You cannot solve the world’s problems in a small company,” he says. “The goal is not to say that we are going to do it anyway, with or without money. It’s a nice, brave thing to say, but very soon you’ll be running out of cash.”

“They have to go through the valley of death” For a taste of what it’s like to have C.K. Prahalad running your company, flash back to September 1999, at the University of Michigan’s Executive Education Center. Prahalad prowls the rows of nervous managers attending Michigan’s renowned four-week leadership program, seemingly feeding off of the anxiety in the room. He is lecturing on the 16th-century standoff between Cortes and Montezuma — a metaphor for the struggle between startups and established companies. A master teacher, Prahalad lulls his students into thinking that they know the answers to his constant barrage of questions. Then, slowly, he removes the veil, allowing them to see that they are wrong.

In an hour, the students go from confident blusterers to humbled novices. Only at the end does Prahalad guide them from utter confusion to a new level of understanding. “They have to go through the valley of death,” he says. It’s another of Prahalad’s core beliefs: Only when you are challenged, unsafe, out of your zone, can you find self-knowledge.

This is how Prahalad approaches potential Praja clients, often companies he once advised. “It’s amazing, the way he can captivate the upper-level executives — and tell them that they’re crap,” says Joe Kosco, director of business development at Praja. “He gets their attention, and then he says, ‘This is how we’re going to fix it.’ ” He treats his own employees the same way. Dealing with Prahalad, they say, is like playing chess with Bobby Fischer. ” C.K. is an academic with stage prowess,” says Robert Martindale, a business-development manager at Praja. “I feel like I’m getting a PhD.”

Prahalad is Praja’s enforcer-cheerleader, roaming the halls and challenging anyone he meets: “Do you believe yet? You don’t believe, do you? Do you?” He is focused in a way that most of his employees can’t even fathom.

His idea of time off is taking a long walk with Gayatri — and then working some more. His enormous new home in Rancho Santa Fe boasts a pool, along with access to a golf course and a tennis court — none of which he uses very often. He and Jain spend nearly every Saturday together working. Prahalad even tried to convince Jain to move into the mansion next door. “He argued that we could save a lot of time if we didn’t drive to work separately,” laughs Jain.

All of this leads to a strange dynamic within Praja: What do you do when your boss knows more about every aspect of your job than you do? How do you make a sales presentation if everyone in the room is staring at the other guy? Prahalad is acutely aware of this contradiction. To avoid being perceived as the blowhard executive who knows it all, he is always asking for feedback on what he could have done better. He’s sincere about this: It is a way for him to learn — and learning, after all, is something that Prahalad does well. He even asks me several times during my visit, and again after my return, for a report card: “How can I be a better manager?”

The question betrays Prahalad’s own zone of discomfort. He is most at ease when teaching, and he views Praja very much as his classroom. But Praja is, of course, also a business, and the professor has had to wrestle with what it means to actually manage a for-profit organization.

Prahalad admits that the desire of his employees to know exactly what their roles are was one of the things that surprised him most about running a company. And for someone who is used to delivering the message only to top executives, the amount of time that he had to spend explaining his vision took him aback. Some employees fret that with Prahalad’s insistence on constant learning, Praja may be moving too slowly.

Prahalad has learned by now that some of his big-company prescriptions don’t fit here. “The negative side of a small company is that there are no dampers,” he says. “Just because you can make a change quickly, the temptation is to act. Speed is nice to have, but going faster to hell is not how I want to run a company. I want somebody to keep pushing the organization. I also want somebody to say, ‘Let’s be thoughtful about getting this done right.’ “My role,” he continues, “is to balance the tension.”"In great growth times, anyone can lead”

It was a foggy, sleepy day in Seattle, though you wouldn’t know it from the electricity surging through the conference hall last October. C.K. Prahalad, professor and entrepreneur, had just described his vision of using technology and innovative strategy to market to the world’s poor, and the crowd at the Creating Digital Dividends conference was on its feet. “We have company think, not consumer think,” he thundered. “What we make is not what they want.” The problem juices Prahalad — and it shows. Even as he focuses on strengthening Praja, he speaks regularly on the digital divide. He helped persuade Carly Fiorina, CEO of Hewlett-Packard, to launch what HP calls its World e-Inclusion initiative. But that’s the gauzy future. Right now, Praja faces an environment that’s downright poisonous for startups and a capital market that is essentially dead. Many potential customers are slow to commit to buying anything, let alone a new platform that requires a whole new way of thinking.

In late February, Prahalad and Jain refocused the company on marketing its core technology, relying on system integrators to build specific applications. It also laid off more than a third of its staff. “I would be lying if I said that I was emotionally and mentally prepared for this,” Prahalad says.There was a learning experience here too — but not the kind that Prahalad had hoped to have. “Especially in troubled times, leaders must behave like emotional and intellectual anchors,” he says. “You must steady the organization and have a passionate belief that what you are doing is important. I never realized how critical that was in times of turbulence.”

What is so fascinating about Prahalad is that amid the gloomy tidings, he seems more energized than ever. Praja may be fighting for survival, but Prahalad has yearned for a test like this: “Leadership is about what you do when the going gets tough.

“It is the bamboo that bends in heavy winds that has another day to live,” he continues, reciting an old Indian saying. “The trees that don’t bend get uprooted.”

Now he’s in the hot seat as chairman of Praja Inc. Here’s what he has learned so far.When the going is roughest, leadership matters. In times of trouble, Prahalad says, “leaders must behave like emotional and intellectual anchors. There are no external cues now. The critical issue is about faith, passion, and, most importantly, authenticity — so that people know you are not pretending. People can see a sham.”

Successful managers embrace discomfort. “If you do precisely what you’re supposed to do,” Prahalad says, “and you’re boxed in, then you’re going to do that very well.” But if pressed to do things that aren’t in your normal job description, he says, the challenge can push you to a new level of achievement.Great leaders stay on message. For Prahalad, nothing is more important than reminding people what the company stands for. “I spend a lot of time talking about what we’re doing in terms of strategy,” he says. “You have to give the same message over and over again.”

It’s not one person. It’s not the team. It’s both. A painting of a pack of wolves in Prahalad’s office symbolizes the combination of leadership and teamwork that pervades successful organizations. “With wolves, solidarity is first,” says Prahalad. “But when they hunt, they change roles. The implicit hierarchy depends on who does what.” In an organization, he adds, “one unique person makes a difference, but you need teamwork to make it happen.” Think? Act? Balance the two. Says Prahalad: “In a company like ours, if we want to do something, we can just call a meeting. But in a small company, you have to exercise caution and build your own personal dampers so that you don’t act on everything. Sometimes not acting may be smart. But if I get the feeling that everybody’s becoming so thoughtful that nobody’s doing anything, I want to go and light some fires somewhere.”

** …COMPILED FROM THE INTERNET

India votes for Anil Ambani in DNA poll
Daily News & Analysis, India - Dec 30, 2005… The list includes India s top thought leaders: Anand Mahindra, Azim Premji, GR Gopinath, CK Prahalad, Mukesh Ambani, Narayana Murthy, Ratan Tata, Sunil Mittal …

Learning to Listen: Technology And Poor Communities
AllAfrica.com, Washington - Jan 20, 2006… The Indian professor CK Prahalad, a management guru at the US-based University of Michigan, led the call for change in his 2004 book Fortune at the Bottom of …

Forces that will define companies’ future
Rediff, India - Dec 27, 2005… 1989; Ghemawat P., Commitment: The Dynamic of Strategy, Free Press, New York, 1991; Hammel G., Prahalad CK, Competing for the Future, Harvard Business School …

Davos: Stars, Snow, and Seminars
BusinessWeek - Jan 22, 2006… fun at the “celeb-ness” of Davos, Gere, Jolie, and Stone will be joining the likes of Microsoft (MSFT ) co-founder Bill Gates and CK Prahalad, University of …

2005: The marketing year that was
Deccan Herald, India - Jan 1, 2006… lexicon. Dr CK Prahalad has woken a whole nation of marketers to a possibility that lies ahead at the bottom of the pyramid. Does …

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-Choupals” 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-person” 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 se