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Best Business Books 2005: Strategy

In 1998, Cemex, the world’s third-largest — and Mexico’s largest — cement manufacturer, launched Patrimonio Hoy (“savings/property today”). Patrimonio Hoy enables the very poor to pay for materials to upgrade their homes, growing Cemex’s volume in the do-it-yourself market, where margins are high and demand isn’t cyclical. Patrimonio Hoy is built upon the values of Mexico’s poor: the importance of family; a belief in the responsibility of one generation to leave behind something for the next (like a house); maternal leadership; and respect within the community. Patrimonio Hoy does not do business with individuals, but contracts with pools of three people (typically the maternal heads of households) called socios. Each socio commits to making weekly payments of 120 pesos for at least 70 weeks, and each of the three members takes a monthly turn collecting from the others. At the end of the first five weeks, Patrimonio Hoy delivers 10 weeks’ worth of raw materials through a selected Cemex distribution partner, effectively extending credit for the remaining five weeks. As the socio continues to meet its obligations, the delivery schedule (with credit extensions) accelerates. Patrimonio Hoy also offers construction and architectural assistance. Cemex’s sales have tripled in geographies where Patrimonio Hoy operates.

India’s Aravind Eye Care System performs 190,000 eye surgeries per year at quality levels as good as or better than those available in the developed world’s best hospitals — at a fraction of the cost. Aravind’s doctors benefit from the large eye-patient volumes, quickly gaining more experience than doctors elsewhere in the world. Aravind’s doctors are extraordinarily productive, Professor Prahalad explains, in part because they operate on two adjacent tables:

By the time the first operation is over, the second patient is ready with the microscope focused on the eye to be operated on. The first patient is bandaged by the nurses and moved out. As soon as the first patient moves out, the third patient is put on the first table and prepared for the operation.

Aravind has also vertically integrated into manufacture of the lenses, sutures, and pharmaceuticals it uses (Aravind manufactures about 20 percent of the low-cost lenses in the world).

The Fortune at the Bottom of the Pyramid is essential reading for four reasons. First, the powerful business models targeting the developing markets that Professor Prahalad describes offer important analogies that every strategist should consider, but that few American or European managers in developed markets are likely to experience either directly or through reports in the business press.

Second, the bottom of the pyramid is crucial to the future sustained growth of major American and European corporations, because developing countries represent virtually all of the world’s expected population growth over the next 50 years. Although typical Western business models can be adapted to serve the top of the pyramid in developing countries, the types of business models Professor Prahalad describes are critical to tap into most of the growth.

Third, customers in the United States and Europe are increasingly served by the businesses Professor Prahalad describes. For example, customers from the United States and Europe already travel to India for eye surgery at Aravind, attracted by its excellent quality, high level of service, and low prices (significantly lower even after paying the cost of travel). Cemex is extending its reach into the United States, targeting workers of Mexican heritage who regularly send money to family members in Mexico (almost $10 billion per year, with an estimated 10 percent intended for home construction). To tap this market, Cemex established Construmex, a program enabling workers in the U.S. to send money directly to cement distributors in Mexico, who in turn deliver building materials directly to building sites in Mexico. If successful, the Construmex pilot may transform the money transfer businesses and change U.S. retail banking and construction lending.

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