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Published: January 10, 2002

 
 

The Fortune at the Bottom of the Pyramid

Finally, research must identify useful principles and potential applications from local practices. In Tier 4, significant knowledge is transmitted orally from one generation to the next. Being respectful of traditions but willing to analyze them scientifically can lead to new knowledge. The Body Shop’s creative CEO, Ms. Roddick, built a business predicated on understanding the basis for local rituals and practices. For example, she observed that some African women use slices of pineapple to cleanse their skin. On the surface, this practice appears to be a meaningless ritual. However, research showed active ingredients in pineapple that cleared away dead skin cells better than chemical formulations.

MNCs must develop research facilities in emerging markets such as China, India, Brazil, Mexico, and Africa, although few have made a big effort so far. Unilever is an exception; it operates highly regarded research centers in India, employing more than 400 researchers dedicated to the problems of “India-like markets.”

• Form new alliances. MNCs have conventionally formed alliances solely to break into new markets; now they need to broaden their alliance strategies. By entering into alliances to expand in Tier 4 markets, MNCs gain insight into developing countries’ culture and local knowledge. At the same time, MNCs improve their own credibility. They may also secure preferred or exclusive access to a market or raw material. We foresee three kinds of important relationships: Alliances with local firms and cooperatives (such as the Khira District Milk Cooperative); alliances with local and international NGOs (like Starbucks’s alliance with Conservation International in coffee); and alliances with governments (e.g., Merck & Company’s recent alliance in Costa Rica to foster rain forest preservation in exchange for bioprospecting rights).

Given the difficulty and complexity of constructing business models dependent on relationships with national or central governments (e.g., large infrastructure development), we envision more alliances at the local and regional level. To succeed in such alliances, MNC managers must learn to work with people who may not have the same agenda or the same educational and economic background as they do. The challenge and payoff is how to manage and learn from diversity — economic, intellectual, racial, and linguistic.

• Increase employment intensity. MNCs accustomed to Tier 1 markets think in terms of capital intensity and labor productivity. Exactly the opposite logic applies in Tier 4. Given the vast number of people at the bottom of the pyramid, the production and distribution approach must provide jobs for many, as in the case of Ruf & Tuf jeans from Arvind Mills: It employed an army of local tailors as stockers, promoters, distributors, and service providers, even though the cost of the jeans was 80 percent below that of Levi’s. As Arvind demonstrated, MNCs need not employ large numbers of people directly on their payroll, but the organizational model in Tier 4 must increase employment intensity (and incomes) among the poor and groom them to become new customers.

• Reinvent cost structures. Managers must dramatically reduce cost levels relative to those in Tier 1. To create products and services the poor can afford, MNCs must reduce their costs significantly — to, say, 10 percent of what they are today. But this cannot be achieved by fine-tuning the current approaches to product development, production, and logistics. The entire business process must be rethought with a focus on functionality, not on the product itself. For example, financial services need not be distributed only through branch offices open from 9 a.m. to 5 p.m. Such services can be provided at a time and place convenient to the poor consumer — after 8 p.m. and at their homes. Cash-dispensing machines can be placed in safe areas — police stations and post offices. Iris recognition used as a security device could substitute for the tedious personal-identification number and card for identification.

 
 
 
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Resources

  1. The concepts in this article were first articulated in 1998, and have been made available for discussion in a working paper. For more information, contact the authors.
  2. Stuart Hart, “Beyond Greening: Strategies for a Sustainable World,” Harvard Business Review, January–February 1997; Click here.
  3. C.K. Prahalad and Kenneth Lieberthal, “The End of Corporate Imperialism,” Harvard Business Review, July–August 1998; Click here.
  4. “Is the Digital Divide a Problem or an Opportunity?” Business Week Supplement, December 18, 2000
  5. Robert Chambers, Whose Reality Counts? Putting First Last (ITDG Publishing, 1997)
  6. Thomas L. Friedman, The Lexus and the Olive Tree: Understanding Globalization (Farrar, Straus and Giroux, 1999)
  7. Amartya Sen, Development as Freedom (Alfred A. Knopf, 1999)
  8. Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000)
 
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