Book Review -- Serving the Poor Profitably

The Fortune at the Bottom of the Pyramid

By C.K. Prahalad

Wharton School Publishing

The Fortune at the Bottom of the Pyramid talks about reducing poverty at a time when rock stars and economists alike are calling for a mammoth increase in foreign aid. What’s the connection? Just that the folks crying about the stingy rich and the desperate poor are ignoring the force that has and will continue to bring about poverty reduction. Business.

University of Michigan professor C.K. Prahalad’s book uses b-school case studies to explore how corporations can profitably serve the planet’s four billion people living on less than $2 a day (the bottom of the economic pyramid, or BOP).

The prize is that often-painful business cliché – win-win. Companies profit while the BOP enjoys better products and services and the dignity of being catered to by a world that traditionally looks at them as charity cases. As the idea goes, poor consumers are empowered, their purchasing power increases, and the winnings get bigger. WIN-WIN, as it were.

Prahalad comes along at an important historical moment, because as Bono and Jeffrey Sachs sing in harmony for more money, the uncomfortable fact remains that anti-poverty programs as typically practiced are not effective. More bluntly, they don’t bring large numbers of people out of poverty. The countries with the most success in doing just that over the last 50 years (South Korea, China, India, etc) have put the development of strategic industries and a coherent development strategy well ahead of extending their hand for foreign aid.

While the book is at times poorly edited, overly focused on India, and lacking cohesion between case studies, it explores some brilliant business ideas that can turn the previously unreachable poor into empowered and paying customers.

Prahalad builds upon the provocative assertion of Hernando de Soto (the economist, not the explorer) that the world’s poor aren’t actually poor in the way that we think. His case studies show how an innovative approach to serving poor markets proves that the poor have money to spend and desperately want the goods and services that can improve their quality of life. They just can’t buy them with existing pricing or distribution systems.

Take CEMEX, a multi-billion dollar cement company that decided to profit on the observation that if you take a drive through most cities in Mexico, it seems like half of the houses are perpetually under construction. Even though Mexico’s poor already buy CEMEX cement, the company bet that it could serve them better by providing materials and advice on credit to small groups of homeowners.

CEMEX started a BOP-focused program called Patrimonio Hoy where three people from the same city form a group, make payments for 70 weeks, and have construction materials delivered to their houses along with architectural and building advice. The credit-savings scheme works such that after five weeks, materials worth the first ten weeks of payments are delivered (each member pays 120 pesos per week). This business model keeps customers honest (they are invested, lateness is punished, and they appreciate the trust), and CEMEX earns a 12.5% membership fee along with sales of its cement at a slight premium. After three years, customers seem happy. CEMEX has 36,000 of them across 23 cities in Mexico and is adding 1500 clients per month. And the default rate so far? Less than half of one percent. Unless the general manager is lying, that’s impressive.

The other case studies, for example Unilever’s distribution model in rural India using female entrepreneur sales reps in villages or Jaipur Foot providing high-quality prosthetic limbs at a profit for $50 show that poor people want your products and will pay for them too, on the right terms.

What is the right way to serve the poor profitably? Many of the tactics are not new – creative financing options, individual use packaging, and pyramid-style marketing programs just to name a few – but they allow scalability by tweaking the revenue and cost sides of the equation to suit the idiosyncrasies of emerging markets.

These tactics are important in serving the poor, but unfortunately, they often cannot reach the very bottom of the pyramid. CEMEX for instance targets people living on $5-15 a day, not less than $5. But it’s generally the case with development programs involving cost recovery that you won’t be reaching the poorest of the poor. The fact is an unfortunate one, but development work is full of harsh realities that are either heeded or foolishly ignored.

Prahalad’s thesis, that the world’s poor represents the biggest untapped growth opportunity in recent history can come off sounding a bit crass. But it’s not, because any profit-making scheme that exploits the poor is unlikely to be a lucrative long-term market for the company. Successful companies that push the boundaries of exploitation through high prices and oligopolies – the book gives Western Union as an example – can present opportunities to creative companies. CEMEX, for example, is outflanking money transfer firms by allowing Mexicans living in Los Angeles to wire money directly to cement distributors for their houses back in Mexico.

Environmental issues are brushed on lightly throughout the book, but most questions are left unanswered. For example, marketing to the poor with single servings of everything from coffee to shampoo is an effective strategy, but it can lead to streets filled with trash. However, in a developing country where the government has neither the budget nor even the interest in running a sanitation system, it hardly seems fair to blame corporations for giving customers small sachets of powdered laundry soap over a large bottle if that’s what they demand. Yet the environmental question is a big one, and perhaps another book is needed to address it in this context.

It must be said that Bono, Sachs and the rest of the MORE AID NOW chorus raise an important point – the rich world has ignored the poor world for too long, and it’s time for a change. But inviting the Fortune 500 to the table is the only way to bring about that other often-painful cliché – sustainable development. And it needs to go far beyond charitable giving or corporate responsibility programs. Prahalad and his b-school researchers are on the right track. It’s time for the business world to take their products to the poor.

Exclusive Excerpt from “The Casio Killer”

Dan Brown’s latest Robert Langdon adventure

Chapter 96

AS THE complexity of the puzzle seared the synapses of his brain, all Robert Langdon could think was how much he hated pickles.

He tried to focus as he steered the rented Dodge Stratus into the parking lot of Houston’s First Methodist Church. After a nod to Stacy, they jumped out of the car and ran, hand in hand, towards the front door of the church. A drab, gray, boxy concrete structure, it was one of the least architecturally significant buildings in the history of religion. Langdon tingled with excitement.

He rapped three times on the massive oak slab door and listened, trying sort through the events of the previous 24 hours. The midnight call to his Cambridge house from the head of the Rocky Mountain Institute, desperately seeking his advice on a string of murders of the world’s top environmental scientists. Meeting geologist Stacy Bernstein, heir to the Vlassic pickle fortune, who despite the loss of her father just hours earlier seemed eager to sleep with him. The three victims, killed inside three churches in southeast Texas, all found with Casio calculators in their pockets. The number visible on the screen in each instance, 71077345. Taunting him like a numerical ghost.

“It’s one of the mmm-ost s-s-s-s-ophisticated encoding systems ever created by m-m-man,” Robert described to Stacy as they sat locked inside the walk-in freezer of a grocery store in Corpus Christi.

The discovery of the first example of an adding machine used as a code, Langdon explained through chattering teeth, won historian Rector Von Richter the Nobel Prize in 1924. Richter showed that Marco Polo secretly proposed to Princess Xei Xeling in 1292 through a message left on an abacus.

Langdon liked to use this example with students of his Crossword Puzzle Trivia Posing As Symbology course at Harvard.

“Does anyone know what came of Polo’s proposal?” he asked his class one autumn morning. Roland Vandenberg, star of the baseball team and class clown, raised his hand.

“The most annoying swimming pool game of all time?” The class roared with laughter and Langdon shook his head. A lifelong swimmer, Langdon new the Marco Polo pool game better than most. He considered telling his class that he wrote his Master’s thesis on it but realized they would never understand.

Snapping back to the present, Langdon grasped the polished brass handle of the church door, and finding it open, he entered. To the rear of the church a one-legged man in a kimono hopped towards the emergency exit. As they started in pursuit, something entered Langdon’s field of vision from above. He looked up, and a wave of nausea spread over him. Hanging from the rafters was a middle-aged man in Dockers and a cornflower blue dress shirt.

His jaw dropped as he recognized the victim – Jim Bundy, Professor of Oceanography at UC Santa Barbara and vociferous critic of offshore oil drilling.

Stacy pulled over a chair from the corner of the entryway and stood to get a closer look. “His chest pocket!” she gasped, reaching up towards his shirt. She removed a calculator and handed it to Langdon.

His eyes bulged as big as golf balls when he saw the familiar string of numbers. 71077345. Mocking him like the phone number of a girl who was screening her calls. Like Vittoria, for instance, the attractive entanglement physicist he slept with in “Angels & Demons” just hours after falling out of a helicopter.

“It’s the same code!” Stacy whispered.

“Yes, but what could it mean?” Langdon looked at his new friend, suddenly wishing she was Sophie, the cryptography expert from “The Da Vinci Code” who was cute, smart, and happened to be a direct descendent of the Son of God. He hadn’t seen Sophie since she cracked the keyless entry system to his Ford Expedition and fled his Cape Cod timeshare last autumn.

Langdon gave Stacy the calculator and did a handstand against the wall to try to regain his composure. For some reason, he always had his best ideas upside down.

Suddenly, the answer came to him like a fortune cookie with the answer inside. UPSIDE DOWN.

“Stacy, give me back that calculator,” he said, flipping back onto his feet and feeling the blood rush back to his legs. He turned the device around and looked at the screen.

ShELLOIL

“But what could it mean?” Stacy said breathlessly, looking over Robert’s shoulder. “It sounds like Yiddish.”

Langdon clicked his tongue in disapproval and smiled. “You’re a pickle heiress to your very core, Stacy,” he said, hoping he hadn’t said something anti-Semitic. But there wasn’t time for apologies. He had cracked the code.

He was already halfway to the car when Stacy ran out of the church, yelling. “She lloil? Shello il? Robert!”

An hour later, Langdon and his not-so-bright geologist friend were on a chartered jet headed to Alaska. He tried to rest, knowing that the very future of clean and renewable energy rested on his shoulders.