Serving the four billion poor at the “bottom of the pyramid,” however, will require radical innovations in technologies and business models. It will require a reexamination of “price-performance” relationships for products and services and a new level of capital efficiency. It will create a new standard for measuring financial success and quicken the penetration of disruptive new, environmentally sustainable technologies.
Companies will be forced to change their thinking that “bigger is better” and learn to marry highly distributed, small-scale operations with world-scale capabilities. So, the bottom of the pyramid presents a new managerial challenge, potentially similar to that posed by the Internet and e-business.
The Unrealized Opportunity at the Bottom of the Pyramid
With the end of the Cold War, the previously closed markets of China, India, the former Soviet Union and its allies, and Latin America opened to foreign investment. Although this seemed to translate into vast new growth horizons for MNCs, experience has shown that the lure of millions of additional “middle class” consumers was vastly oversold. The Asian and Latin American financial crises have made matters worse. Many MNCs are slowing down investments and rethinking risk-reward structures in these markets.
Yet, despite these setbacks, the magnitude of the new opportunities in emerging markets is real and larger than previously thought. The real market opportunity here is not just the wealthy few in the developing world, but the vast number of “middle class and poor” with aspirations to a better life style by joining the market economy for the first time. Think of the global market as a pyramid. At the top is a small fraction (as a percentage of global population): the affluent consumers in developed countries. Most MNCs originated in this affluent world. Not surprisingly, most MNC managers’ views of business are conditioned by their knowledge and familiarity with these Tier 1 consumers.
Four billion people reside in the emerging consumer base at the bottom of the pyramid, where the per capita income is less than $1,500 (PPP) per year. More than a billion people earn less than a dollar a day. The majority live in villages, urban slums and shantytowns. Educational levels are low or non-existent. These markets are hard to reach — in terms of distribution, credit or communications. Over the next 40 years, the numbers in this tier could swell to about six billion, since the bulk of the world’s population growth is expected to come from this segment. Yet this massive tier of the world pyramid is largely invisible to the corporate sector.
Why Is This Market Opportunity Invisible?
Perception of market opportunity is a function of the way many managers think and the analytical tools they use. Converting the poor into active consumers requires MNC managers to come to terms with a core set of entrenched assumptions and practices that need to be reevaluated.
MNC cost structures are fixed: the poor are not target consumers because MNCs, with their current cost structures, cannot compete for that market profitably. The focus is on product, not functionality: the poor cannot afford and have no use for products and services sold in developed markets. The focus is on product and process innovations, not business innovations. Innovations come from tier one: only developed markets can appreciate and pay for new technology, the poor can use older technology. We do not see the bottom of the pyramid forcing us to innovate around sustainable development: the bottom of the pyramid is not important to the long-term viability of MNCs’ business. Intellectual excitement is in developed markets: It would be hard to recruit, train, and motivate managers who would engage in creating a commercial infrastructure at the bottom of the pyramid.
Much of the difficulty in understanding the Tier 4 opportunity lies in understanding the structure of income distribution in most developing countries. An analysis reveals that the income gap is widening. Also, Tier 1 consumers use a disproportionate level of global resources. The United States, for example, with 250 million people (approximately four percent of the world population), consumes more than 25 percent of the world’s energy resources. With its vast population and rapid growth, tiers three and four offer a test-bed for incubating future technologies and products. While global income equality may be a pipe dream, improving Tier 4 quality of life is prerequisite to preserving the market economy.
Yet this opportunity cannot be seized without fundamental innovations by MNCs. It is possible to serve the bottom of the pyramid, and develop the products and services required in a culturally sensitive, environmentally sustainable and economically profitable way, because the following forces or “innovation drivers” point to the emergence of a market for goods and services there (see chart below).
These drivers suggest that a significant portion of future business opportunities may emanate from Tiers 3 and 4. MNCs must recognize that in this market low cost, good quality, sustainability, and profitability have to be combined.
Hindustan Lever Limited (HLL), a subsidiary of Unilever that is widely considered the best managed company in India, showed how this strategy can be successfully executed. Like most MNCs, it had historically catered to the needs of the Indian elite. A local firm, Nirma, challenged HLL in its detergent business by creating a new business system — a new product formulation, new manufacturing process, distribution, packaging, and pricing. HLL initially dismissed Nirma as a low-end producer. As Nirma grew rapidly, HLL realized both its new opportunity as well as its vulnerability. Nirma was attacking from the bottom. HLL, responded, somewhat belatedly, with its own offering for this market — drastically altering the traditional HLL business model.
HLL’s new product formulation dramatically reduced the ratio of oil to water in the detergent, thereby reducing the pollution created by washing clothes in rivers. It decentralized the production, marketing and distribution of the product to take advantage of the abundant labor pool in rural India and quickly penetrated the innumerable small outlets where poor people shop. It reinvented the cost structure of the business, thus introducing the product at a price point affordable to the “poor.”
This proved that, contrary to popular assumptions, the poor can be a very profitable market, especially if MNCs are willing and able to change their business models. The bottom of the pyramid is not a market that allows for high margins, but unit sales here are extremely high.
Today, Nirma is the largest branded detergent maker in the world, while experience at the bottom of the income pyramid has allowed HLL to register a 20 percent growth in revenues per year, and a 25 percent growth in profits per year, for the last five years. Its market capitalization has grown to $12 billion — a 40 percent per year growth rate. Unilever benefited from HLL’s experience in India by transporting the business principles to create a new detergent market among the poor in Brazil. The detergent brand Ala has been a runaway success in Brazil. Significantly, Unilever has adopted the bottom of the pyramid as a strategic priority at the corporate level.
Thus, innovation is essential to capturing the opportunity at the bottom of the pyramid. The starting assumption must be that serving Tier 4 is not about cheap, low quality products, but about bringing together the best of technology and a global resource base to address local opportunities. It is about innovation within a clearly defined opportunity space: cost, quality, sustainable development, local knowledge and needs, and volume. si
