Is there REALLY a fortune at the Bottom of the Pyramid?

An Article from Business Respect, Issue Number 102, dated 3 Sep 2006
By Mallen Baker

The seminal work by CK Prahalad, arguing the crucial role of multi-national corporations in alleviating poverty by treating the poor as consumers, has been one of the most influential tracts in recent years. Now, a vigorous attack has been mounted on its underlying assumptions and conclusions.

Aneel Karnani, Associate Professor of Strategy at the Stephen M. Ross School of Business, University of Michigan, has produced a critical analysis that not only challenges some of the tenets of Prahalad's thinking - it savages them. Prahalad had defined the 'bottom of the pyramid' (BOP) as being the 4 billion people in the world that live on less than $2 a day. Karnani says: "The BOP proposition is characterized by much hyperbole and very weak research methodology. The fortune and glory at the bottom of the pyramid are a mirage. The fallacy of the BOP proposition is exacerbated by its hubris."

Karnani's attack focuses on three propositions in Prahalad's argument:
1. There is significant purchasing power at the bottom of the pyramid, meaning that companies can make good profits by selling to the poor.
2. Selling to the poor can bring prosperity to the poor
3. Large multi-national corporations can, and should, play a leading role in this process.

First of all, Karnani takes serious issue with assumptions around the potential size of this market. He says that although Prahalad argues that 4 billion people fall into this category, according to the World Bank the numbers are closer to 2.7 billion. Not only that, but Prahalad's estimation that this is a market worth $13 trillion does not take into account a number of key facts. First of all, those bottom of the pyramid consumers exist on $2 a day or less - some of them quite a lot less. So the average figure is closer to $1.27 - and if you take into account the effect of exchange rates, the size of that market falls to around $0.3 trillion - which now compares rather less favourably than, for instance, the $11 trillion size of the US market.

Secondly, he believes that Prahalad has underestimated the high costs that would be borne by multinationals seeking to serve this market. The costs of distribution are high because these consumers are geographically dispersed, and there is poor infrastructure linking them. Not only that, but very little of that small income is actually available to goods producers. The poor spend 80 percent of their income on food, clothing and fuel, leaving very little available for extras.

He attacks Prahalad because many of the case studies used in support of the BOP proposition actually involve consumers who don't fall under the BOP criteria at all. So, for instance, he cites the case of Casas Bahia - whose customers on average earn twice the minimum wage (R$400) - well above the $2 a day threshold.

Likewise, he says, the focus on iodised salt produced by Hindustan Lever is misleading. The product may be technologically more advanced than the alternatives, but its higher price than some of the others has led to poor penetration of the product amongst the poor.

Prahalad says that Amul ice cream focuses on serving the poor, selling servings at 2 cents. Karnani says that Amul's website shows that its cheapest offering is at 5 rupees, equivalent to 57 cents.

One of the problems, he says, is Prahalad's insistence that the poor are savvy, value-conscious consumers whose views should be respected and served by companies. Lack of education and the ongoing effects of poverty may often lead people in this situation to make choices that are not in their own interest. In addition, Prahalad's insistence that the quality of the product should not be sacrificed in making cost adjustments to meet the poor's need is a hindrance, not a help.

He says that, unless existing producers are all incompetent or grossly inefficient, the only way to significantly reduce prices is to reduce quality, or else to achieve significant improvements in technology.

Karnani quotes the example of Nirma, a demonstrably inferior product to some of the alternative detergents on the market, such as Surf. It was hard on the skin, and could sometimes cause blisters. And yet it retailed at a third of the price of its competitors, and achieved majority market share from consumers for whom the trade off between price and quality was one that they were happy to make. He concludes: "Insisting on not lowering the quality actually hurts the poor by depriving them of a product they could afford and would like to buy".

According to Karnani, rather than focusing on the poor as consumers, we need to view the poor as producers. The only way to help the poor is to raise the real income of the poor, either by lowering prices through lowering quality to provide goods that meet real needs, or through raising the income that the poor earn.

As you might expect, CK Prahalad has responded in robust form to the critique.

Prahalad disputes the charge that his arguments focus on turning the poor into consumers without consideration of their role as active economic agents. The totality of the argument on poverty alleviation includes creating transparent conditions for markets to flourish, a market based approach that includes single entrepreneurs, SMEs, NGOs, cooperatives and MNCs, creating profitable products and services for the BOP market, new business models and creativity and of production and income generation. And yet Karnani has extracted only the focus on treating the poor as consumers.

He also restates the view that around 4 billion live on $2 a day or less, citing a World Resources Institute / International Finance Corporation study due to be published in October that confirms the figure.

Karnani has also ignored, in his view, one of the central messages in the thesis - not that it is easy for companies to serve existing needs amongst the poor, but that there are ways to create the capacity for the poor to consume through measures to make those products available and affordable. This can come through devices such as single serve portions, monthly payments, pay per use, new distribution models and low prices through innovation and improvement in technology.

But finally, Prahalad outlines that there is a fundamental difference in ideology that is worth mention. Prahalad believes in choice - rather than a rich elite deciding for the poor because they cannot decide for themselves. The process has to start for respect for Bottom of the Pyramid consumers as individuals, and achieving this will take new and creative approaches. Nobody said the process was easy.

Of course, Karnani would presumably respond that respecting choice also means respecting the right to choose lower quality.

This is not a purely academic debate. The thinking behind the 'Fortune at the Bottom of the Pyramid' is generating considerable activity. For instance, the Inter-American Development Bank has just adopted the Bottom of the Pyramid as their focus. A number of companies have begun initiatives in this area, some to a considerable scale. It there is no real market there, it will be a remarkable folly.

What Karnani has certainly achieved is to remind everyone that the challenges in meeting the needs of the poorest consumers are not straightforward. He is wrong to have suggested that Prahalad's argument had failed to recognise this - but it is fair to say that the essential impact of a study can often be reduced in the memory to the simplest components, and this would be a mistake. The approach to the Bottom of the Pyramid is about creating the conditions for a growing and thriving economy, not just about selling single sachets of soap.

Story link http://www.mallenbaker.net/csr/CSRfiles/Resources.html

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