We must see India and Bharat as one

C.K. Prahalad

Posted: Sep 19 2009 By Neelima Mahajan-Bansal

Name: C.K. Prahalad

Designation: Paul and Ruth McCracken Distinguished University Professor, Ross School of Business, The University of Michigan

Work History: Member of faculty at the University of Michigan from 1977. Before that he taught at IIM-Ahmedabad. His first job was at the Union Carbide battery plant

Achievements: A Padma Bhushan awardee, Prahalad is the author of several bestsellers like Competing for the Future (with Gary Hamel), The Future of Competition (with Venkat Ramaswamy) and The Fortune at the Bottom of the Pyramid . According to Thinkers 50, he is the most influential business thinker alive.

Hobbies: Travel, long walks and reading

When Coimbatore Krishnarao Prahalad and his colleague Stuart Hart wrote an article on the bottom of the pyramid (BOP) in 1998, no management journal accepted it. Unconvincing, they said. In 2002, Strategy+Business agreed to publish it and that one idea changed the way multinationals thought.

Suddenly, everyone was looking at poor people across the world as a lucrative market. Prahalad followed his idea up with the bestselling title The Fortune at the Bottom of the Pyramid. The fifth anniversary edition of the book — with a new case study on Jaipur Rugs and CEO comments on the application of the concept - is due for release in October. In this interview with Forbes India, Prahalad talks about how the concept of the BOP has evolved over the years:

How have you seen your own idea of the concept evolve over the last five years?
There has been a big change in the acceptance of the concept. There have been significant efforts in many industries to tap micro consumers and micro producers at the BOP. Perhaps the most visible change has been in the wireless industry. Today 400 million people are connected in India. These are mostly micro consumers. There is competition to serve this market. The companies that are serving this segment are making significant profits and are valued highly as seen in their market capitalisation. Airtel has 100 million consumers.

They plan to achieve 200 million subscribers in the next four years. BOP has provided these companies with a huge opportunity.

As envisaged in the book, BOP markets have become a source of innovations. With wireless, we see the convergence of industries and industry boundaries. Take remittances using cell phones, or making small payments using cell phones. This is the convergence of the traditional finance and telecom industries. The cell phone has given an identity to people. So if you look at the penetration of cell phones alone in the BOP markets, there is so much change in such a short time.

Safaricom is doing the same thing in Kenya - they have 80 percent market share. The same thing is happening in South Africa for instance. This is a global change.

BOP markets will become a fundamentally new source of innovation. Look at the spread of innovation in India - for example, the Tata Nano. This has created an inflexion point in the global auto industry, not just in India. Now the focus is also on housing for the poor - ""Nano housing"" -and for health insurance.

Look at Jaipur Rugs, ITC eChoupal, Amul, Aravind Eye Hospital, Narayana Hrudayalaya - they all have invented a new way of creating world scale. The origination for all of these businesses is the village - whether it be eye camps for Aravind or farmers for ITC eChoupal. One learning that has emerged is that six years back, large companies thought that they could do it alone. Now they know that they need an ecosystem - whether it be Shakti Ammas [for Hindustan Unilever], Jyoti Ammas [for British Petroleum,s biomass stoves], village-level entrepreneurs, or NGOs. To build large enterprises serving the BOP markets you need to create transparent market-based ecosystems.

The thing I did not anticipate was the rate at which new applications will evolve at the BOP. Like mobiles and remittances. Applications that come from BOP and the rate at which the poor adapt and master high-technology solutions is a big surprise to me. Look at the success of the Thomson Reuters cell phone-based application for information on weather and local prices. People are willing to pay Rs. 170 a month because they can make more money by using this information.

The second surprise is how BOP markets are creating enormously complex and interesting approaches to developing new markets. This is fostering fundamentally new business models. Look at the market for information - price information and weather information - that was traditionally the privilege of the rich. Now everyone with a cell phone can have it. There is a paradox in India - let,s assume that I as a farmer increase my productivity. I have had no choice but to sell my produce - be it vegetables or wheat - to the local buyers. They could easily depress price. So I had no motivation to improve my productivity. If I have the option of selling anywhere within a radius of 200 km by checking prices various buyers offer, I will want to raise my productivity.

What is a good starting point for the BOP concept - to solve poverty or to make capitalism more responsible?
Bill Gates talked about creative capitalism in his 2008 Davos speech. He referred to my book as an inspiration. There is some traction behind social capitalism - look at Mohammed Yunus. There is some traction behind how do you create shared value, or shared wealth. Businesses need to recognise they are a social institution that operates with a social license from the community. It may be implicit. If you look at increasing legislation in the US on executive compensation, its like saying you violated the license that society gave you and we will correct that.

We must see India and Bharat as one. If you leave Bharat behind, the social license will be revoked. It will lead to an unmanageable situation. Business leaders need to do good, but not by philanthropy or CSR, but by enlarging the scope of business; making it more inclusive. Democratise commerce. People who have access to information will not tolerate inequality.

One of the debates from the beginning has been whether it is fortune at the BOP vis-a-vis fortune for the BOP. Where do your thoughts on this stand? 
It is a silly debate. It,s not either-or. If a micro-finance institution (MFI) lends at 20 percent interest and makes money, it,s fortune for the MFI. But if the alternative for the poor is to borrow at 150 percent, is it a fortune for the borrower as well? She is reducing her interest burden. No business can sustain itself if there is no value created for the consumer. If both parties don,t get value, there is no transaction. That,s a truism in business.

Can we say that poor people have no value for time? Take the example of the chulha where we use pellets instead of branches, grass, and firewood. Now the villagers don,t have to walk in the sun for three-four hours to get firewood. In the short term there can be asymmetry of value, but people will find alternatives.

There are so many MFIs in India - everyone is trying to give money away because they think there is value here. Business can survive only when there is joint value for the consumer and the firm. The cost to the poor is going down. In the long-term, competition will drive asymmetric profits away.

If I am poor and I have no choice but to borrow from the moneylender, I am dealing with an inefficient local monopoly. We have to break those by bringing the benefits of an organised sector that competes and is more transparent.

We need to look at the institutional basis for long-term efficiency and I define long term as 10 years, rather than short-term profit making by some deviant organisation. If you have 1,000 people giving microfinance and five do something stupid, you can,t take the example of these five and think that everyone is bad.

In the last five years, what are the key lessons that have emerged about the rules of engaging with BOP markets?
The traditional approach to poverty alleviation assumed that we - the elites - have to tell the poor what to do. While we must enforce global standards, global technology and the global ability to organise, we also need to have local responsiveness. Co-creation is an integral part of serving - there are a lot of knowledge and capabilities in the poor. People are smart. We were developing a chulha with British Petroleum. When we talked to women in villages, we received a lot of suggestions for improvement like the inclusion of a fan to regulate the flame; or to get 45 minutes of cooking time to cook a full meal per load of pellets and not 35 minutes.

The BOP concept talks of just corporate-led social transformations. Do you see a role of the state in this? 
I think there is some role in making healthcare, education, and information infrastructure easily accessible and available. This would be public-private partnership rather than the public sector assuming that they can deliver at a lower cost and efficiently. The private sector has the motivation to be efficient. The public sector can provide the infrastructure and support base. Your maid will probably, despite her constraints, send her child to a private school. Your maid will want her kid to get an English education. The poor demand value and they want good quality.

Critics of the concept say it is not how big it is made out to be. What is your evaluation of the real size of the BOP opportunity?
People ask the question of value versus volume. They concede that if there are 500 million people that we can serve but the value per person will go down so the overall margins will go down. The value in terms of margins and profits is lower than the top. Yes, you are right about this.

But we need to change the business model. Look at Airtel. They have converted all fixed costs to variable costs. Instead of looking at ARPUs [average revenues per user], they look at profit contribution per minute. They are agnostic to the rich and poor, and the urban and rural.

Unless you change the business model you won,t crack this opportunity. I don,t think Airtel is complaining about moving into rural India. Innovation is at the heart of going after the BOP. The size of the opportunity is at least 4 billion consumers globally. Airtel is negotiating with MTN - if they bring the same discipline they have learnt in India to Africa, look at the potential. If you break the code, you can take this model to advanced countries as well - and make more money there. The Tata Nano can sell in Europe. Innovations can travel.

Find this article in Forbes India Magazine of 25 September, 2009