Management Guru Discusses

Creative Capitalism – C K Prahalad

Posted: Dec 24 2008

CK PRAHLAD Journal of International Affairs December 24, 2008 - C.K. Prahalad is a management thinker and author of the best-selling The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits and the recently published The New Age of Innovation. He is a world-renowned expert on business strategies geared toward poor or ""bottom of the pyramid"" markets. Prahalad_s groundbreaking ideas have influenced large corporations, multilateral institutions and famed philanthropists such as Bill Gates. He is currently the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Michigan. Prahalad spoke with Emily Gouillart of the Journal of International Affairs about the increasingly undeniable role of the poor as an integral part of global finance, the ""co-created"" future of international markets, the financial boom in his home country of India and the responsibilities that the ""top 1 billion"" have in shaping the future of globalization.

Journal: Bill Gates, who cites you as a major influence in his philanthropic work, has built a foundation that relies on partnerships with large corporations to supply resources and technology to the poor. What role has co-creation played in his foundation_s work, and has he applied its principles correctly? Do you think his anti-poverty model is sustainable?

Prahalad: What Bill Gates has been talking about is ""creative capitalism,"" a concept that states that large firms and companies - that represent the institutional embodiment of capitalism - must focus at least some attention on the 5 billion poor. If we do not address this problem, we will lose the social legitimacy of the institution called the private sector. Bill Gates_ work is in keeping with future trends, albeit at a very critical time. The original work on ""bottom of the pyramid"" (BOP) was all about bringing the disciplines of markets and the private sector-especially its organizational capability, technological prowess and the capacity to scale-to the problem of poverty alleviation. If you want to reach out to BOP markets, there is a vital creative component that requires bringing scale and organizational resources to the problems that we now recognize cannot be solved by subsidies, government intervention or aid from multilaterals. There will still be a sliver of maybe a billion people-the very bottom billion-that will require philanthropy and subsidies. But even in philanthropy, we can bring in the discipline of markets and create solutions that are scaleable and cost-effective. The phenomenon that we have witnessed thus far is an ""ideological divide"" that forces well-meaning people-whether they represent multinationals, non-governmental organizations (NGOs) and the civil society sector, philanthropists or businesspeople-to be adversarial with each other coming together. This has prevented them from working together. Creative capitalism calls for a new kind of reconciliation across the ideological divide. It is the new convergence of the role of civil society, philanthropy, public sector and private sector around problems that have been intractable for a long time.

So the Bill Gates model does represent the new convergence of a co-created world?
Yes, it is a convergence where independent interest groups are acknowledging past shortcomings and are now joining together to find solutions to this problem. They are saying, ""We have tried, but now we have to look at the poor as a problem to be solved, not as a constituency to provide legitimacy to our independent institutional frameworks."" That is the future. That is co-creation.
You have said that global Financial institutions struggle to achieve co-creation because they only look at the ""big picture. "" You also cite the example of Grameen Bank as a company that has been innovative by addressing ""one customer at a time"" on a large scale. If the World Bank asked you to consult on a poverty eradication program or Millennium Development Goal initiative in a developing country, what would you suggest they do to have a more granular approach? Can this be done at an institutional level?

Ultimately, all solutions that work must be locally responsive. There is no universal silver bullet. Four billion people represent enormous variety in cultures, literacy and media and business capacities, so everything must remain locally focused. An institution like the World Bank, with its particular cost structure, may not be able to make change at the most granular level, but it can still have success through partnerships. These institutions need to identify and make use of multiple layers of partners as an integral part of their institutional structure. For example, they could lend money to a local community bank. Next, they would insure that that community bank succeeds and lends money to, say, a local self-help group or a merchants_ group. It is the local self-help group that can tailor resources to address the unique local needs, to co-create the right actions with those in the know.

That said, the ultimate responsibility for these huge expenditures belongs to the World Bank, and they must spell out explicit principles. It cannot simply give money to one government and let them decide how to spend it. It may decide what projects to spend on, but solutions for sustainability depend on ity-building at the grassroots level. It must identify points of departure. Global financial institu- tions, including the World Bank, must learn to collaborate and co-create with local institutions while still setting firm principles. Principles are about more than reducing corruption that is the lowest level of ambition. Capability- building must be the overarching principle. This is part of democratization for global finance.

You speak frequently about the problem of ""elitism"" when CEOs or other leaders formulate strategies to help the poor. Can you give us a scenario, either real or imagined, where this could or did take place-and what you believe should have been done differently?

When I talk about elitism, I don_t want it to be interpreted as being inherently negative-usually it is only a matter of perspective. For example, you can ask a simple question of a group of corporate executives in the United States: How much do you pay per minute for cell phone time? I must have asked this of 5,000 senior executives in the United States and Europe. Their answer- they cannot tell me. The cost of a cell phone minute is inconsequential for them as a component of their total spending, within their portfolio of products and services. But for a poor person in South Africa, or in India, cell phone cost-the per-minute cost-is quite relevant. So in talking about elitism, this represents one kind-where people are simply unaware of the problems that the poor people face. That problem can be reasonably easily solved, because once you talk about it and sensitize them, they generally recognize the new things they must worry about.

The second form of elitism, which is more difficult to solve, is the belief that we have the right and the obligation to decide what the poor can and cannot have. For example, a lot of people look at the BOP work-which is about creating an opportunity for poor people to get access to world-class products and services at affordable prices-as promoting consumerism. [People in the developed world] have no problem having forty-five types of packaged coffee on the supermarket shelf for themselves, but they resent the idea that poor people can have even two types of coffee or might be allowed the patterns of consumption that accompany world-class quality. The idea is that [the poor] should survive in their current fashion, perhaps by remaining totally isolated [from global markets]. This form of elitism is a bigger problem to me, because then we are assigning to ourselves the right to tell ordinary people what they can and cannot have. My ideology is simply that the poor should have the right to make choices that you and I enjoy, and therefore should be referred to and treated as consumers with the same dignity and self-esteem that we want ourselves to be granted. So whether they are micro- producers, micro-consumers, micro-investors, micro-innovators or micro-entrepreneurs, I only want them to be given the same choice and the same respect. Not allowing that is the form of elitism that I worry about most. Ignorance of the nature of the problem at the BOP is acceptable to me-it can be cured-but ideological elitism is something more difficult.

You once showed a journalist a store in a small town in India where the shampoo brands included many of the ""gas station"" brands found in western countries, but few luxury brands. What are the industries or corporations that you wish would reach out more? What is the untapped resource?

Many people gravitate toward the example of the shampoo, but I think that_s just the starting point. Take cell phones. You and I have the same cell phone. I can be very poor, but if I have a phone it still makes me connect with other people. You may have more bells and whistles, a better camera, but I have the same core functionality that you have. It is the same for shampoo, yes, but it really should be the same for education and health care. What we need to do is to strip away all the bells and whistles from these products and services, identify the core functionality and make sure that that functionality is available at a world-class level and at affordable prices. Now, if somebody wants to pay more money to have a camera with a cell phone at the BOP, my attitude is, ""Sure, let them have it."" But if they just want a basic cell phone, it must provide the same quality of service for voice and connectivity that you and I have-and texting as well, given how important that medium has become. Once we do that, the cell phone becomes the device through which the BOP customers can organize themselves and conduct their business. Cell phone connectivity in the BOP translates to the advancement of banking and commerce, the exact kind; of growth they need. Cell phones aren_t just for conversation-if you are a BOP consumer, you need them to settle small transactions and to make remittances. With [increased cell phone availability] we see more and more benefits, and a huge opportunity for creating wealth. The key issues are providing affordable world-class products and services and protecting the the element of choice. These are the fundamental parts of democratizing commerce. Do you have an opinion on the efforts to bring hand-crank laptops and things ike that to rural areas, especially in terms of their effectiveness? Even if the philosophy is in keeping with your way of thinking, do you have a sense of the success and failure of initiatives like these?

There has been a tremendous amount of experimentation, which is good news. People are assuming that the poor have more time, and so they can use that additional time to: crank, pedal, and so forth to be able to enjoy the benefits of laptops and cell phones. That said, why not go beyond and apply this philosophy to other innovations that are not yet widespread in other parts of the world-for example, one can easily bring solar panels to these regions. Both experiments are important, but the fact that they are very experimental is significant. The real key, however, is connectivity. In the transitional phase of world-class communication services, if we have someone cranking or pedaling to get an electric charge, that_s okay but not in the long-term.; Not only should we not accept that, but we should take it one step farther. If we think through the bottom of the pyramid opportunities, I believe we will have technological breakthroughs that will reduce the cost of solar panels, increase the efficiency of storage and so on. In the case of laptops, it is also important to be able to read in ambient light in these areas- here when you bring your laptop outside on a sunny day, you cannot read. But for BOP customers who live in villages, it will be a greater priority for them to be able to read in outdoor and ambient light. But we must think through how to do it right. We must view the bottom of the pyramid market as an opportunity for innovation. The goal is to avoid pushing the poor backwards, technologically. That said, all experimentation that is transitional and helping the poor to improve their quality of life is welcome.

Is intellectual property a problem for these kinds of innovations? What are the bureaucratic drawbacks to this kind of advancement?

When you consider a market of 5 billion people as a new opportunity, the sheer scale brings down costs. The reason that cell phones are possible to make for 25 dollars and still bring profit to the companies is because of scale. Sheer scale will find new ways of production and new ways of reducing costs. Remember, most BOP consumers do not care about the camera. They just want good reception and the ability to text. The intellectual property (IP) debate can become quite simple. I am not suggesting that we throw away intellectual property rights, only that we should scale it up large enough so that even if you collect a small licensing fee, the sheer volume will make up for it. I think we need to ask the question: Is this tradeoff real or not? Second, this debate has been going on about AIDS drugs and others-if 2 million people the every year in Africa alone, and we sit around talking about intellectual property rights, is that even ethical? We need to remind ourselves of the magnitude of the problem and therefore acknowledge the true role of intellectual property regimes. We need new regimes that understand the limits of IP protection and, under specific circumstances, we must be able to put such innovations in the public domain.

Remember, the world is going toward open-source. We need to be constantly searching for conditions that protect the rights of innovators and, at the same time, adjusting to special cases such as the HIV/AIDS issue in Africa. Of course, it is controversial to suggest that we in the United States are very selective in our commitment to patent protection. After September 11 , when there was a fear of anthrax attacks, botii the United States and Canada, in their desire to stockpile [anthrax medication] Cipro, were willing to violate patent rights. They were willing to force a price reduction and start production if necessary. We said it was justified in the interest of ""national defense"" and ""national security."" However, for an African state with 30 percent of its people dying of AIDS, they have a national security threat that is beyond comparison. So we cannot take both sides of the street-when we are threatened we are willing to violate IP, and when other people are threatened we are willing to treat IP as sacred. When millions of people are experiencing needless death-and it is needless, because we know how to solve it-pricing and IP must give way. This is not an issue of the public versus private sector; this is a moral issue.

What does the shrinking of credit markets in developed or ""Northern "" countries mean for available credit in developing ""Southern"" countries? In light of the current credit crisis, how do you see the shrinking of these Northern markets impacting the Southern countries?

The credit crunch in and of itself is unlikely to affect poor countries because their economies are not as interconnected as those in the rest of the world. That said, I am concerned that the credit crunch is going to force large private sector companies to become less experimental-much more focused on their basic core business and unwilling to experiment at the margin, even if the expenditure for doing so is low. All these initiatives, the corporate social responsibility initiatives, are experimenting to build a new way of doing business. Some may view these new priorities as marginal and dispensable, rather than as something to be protected for the long haul. That is a bigger worry. That said, the poorer economies will not take a huge hit as a result, and the large emerging markets like China and India have enough assets for now. India, especially, is not as exposed to pricing in developed markets and will not be influenced in the same ways.

Are there companies that have seen their ""bottom of the pyramid"" market initiatives become their core business, even if that was not the case in the past? Do you think this is common, or at least likely, enough to prevent the phenomenon of corporate social responsibility initiatives being treated as expendable?

It is not about them being expendable. We tend to forget that Wal-Mart was created to serve an ordinary, lower-middle-class market, not to serve the rich. It is the world_s largest company, and it stays that way because of ordinary people. The Model T was also built for ordinary folks. Take companies like Procter &. Gamble or Unilever. In the developed markets they cater to the well-to-do and to what we call ""the middle class"" in the United States, which are extremely well-to-do by the BOP standard. Yet when they expand to India, Brazil or Mexico, their primary and sometimes only markets are bottom of the pyramid. Unilever, for sure, uses a strategy of ""straddling"" the pyramid-not focusing exclusively on the bottom or top. British Petroleum would call it the ""emerging consumer market,"" not the bottom of the pyramid.

Essentially, people recognize that while the bottom of the pyramid focused attention on the needs of 5 billion people, ten years later that can no longer be considered an ""initiative."" Everybody recognizes the power of this market, and even if CEOs and leaders hold different views on how to access those markets, nearly all are changing their strategy. I should also note that for most companies, this is happening very rapidly. They now understand that at some stage they must go beyond die 1 .5 billion they have always served. There will always be a range in the choice and degree to which they expand their market horizon to new classes of consumers and cost structures.

What are some of the discrepancies that make granular thinking so important? Are they mostly cultural in nature?

They often are, for sure. Take the example of India. Between the states of Bihar and Karnataka, the differences are quite stark. Both are very poor states and are often lumped together when we talk about India, but the cultural differences are huge. Take the example of children in school. This matters. In most parts of rural India, the children are teachers of the parents because they are going to school and their parents never did. Hygienic practices like washing your hands before eating are taught in schools. Children learn it first, so that they can pass these lessons on to their parents. This can have a significant impact on the quality of health. The number of children in school can be critical for improving public health. The number of children in school is different in Bihar and Karnataka. There is no one solution for India. Each one must be granular.

You left India as a young man because the environment there was not hospitable to your globally focused ideas about markets and finance. How long did it take before you found yourself able to truly apply your work to India_s evolution? I would say it was around 1993, when India started opening up market-wise. India was experimenting then with what it calls a ""mixed economy,"" which was neither total socialism nor a pure market-oriented view of the world. The public sector, private sector, the state and federal governments were all involved in running businesses. I call it ""mixed-up"" rather than ""mixed."" But from 1992 to 1993, when India really had a foreign exchange crisis, it opened up the markets under duress. That created a whole new dynamic within the country. The initial fear was that powerful multinational firms would destroy all local firms and industries.

What one found instead was that Indian private sector companies were resilient and were becoming strong and competitive. Over a period of about ten years, not only have the multi-nationals not had free reign as was feared, but Indian firms have become stronger and have grown rapidly. The foreign direct investment (FDI) out of India last year was higher than the FDI to India, which is completely different from what a theorist would suggest is needed for development. And there are now Indian multi-nationals, such as Tata and Reliance. The information technology (IT) boom was a huge boost to Indian confidence-suddenly there were Indian entrepreneurs who were young and willing to go out, who fought to be world-class. They truly built brands. The pharma industry soon followed. Today, there is a tremendous amount of confidence in India, and we see nuggets of excellence in a poor country that can grow. The question is, how do you cause that growth? That was the question I was eager to answer.

I have had a small part in it. I have been going out every year for the last fifteen years, building Indian multi-national corporations and working with CEOs to help them become world-class. This meant experimentation and developing a sense of confidence that India an be an effective global player. It has been a huge change, with much success.

You have said that current tools and products of finance have become esoteric and that global financial institutions in particular have struggled to stay current and effective. Do you have a sense of what new tools should be introduced? What are the outdated modes of thinking to which corporations and institutions continue to cling?

You know, when you go to the bottom of the pyramid, you have to understand first and foremost that people need straightforward tools. They have to protect their balance sheet first, and the balance sheet mindset assumes that their home, land and all income- earners will be protected. Second, you have to understand that wealth creation depends on access to credit. That is true in the United States, Europe, everywhere. Everybody in the United States assumes that it is reasonably possible to get a credit card by the age of seventeen, to get an auto loan by age twenty to twenty-two, to find work and get a homeowner_s loan by thirty. Access to credit built the United States. The bottom of the pyramid needs exactly the same.

If you look at the self-help groups and all the grassroots-level communities that are so key to BOP markets, it is $20, $50 and $100 that gets people out of poverty. Consider a fruit seller in India. If he borrows 100 rupees from a local money lender and has to pay 120 rupees back every day, there is no way for him to accumulate capital. He is lucky just to subsist. By giving him that 100 rupees at 2 percent or even 1 percent interest a day, already you are helping him. If you instead give him a loan at 1 percent a month, you are fundamentally changing his life. Out of the 30 or 40 rupees in profit that he makes selling fruit, he can save small amounts over time and eventually build a larger business.

We need to create micro-entrepreneurs, and we will do that by making credit available at reasonable rates. The private sector is critical for this. One thing we always underestimate in this game is that all poor people have a poverty penalty. They pay more for everything from water to credit. And all are subject to local monopolies called money lenders-though really, they are warlords-so our job is to use modern systems, new forms of distribution, to reduce the impact of the local monopolies and to get regional and global competition to expand its market space.
You have said that India_s emergence as a major global player was driven by the IT industry and that the IT industry is a co-creation driven industry. Do you see other major emerging industries that will be fueled by co-creation? Do you think that a developing nation like India could enter the global financial mainstream by specializing in that industry?

Health care and education, of course, will be huge in every country. India is not an exception. It has a very young and very large population, so education and health care will be essential. Agro-industry will be huge, and virtually anything that is agricultural-based will require co-creation to thrive. You can already see how Brazil has evolved through agro-industries; they have become one of the largest exporters in the world of agricultural products. More importantly, though, they have also taken huge steps toward energy independence because of the transition to ethanol. There are staples too, which are still evolving-manufacturing will always be huge, and China has illustrated and continues to illustrate this.

Speaking of China, that nation has a very hierarchy-focused culture. Is co-creation a viable framework for a country ike China, or are the cultural differences too great?

The ability to co-create depends on the willingness of two parties to recognize each other as equals. That is fundamental. If you have a very hierarchical view of the other person or if you regard them as incapable or subordinate, it goes back to the same issue of elitism with all the problems that entails. Co-creation is harder, though usually not impossible, in that case. That said, as people become more affluent, they become more educated, and they will assert their rights. Ultimately, co-creation cannot be avoided- it is the future. Yet in the initial stages of development, we have seen that people are willing to say, ""Since I don_t know, I_m willing to listen and willing to learn.""
There are some who have suggested that the notion of a ""fortune at the bottom of the pyramid"" might be exploitative, either intentionally or unintentionally. They say that a company that seeks out a BOP market, then finds that it does not deliver as they had hoped and thus exits the market, is simply using the poor to help themselves without ethical regard for their well-being. Does that concern you?

There are three components to address with that question: First, can companies exploit? Of course they can, but they don_t and can_t start with an exploitative view. Especially now with the Internet and the growing access to information, the checks and balances provided by NGOs and ordinary citizens who limit exploitation. Any blogger can start a global crisis for a large company. We must not underestimate that. Thus, whether or not they can be exploited is a mostly theoretical question. It can happen and has happened in select instances, but it has never lasted for long. On the other hand, while we spend so much time wondering about the exploitative potential of large firms, poor people are still being exploited by local moneylenders. We tend to focus on these large companies, like Coca-Cola, Nike or Nestle, because they make press. Millions of corrupt money-lenders do not. So we are willing to accept a local tyranny while comparatively minor problems with a global company get over-played.

In doing so, we are fostering a counter-productive impact by creating an environment where large companies are shy about entering this arena. We leave the poor at the mercy of moneylenders, and we must be cautious about that. To make it very simple, consider a situation where Citibank proposes a new program where they lend money at 15 percent to the poor. Many NGOs would be up in arms arguing that Citibank is exploitative and should lend at the same rate as they lend to the rich, say at 10 percent. But from a poor person_s point of view, their only alternatives up to that point would have ranged between 50 and 300 percent. Sometimes, we have to remind people whose side they are really on. If you are on the side of the poor people, 15 percent is much better than what they already have as an option and better than having to pay the poverty penalty to their local money-lender. That is the first part.

Second, can some multi-nationals walk away from certain markets? Yes, they can and do. If it is not profitable, or opening up as they expected, as a private sector company, they have the obligation to walk. They are not in the business of subsidizing forever. In the short-term, you account for it as an investment; in the long-term, you must make sure it does not become a subsidy. If the market can_t pan out and it_s not profitable, it will merely become a subsidy. So titey must avoid this and already do so routinely with conventional markets. They go in and out based on profit margins; they discard unsuccessful products; they sell failing divisions. This is standard. The real question therefore becomes: If we socialize BOP markets to expect certain minimum standards of performance, what are the implications of a large company moving out? In my experience, when a large multi-national moves out of an established BOP market, a local company will come and fill the gap. This happens all the time. Actually, the real competitors for global companies are local companies that can replicate their quality at half the cost. The key is to get the market working and to cultivate scalable markets. Whether it is a multi-national or local company doesn_t matter, as long as the market_s needs are being met. One of the most interesting companies in India, called Amul, is a cooperative. That suits the market perfectly. What is next for you and your work with BOP consumers?

The natural extension of what I do is to ask a bigger question, which I am now very focused on: How do you democratize commerce? How do you get every human being to have access to the benefits of globalization? Usually, economists ask: Is globalization good or bad for the poor? This formulation polarizes the debate. Globalization is like gravity-why deny it? We must instead defy it-in defying gravity, we can build a plane that flies. If you treat globalization as a natural Process in the world, our job is to find the benefits and ensure that all people get access to them. This means treating every person as a micro-consumer, getting them world-class products and services, offering choice and creating micro-producers who are fairly compensated for their efforts. I am working on creating micro- producers, micro-consumers and micro-innovators who all get compensated appropriately. That is the new frontier. Getting there will require multiple steps. In my work on the bottom of the pyramid, the core idea was to create inclusive capitalism-you can also call this creative capital, whatever you like. The first point, though, is to include the 5 billion people in the global economy who have not been included. The second point about co-creation concerns the creation of choice, individually crafting each consumer_s own experiences in the market and in their own businesses.

I am very interested in opportunities that incorporate the poor at the bottom of the pyramid into the global supply chain, not just at the local level. For example, I am writing a case study of an Indian company called Jaipur Rugs. They receive wool from as far away as Australia, New Zealand, China and Argentina. It is then blended with wool from Rajasthan in India. 40,000 women in rural India create classical and contemporary handmade carpets that are then sold in the United States. This is the ultimate global supply chain, where the poor are woven into the supply chain. This is the democratization of commerce.