The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits

Book review

CK Prahalad. 2004. The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits. Wharton School Publishing. New Jersey.

Most books about poverty eradication focus on policy solutions developed by national governments, aid strategies developed in advanced economies

or what western citizens can do to shame their governments into further action. Studies focus on how the state can best develop policies to enhance development or what the international policy regime can do to help. Very often, books on development or poverty reduction live in a Manichean world of dualistic good and evil. Good takes the form of developing-country governments or people, and evil takes shape in developed-country governments or global firms.

What is interesting about this book is just how different it is to the normal work on poverty and development. It is also interesting to see a book emerge from one of the key business thinkers of the last decade. CK Prahalad is famous for his work on competitive strategy and 'core competency'. It is thus doubly interesting to see him address the issue of development from a profoundly business-centric view of the world. Of course, this approach has immediately lead to attacks by those who see business as a key problem and impediment to development. For those willing to suspend their initial scepticism or disbelief, this book will prove challenging and interesting.

The central tenet of Prahalad's thesis is that the consumers at the bottom of the pyramid - as he calls it - are a largely untapped market. He argues that, for those firms willing to tap this market, profits will follow and consumers will gain from better access and greater innovation. His argument is not just an economic one (although it is here that his work is strongest) but a moral one. He argues, quite convincingly, that being on a low income does not remove a desire to consume decent products or indeed induce significantly greater risks for suppliers. Indeed, he provides many examples, most notably in micro-finance, that the poorest in communities are among the lowest-risk clients.

The 'poverty premium' Prahalad discusses is recognisable for all countries, not just developing ones, but it is most marked in those countries. He contrasts the costs of goods and services in two areas of Mumbai: one poor, one rich. He calculates the poverty premium as being between five and 25 times the cost for richer consumers. However, what is interesting is that Prahalad then proposes a market solution. He argues: 'For example, the poor in Dharavi pay 600 to 1,000 per cent interest for credit from local moneylenders. A bank with access to this market can do well for itself by offering credit at 25 per cent. Although 25 per cent interest might look excessive to a casual observer, from the point-of-view of the BOP consumer, access to a bank decreases the cost of credit from 600 per cent to 2 5 per cent.'

The approach Prahalad takes involves using a number of case studies and getting a lot of detail out of companies about how they serve the most disadvantaged markets. What is a bit of a failing in the book is that he has not drawn parallels between how the poor are served in developed economies and in developing ones. For example, he discusses the setting up of networks of Shakti Amma ('empowered mother') in India as a distribution tool for Hindustan Lever Limited (HLL). The network gets commission for each sale of HLL products and acts as a distribution point for the company. However, this is not dissimilar to the network of agents used by catalogue firms in many European countries.

Prahalad waxes about the impact of technology on poor consumers and mentions the use of mobile phones by Keralan fishermen to auction their catch in advance, in order to pick the best port to land their catch. He also discusses the impact of mobile phones and the internet. ITC in India provided computers and internet links for a group of farmers that allowed them to check global futures prices and other market prices before selling their crops. This increased their incomes by 5 to 10 per cent.

Prahalad argues that creating the capacity to consumer is focused on three As: affordability, access and availability. Affordability comes with packaging innovation or innovative purchasing schemes that create incentives to maintain payments (such as payment clubs in Mexico). Access is important for poorer consumers, who tend to work longer hours. Distribution thus has to be geographically intense for poorer consumers to access products. Availability is also extremely important for consumers who cannot defer consumption.

The slightly moralistic tone of the book is not entirely misplaced, as Prahalad rightly argues for the right of the poorest to make choices where they can. He also identifies the self-respect and dignity that actually being able to be a consumer can bring to the very poorest. The issue of trust is also centrally important. The author spells out how Bimbo, the Mexican baker, and Casas Bahia in Brazil build relationships with their customers and retailers. The requirement that all Bimbo managers spend time as delivery drivers and the fact that it refuses to sub-contract delivery because of its importance to the trust relationship it has with retailers is an important lesson for many companies. However, the issue of risk for poorer consumers is even more interesting, given the common perception that the poor are a greater risk. ICICI Bank and Grameen Bank in India and Bangladesh have default rates as low as 1 per cent and 1.5 per cent respectively.

It is unusual to find a book that feels so out of kilter with much of the literature in its area. As a business book it talks about the 'wrong' people; as a development book it takes the 'wrong' approach. In this case, two wrongs make a right. The need to rethink business strategies and approaches for the poorest consumers is borne out by perhaps his favourite case study - that of the Jaipur Foot. A prosthetic foot in the US will cost around $ 12,000. The Indian version has to deal with much more strenuous use, such as squatting, uneven surfaces and sitting cross-legged. The Jaipur Foot, developed by a group of doctors and nurses, can be purchased for $25 per foot. The operation has been running for some time and makes a profit. Anyone with a serious interest in development and business strategy should read this excellent book.

SIDEBAR

"It is unusual to find a book so out of kilter with much of the literature in its area"