A critical analysis of “The Fortune At The Bottom Of The Pyramid”
July 8th, 2015, 12:13 pm|
When it comes to serving the “Bottom of the Pyramid” population, the first point that comes to mind, as a student of Economics is to bring them out of the vicious cycle of poverty. Now the definition of poverty is diverse. It means deprivation of basic human needs and also lack of fundamental freedoms of action and choice and also reduced self-esteem. For this purpose they need to be supported by policies, programs and survival strategies that will help them to boost their income. Whether the government or the private sector is better in doing so is a debatable issue, but what we need is a society where government, NGOs, private sector work in collaboration with each other in order to bring socio-economic transformation in their lives.
The objective of C.K.Prahalad in his book “The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits”, is to mobilize the investment capacity of large firms with the knowledge and commitment of NGOs to co-create solutions to the problems at the bottom of the pyramid. Prahalad’s vision requires the BOP be viewed as a growth opportunity and as a source of innovation in products, services and business models for the private sector. He provides 12 principles for innovations which are necessary to operate within BOP and with the help of which there will be increased participation of BOP in the global economy along with eradication of poverty. But it is important to check whether the concepts and the possible ways suggested by Prahalad will actually have an impact or not.
Firstly, Prahalad defines the Bottom of the Pyramid population as the “4-5 billion poor people who are unserved or underserved by the large organized private sector including multinational firms”. But there is some problem in defining vividly that who actually constitute the BOP population, people living on less than $2/day, less than $1/day or about people earning more than $2/day but still in poverty without adequate access to world class goods and services. But as per the World Bank estimates, the figure is 2.7 billion in 2001(https://openknowledge.worldbank.org/bitstream/handle/10986/14047/wps3341.pdf?sequence=1 ). So there has been an overestimation of the BOP population which has an impact on the size of the market of BOP.
Secondly, Prahalad says in order to convert the BOP into a consumer market, we need to create the capacity to consume. According to him due to the credit rating system provided by Casas Bahia, the BOP consumers can buy appliances. But I think e credit rating system can help poor people cope with poverty at that time point only but not escape from the vicious cycle of poverty because the process does not bring any change in the affordability of the product. A solution that has been suggested by Prahalad in this respect is “to make unit packages that are small and, therefore, are affordable”. The poor might not have money to buy a bottle of shampoo, but could buy sachets for occasional use. But small packages can also increase consumption. Even though small packages create value by increasing convenience they do not increase affordability. The only way to increase affordability is to reduce the price per use.
Thirdly, there are several marketing related issues raised by the book. The BOP proposition suggests that the consumption choices available to the poor can be increased by targeting various products and services, such as iodized salts, televisions etc. But simply selling to the poor does not necessarily improve their welfare or reduce poverty. A poor is far more constrained by lack of income than by lack of variety of goods and services. The BOP initiative could result in the poor spending money on products such as televisions, shampoo, color cosmetics, jams etc. that would have better spent on higher priority needs such as nutrition, education and health.
Fourthly, Prahalad says “4 billion people cannot be a monolith”. This is true. The poor are often geographically dispersed and culturally heterogeneous. This dispersion of the rural poor increases distribution and marketing costs and makes it difficult to exploit economies of scale by the MNCs.
Moreover according to Prahalad’s vision MNC investment at the BOP will help in lifting billions of people out of poverty. The CEO reactions that are available at the end of the book focus only on the success stories. The customer interviews of research are not available. We need to focus also on the failure stories to identify the critical factors necessary for the success.
But apart from all the skepticisms stated above, Prahalad’s vision is also consistent with some of the economic theories.
Prahalad speaks in favor of deskilling of work due to lack of talent in the developing countries and the impact is that work gets fragmented. Adam Smith has also talked about the “theory of division of labor” where workers are engaged at different stages of production and which induce economic growth.
According to Prahalad “contrary to popular belief, the BOP consumers accept advanced technology readily”. Robert Solow in his theory of economic growth also focused on the role of technological progress as a source of long run economic growth.
Finally it can be concluded that Prahalad should be appreciated for the very creative solutions and strategies he highlights for competing in the emerging markets. This knowledge can stimulate innovation in the corporate sector leading to improved conditions and quality of life for the BOP people. Prahalad claims these strategies will help in eradicating poverty, but we don’t see much evidence of it. The best opportunities exist when the firm reduces the price significantly by innovatively changing the price- quality trade off in a manner acceptable to the poor.