By C.K. Prahalad
This is one of my all time favourite books. The basic proposition of this book is that the majority of the world’s population exist at the bottom of the pyramid. Vast in numbers but with a low per capita disposable income. So the question that this book proposes (and then answers) is :
How can companies service these markets profitably?
What can the West learn from this ?
My interest in this book was magnified by my exposure to the Philippines on a project that required me to make multiple visits. I became aware of what is known as the sachet economy.
A whole sector of the population does not have enough money to make household purchases in the manner that we would. They do not buy bottles of shampoo, they buy sachets. They do not buy a bottle of sauce, they buy sachets of sauce. They do not buy packets of cigarettes, they buy cigarettes one at a time.
So as you may imagine companies seeking to service these markets need to think very carefully about the products they offer, the pricing, and in particular their distribution channels and methodology.
There are many great case studies outlined by the author in this book. It is in my opinion a particularly important book because the resource poverty that companies need to overcome to achieve a profit under these commercial conditions is like the blowtorch of natural selection. It is a veritable pressure cooker of business model innovation.
Products, channels and business models that can survive and prosper under this conditions have serious potential to go far through Western markets. Now we are already seeing the emergence of significant corporations from India and China that are acquiring Western companies. I promise you that this is the tip of the iceberg. And it won’t just be big companies. Get ready for super-nimble SME service companies picking off market niches.
To understand some of the most powerful new business models and technologies we need to look at these emerging markets. If you want to see the greatest innovation in business models (and in some cases technology) such as cell phones you don’t look to Silicon Valley but rather to countries like the Philippines and Africa. Many people may question relevance of this lessons from emerging markets. However when you look at the case studies outlined in this book you understand that you ignore this at your peril. The degree of sophistication shown by some entrepreneurs described is spectacular.
One that stands out to me is Aravind Eye Care. The founder had to create an entire ecosystem of products, methodologies, education and patient distribution channels to realize his original vision. There are many amazing elements to this success story not the least that they have been entirely self funding. The proportion of fee paying patients, (even though the fees are very low by Western standards) generates enough surplus to fund the many patients that receive care entirely free.
Perhaps the most amazing insight is that even given the superior productivity of the eye cataract surgeons (2,600 pa compared to the Indian average of 400) the post-operative surgical outcomes are excellent.
When the United Kingdom’s National Health Service compared the post operative outcomes of Aravind Eye Care they were significantly superior. Significantly superior outcomes at a fraction of the price. In a very sophisticated service.
Some other stories that stand out to me include; a company called Casas Bahia, an electronics company from Brazil but amidst other things provides white goods and electrical equipment on extended payment arrangements to slum dwellers. As you might imagine that requires some very clever credit rating mechanisms. Imagine structuring a key part of your business to sell products on credit to slum dwellers. Amazing stuff. Just imagine how powerful that competitive advantage is. I doubt whether they are gonna be swamped by a Western electronics retailer in this market any time soon. And by the way Casas Bahia is no tiddler size business. It has 22,000 employees and generates over $2 Billion in profits.
Another key thing for me in this book was one of optimism for people who are living at the bottom of the pyramid. The book outlines the story of Indian grain farmers who had for many years been ripped off by the middle men grain merchants. A company, ITC Limited decided to set up an entirely different distribution structure that involved creating a new franchise of honest middle men. This involved certification of scales, provision of internet kiosks for checking prices (to give the farmers confidence) and a transparent grain quality system for fair assessment of grain quality (a factor impacting upon price). The impact of this fair, improved distribution system was a substantial increase in the income for farmers and a much better result for everybody (except for the corrupt middle men).
Prior to the establishment of internet kiosks there was much skepticism as to whether these supposedly simple farmers would make use of the technology. Within days the farmers were accessing information as to how to improve their crop productivity. AND within two weeks these (supposedly simple) farmers were accessing the Chicago futures prices to form a view about future price trends for their crops. You can learn more at this wikipedia story about E-Choupal.
If you have in any doubt about the capacity of these people to step up once they are given a fair go this should help to remove that.
One of the best business books that I have ever read and a very powerful introduction to the idea of how emerging market products, services and business models are likely to have substantial impact on lazy and slow-moving businesses in the West.