Need a little help

Improving the Uves of the billions of peopie at the bottom

of the economic pyramid is a nobie endeavor

It can aiso be a lucrative one.

Serving the World's Poor, Profitably

by C.K. Prahalad and Allen Hammond

C ONSIDER THIS BLEAK VISION

of tbe world 15 years from now: The global economy recovers

from its current stagnation but growth remains anemic. Deflation continues to threaten, the gap between rich and poor keeps widening, and incidents of eco- nomic chaos, governmental collapse, and civil war plague developing regions. Terrorism remains a constant threat, diverting significant public and private resources to security concerns. Opposi- tion to the global market system inten- sifies. Multinational companies find it difficult to expand, and many become risk averse, slowing investment and puli- ing back from emerging markets.

Now consider this much brighter sce- nario: Driven by private investment and widespread entrepreneurial activity, the economies of developing regions grow vigorously, creating jobs and wealth and bringing hundreds of millions of new

48

consumers into the global marketplace every year. China, India, Brazil, and, gradually. South Africa become new en- gines of global economic growth, pro- moting prosperity around the world. The resulting decrease in poverty pro- duces a range of social benefits, helping to stabilize many developing regions and reduce civil and cross-border con- flicts. The threat of terrorism and war re- cedes. Multinational companies expand rapidly in an era of intense innovation and competition.

Both of these scenarios are possible. Which one comes to pass vdll be deter- mined primarily by one factor: the will- ingness of big, multinational companies to enter and invest in the world's poor- est markets. By stimulating commerce and development at the bottom of the economic pyramid, MNCs could radi- cally improve the lives of billions of peo- ple and help bring into being a more

stable, less dangerous world. Achieving this goal does not require multination- als to spearhead global social develop- ment initiatives for charitable purposes. They need only act in their own self- interest, for there are enormous busi- ness benefits to be gained by entering developing markets. In fact, many in- novative companies - entrepreneurial outfits and large, established enterprises alike - are already serving the world's poor in ways that generate strong rev- enues, lead to greater operating efficien- cies, and uncover new sources of inntv vation. For these companies-and those that follow their lead - building busi- nesses aimed at the bottom of the pyr- amid promises to provide important competitive advantages as the twenty- first century unfolds.

Big companies are not going to solve the economic ills of developing coun- tries by themselves, of course. It will also

HARVARD BUSINESS REVIEW

B I G P I C T U R E

take targeted financial aid from the de- veloped world and improvements in the governance of the developing nations themselves. But it's clear to us that pros- perity can come to the poorest regions only through the direct and sustained involvement of multinational compa- nies. And it's equally clear that the multi- nationals can enhance their own pros- perity in the process.

Untapped Potential Everyone knows that the world's poor are distressingly plentiful. Fully 65% of the world's population earns less than $2,000 each per year-that's 4 billion people. But despite the vastness of this market, it remains largely untapped by multinational companies. The reluc- tance to invest is easy to understand. Companies assume that people with such low incomes have little to spend on goods and services and that what they

do spend goes to basic needs like food and shelter. They also assume that vari- ous barriers to commerce - corruption, illiteracy, inadequate infrastructure, currency fluctuations, bureaucratic red tape - make it impossible to do business profitably in these regions.

But such assumptions refiect a nar- row and largely outdated view of the developing world. The fact is, many multinationals already successfully do business in developing countries (al- though most currently focus on sell- ing to the small upper-middle-class seg- ments of these markets), and their experience shows that the barriers to commerce - although real - are much lower than is typically thought. More- over, several positive trends in develop- ing countries -from political reform, to a growing openness to investment, to the development of low-cost wireless communication networks-are reducing

the barriers further while also providing businesses with greater access to even the poorest city slums and rural areas. Indeed, once the misperceptions are wiped away, the enormous economic potential that ties at the bottom of the pyramid becomes clear.

Take the assumption that the poor have no money. It sounds obvious on the surface, but it's wrong. While indi- vidual incomes may be low, the aggre- gate buying power of poor communi- ties is actually quite large. The average per capita income of villagers in rural Bangladesh, for instance, is less than $200 per year, but as a group they are avid consumers of telecommunications services. Grameen Telecom's village phones, which are owned by a single en- trepreneur but used by the entire com- munity, generate an average revenue of roughly $90 a month-and as much as $1,000 a month in some large villages.

SEPTEMBER 2002 49

BIC PICTURE • Serving the World's Poor, Profitably

Customers of these village phones, who pay cash for each use, spend an average of 7% of their income on phone ser- vices-a far higher percentage than con- sumers in traditional markets do.

It's also incorrect to assume that the ptx)r are too concerned with fulfilling their basic needs to "waste" money on nonessentlal goods. In fact, the poor often do buy "luxury" items. In the Mumbai shantytown of Dharavi, for example, 85% of households own a tele- vision set, 75% own a pressure cooker and a mixer, 56% own a gas stove, and 21% have telephones. That's because buying a house in Mumbai, for most people at the bottom of the pyramid, is not a realistic option. Neither is getting access to running water. They accept that reality, and rather than saving for a rainy day, they spend their income on things they can get now that improve the quality of their lives.

Another big misperception about developing markets is that the goods sold there are incredibly cheap and, hence, there's no room for a new com- petitor to come in and turn a profit. In reality, consumers at the bottom of the pyramid pay much higher prices for most things than middle-class consum- ers do, which means that there's a real opportunity for companies, particularly big corporations with economies of scale and efficient supply chains, to cap- ture market share by offering higher quality goods at lower prices wbile maintaining attractive margins, in fact, throughout the developing world, ur- ban slum dwellers pay, for instance, be- tween four and 100 times as much for drinking water as middle- and upper- class families. Food also costs 20% to 30% more in the poorest communities since there is no access to bulk discount stores. On the service side of the econ- omy, local moneylenders charge interest of 10% to 15% per day, with annual rates running as higb as 2,000%. Even the lucky small-scale entrepreneurs who

get loans from nonprofit microfinance institutions pay between 40% and 70% interest per year-rates that are illegal in most developed countries. (For a closer look at how the prices of goods compare in rich and poor areas, see the exhibit "The High-Cost Economy of the Poor.")

It can also be surprisingly cheap to market and deliver products and ser- vices to the world's poor. That's because many of them live in cities that are densely populated today and will be

Markets at the bottom

of the economic pyramid

are fundamentally

new sources of growth

for multinationals. And

because these markets are

in the earliest stages, growth

can be extremely rapid.

even more so in the years to come. Fig- ures from the UN and the World Re- sources Institute indicate that by 2015, in Africa, 225 cities will each have pop- ulations of more than i million; in Latin America, another 225; and in Asia, 903. The population of at least 27 cities will reach or exceed 8 million. Collectively, the 1,300 largest cities will account for some 1.5 billion to 2 billion people, roughly half of whom will be bottom- of-the-pyramid (BOP) consumers now served primarily by informal economies. Companies that operate in these areas will have access to millions of potential new customers, who together have bil- lions of dollars to spend. The poor in Rio de Janeiro, for instance, have a total purchasing power of $1.2 billion ($600 per person). Shantytowns in Johannes- burg or Mumbai are no different.

The slums of these cities already have distinct ecosystems, with retail shops.

CK. Prahalad is the Harvey C Fruehauf Professor of Business Administration at the Uni- versity of Michigan Business School in Ann Arbor and the chairman ofPraja, a software company in San Diego. Allen Hammond is the CIO, senior scientist, and director of the Digital Dividend project at the World Resources Institute in Washiiïgton, DC.

small businesses, schools, clinics, and moneylenders. Although there are few reliable estimates of the value of com- mercial transactions in slums, business activity appears to be thriving. Dhar- avi-covering an area of just 435 acres- boasts scores of businesses ranging from leather, textiles, plastic recycling, and surgical sutures to gold jewelry, il- licit liquor, detergents, and groceries. The scale of the businesses varies from one-person operations to bigger, well- recognized producers of brand-name products. Dharavi generates an esti- mated $450 million in manufacturing revenues, or about $i million per acre of land. Established shantytowns in Sao Paulo, Rio, and Mexico City are equally productive.The seeds of a vibrant com- mercial sector have been sown.

While the rural poor are naturally harder to reach than the urban poor, they also represent a large untapped op- portunity for companies. Indeed, 60% of India's GDP is generated in rural areas. The critical barrier to doing business in rural regions is distribution access, not a lack of buying power. But new infor- mation technology and communica- tions infrastructures - especially wire- less-promise to become an inexpensive way to establish marketing and distri- bution channels in these communities.

Conventional wisdom says that peo- ple in BOP markets cannot use such ad- vanced technologies, but that's just an- other misconception. Poor rural women in Bangladesh have had no difficulty using GSM cell phones, despite never before using phones of any type. In Kenya, teenagers from slums are being successfully trained as Web page de- signers. Poor farmers in El Salvador use teiecenters to negotiate the sale of their crops over tbe Internet. And women in Indian coastal villages have in less than a week learned to use PCs to interpret real-time satellite images showing con- centrations of schools offish in the Ara- bian Sea so they can direct their hus- bands to the best fishing areas. Clearly, poor communities are ready to adopt new technologies that improve their economic opportunities or their quality of life. The lesson for multinationals;

50 HARVARD BUSINESS REVIEW

Serving the World's Poor, Profitably • BIG PICTURE

Don't hesitate to deploy advanced tech- nologies at the bottom of the pyramid while, or even before, deploying them in advanced countries.

A final misperception concerns the highly charged issue of exploitation of the pcxïr by MNCs. The informal econo- mies that now serve poor communities are full of inefficiencies and exploitive intermediaries. So if a microfinance in- stitution charges 50% annual interest when the alternative is either i,ooo% interest or no loan at all, is that exploit- ing or helping the poor? If a large finan- cial company such as Citigroup were to use its scale to offer microloans at 20%, is that exploiting or helping the poor? The issue is not just cost but also qual- ity-quality in the range and fairness of financial services, quality of food, qual- ity of water. We argue that when MNCs provide basic goods and services that re- duce costs to the poor and help improve their standard of living-while generat- ing an acceptable return on invest- ment-the results benefit everyone.

The Business Case

The business opportunities at the bot- tom of the pyramid have not gone un- noticed. Over the last five years, we have seen nongovernmental organizations (NGOs), entrepreneurial start-ups, and a handful of forward-thinking multi- nationals conduct vigorous commercial experiments in poor communities. Their experience is a proof of concept: Busi- nesses can gain three important advan- tages by serving the poor-a new source of revenue growth, greater efficiency, and access to innovation. Let's look at examples of each.

Top-Line Growth. Growth is an im- portant challenge for every company, but today it is especially critical for very large companies, many of which appear to have nearly saturated their existing markets. That's why BOP markets rep- resent such an opportunity for MNCs: They are fundamentally new sources of growth. And because these markets are in the earliest stages of economic devel- opment, growth can be extremely rapid.

Latent demand for low-priced, high- quality goods is enormous. Consider

the reaction when Hindustan Lever, the Indian subsidiary of Unilever, recently introduced what was for it a new prod- uct category-candy-aimed at the bot- tom of the pyramid. A high-quality con- fection made with real sugar and fruit, the candy sells for only about a penny a serving. At such a price, it may seem like a marginal business opportunity, but in just six months it became the fastest- growing category in the company's port- folio. Not only is it profitable, but the company estimates it has the potential to generate revenues of $200 million

to English proficiency to vocational skills. The products are expected to be the largest single revenue generator for the company and its franchisees over the next several years.' Credit and fi- nancial services are also in high demand among the pi>or. Citibank's ATM-based banking experiment in India, called Su- vidha, for instance, which requires a minimum deposit of just $25, enlisted 150,000 customers in one year in the city of Bangalore alone.

Small-business services are also pop- ular in BOP markets. Centers run in

The World Pyramid

Most companies target consumers at the upper tiers of the economic pyramid,

completeiy overlooking the business potential at its base. But though they may

each be earning the equivalent of less than $2,000 a year, the people at the

bottom of the pyramid make up a colossal market-4 billion strong-the vast

majority of the world's population.

purchasing power parity (in U.S. dollars)

>$20,000 100

$2,000-20,000 2,000

<$2,000

population (in millions)

per year in India and comparable mar- kets in five years. Hindustan Lever has had similar successes in India with low- priced detergent and iodized salt. Be- yond generating new sales, the company is establishing its business and its brand in a vast new market

There is equally strong demand for aiïordable services. TARAhaat, a start-up focused on rural India, has introduced a range of computer-enabled education services ranging from basic IT training

Uganda by the Women's Information Resource Electronic Service (WIRES) provide female entrepreneurs with in- ft>rmation on markets and prices, as well as credit and trade support services, packaged in simple, ready-to-use for- mats in local languages. The centers are planning to offer other small-business services such as printing, faxing, and copying, along with access to account- ing, spreadsheet, and other software. In Bolivia, a start-up has partnered with

SEPTEMBER 2002 51

BIG PICTURE • Serving the World's Poor, Profitably

the Bolivian Association of Ecological Producers Organizations to oifer busi- ness information and communications services to more than 25,000 small pro- ducers of ecoagricultural products.

It's true that some services simply can- not be offered at a low-enough cost to be profitable, at least not with tradi- tional technologies or business models. Most mobile telecommunications pro- viders, for example, cannot yet prof- itably operate their networks at afford- able prices in the developing world. One answer is to find alternative technology. A microfinance organization in Bolivia named PRODEM, for example, uses multilingual smart-card ATMs to sub- stantially reduce its marginal cost per customer. Smart cards store a custom- er's personal details, account numbers, transaction records, and a fingerprint, allowing cash dispensers to operate without permanent network connec- tions - which is key in remote areas. What's more, the machines offer voice commands in Spanish and several local dialects and are equipped with touch screens so that PRODEM's customer base can be extended to illiterate and semiliterate people.

Another answer is to aggregate de- mand, making the community-not the indivldual-the network customer. Gyan- doot, a start-up in the Dhar district of central India, where 60% of the popula- tion falls below the poverty level, illus- trates the benefits of a shared access model. The company has a network of 39 Internet-enabled kiosks that provide local entrepreneurs with Internet and telecommunications access, as well as with governmental, educational, and other services. Each kiosk serves 25 to 30 surrounding villages; the entire network reaches more than 600 villages and over half a million people.

Networks like these can be useful channels for marketing and distributing many kinds of low-cost products and services. Aptech's Computer Education division, for example, has built Its own network of 1,000 learning centers in india to market and distribute Vidya, a computer-training course specially de- signed for BOP consumers and available

52

in seven Indian languages. Pioneer Hi- Bred, a DuPont company, uses Internet kiosks in Latin America to deliver agri- cultural information and to interact with customers. Earmers can report dif- ferent crop diseases or weather condi- tions, receive advice over the wire, and order seeds, fertilizers, and pesticides. This network strategy increases both sales and customer loyalty.

Reduced Costs. No less important than top-line growth are cost-saving op- portunities. Outsourcing operations to low-cost labor markets has, of course, long been a popular way to contain costs, and it has led to the increasing prominence of China in manufacturing and India in sofrware. Now, thanks to the rapid expansion of high-speed digi- tal networks, companies are realizing even greater savings by locating such labor-intensive service functions as call centers, marketing services, and back- office transaction processing in devel- oping areas. For example, the nearly 20 companies that use OrphanlT.com's affiliate-marketing services, provided via its telecenters in India and the Phil- ippines, pay one-tenth the going rate

for similar services in the United States or Australia. Venture capitalist Vinod Khosla describes the remote-services opportunity this way: "1 suspect that by 2010, we will be talking about [remote services] as the fastest-growing part of the world economy, with many tril- lions of dollars of new markets created." Besides keeping costs down, outsourc- ing jobs to BOP markets can enhance growth, since job creation ultimately increases local consumers' purchasing power.

But tapping into cheap labor pools is not the only way MNCs can enhance their efficiency by operating in devel- oping regions. The competitive neces- sity of maintaining a low cost structure in these areas can push companies to discover creative ways to configure their products, finances, and supply chains to enhance productivity. And these discov- eries can often be incorporated back into their existing operations in devel- oped markets.

For instance, companies targeting the BOP market are finding that the shared access model, which disaggregates access from ownership, not only widens their

The High-Cost Economy of the Poor

When we compare the costs of essentials in Dharavi.a shantytown of more than

1 million people in the heart of Mumbai, India, with those of Warden Road, an

upper-class community in a nice Mumbai suburb, a disturbing picture emerges.

Clearly, costs could be dramatically reduced if the poor could benefit from the

scope, scale, and supply-chain efficiencies of large enterprises, as their middle-

class counterparts do. This pattern is common around the world, even in de-

veloped countries. For instance, a similar, if less exaggerated, disparity exists

between the inner-city poor and the suburban rich in the United States.

Cost Dharavi Warden Road

Poverty premium

credit (annual interest)

municipal-grade water (per cubic meter)

phone call (per minute)

diarrhea medication

rice (per kilogram)

600%-! ,000%

$1.12

$0.04-$0.05

$20

$0,28

12%-,8%

$0.03

$0,025

$2

$0.24

53X

37X

1.8X

10X

1.2X

HARVARD BUSINESS REVIEW

customer base but increases asset pro- ductivity as well. Poor people, rather than buyingtheirown computers, inter- net connections, cell phones, refrigera- tors, and even cars, can use such equip- ment on a pay-per-use basis. Typically, the providers of such services get con- siderably more revenue per dollar of in- vestment in the underlying assets. One shared Internet line, for example, can serve as many as 50 peopie, generating more revenue per day than if it were dedicated to a single customer at a flat fee. Shared access creates the opf>ortu- nity to gain far greater returns from all sorts of infrastructure investments.

In terms of finances, to operate suc- cessfully in BOP markets, managers must also rethink their business met- rics - specifically, the traditional focus on high gross margins. In developing markets, the profit margin on individual units will always be low. What really counts is capital efficiency-getting the highest possible returns on capital em- ployed (ROCE). Hindustan Ixver, for in- stance, operates a $2.6 billion business portfolio with zero working capital.The key is constant efforts to reduce capital investments by extensively outsourc- ing manufacturing, streamlining supply chains, actively managing receivables, and paying close attention to distrib- utors' performance. Very low capital needs, focused distribution and tech- nology investments, and very large vol- umes at low margins lead to very high ROCE businesses, creating great eco- nomic value for shareholders. It's a model that can be equally attractive in developed and developing markets.

Streamlining supply chains often in- volves replacing assets with informa- tion. Consider, for example, the expe- rience of ITC, one of India's largest companies. Its agribusiness division has deployed a total of 970 kiosks serving 600,000 farmers who supply it with soy, coffee, shrimp, and wheat from 5,000 villages spread across India. This kiosk program, called e-Choupal, helps in- crease the fanners' productivity by dis- seminating the latest information on weather and best practices in farming, and by supporting other services like

soil and water testing, thus facilitating the supply of quality inputs to both the fanners and iTC. The kiosks also serve as an e-procurement system, helping farmers eam higher prices by minimiz- ing transaction costs involved in mar- keting farm produce. The head of (TC's agribusiness reports that the company's procurement costs have fallen since e-Choupal was implemented. And that's despite paying higher prices to its farm- ers: The program has enabled the com- pany to eliminate multiple transpor- tation, bagging, and handling steps - from farm to local market, from market to broker, from broker to processor - that did not add value in the chain.

Innovation. BOP markets are hot- beds of commercial and technological experimentation. The Swedish wireless company Ericsson, for instance, has de- veloped a small cellular telephone sys- tem, called a MiniGSM,that local oper- ators in BOP markets can use to offer cell phone service to a small area at a radically lower cost than conventional equipment entails. Packaged for easy shipment and deployment, it provides stand-alone or networked voice and data communications for up to 5,000 users within a 35-kiIometer radius. Capital costs to the operator can be as low as $4 per user, assuming a shared-use model with individual phones operated by local entrepreneurs. The MIT Media Lab, in collaboration with the indian govern- ment, is developing low-cost devices that allow people to use voice com- mands to communicate - without key- boards - with various Internet sites in multiple languages. These new access de- vices promise to be far less complex than traditional computers but would per- form many of the same basic functions.^

As we have seen, connectivity is a big issue for BOP consumers. Companies that can find ways to dramatically lower connection costs, therefore, will have a very strong market position. And that is exactly what the Indian company n-Logue is trying to do. It connects hun- dreds of franchised village kiosks con- taining both a computer and a phone with centralized nodes that are, in turn, connected to the national phone net-

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work and the Internet Each node, also a fr^anchise, can serve between 30,000 and 50,000 customers, providing phone, e-mail, Internet services, and relevant local information at affordable prices to villagers in rural India. Capital costs for the n-Logue system are now about $400 per wireless "line" and are prt> jected to decline to $ i o o - a t least ten times lower than conventional telecom costs. On a per-customer basis, the cost may amount to as little as $i.̂ This ap- pears to be a powerful model for ending rural isolation and linking untapped rural markets to the global economy.

New wireless technologies are likely to spur further business model innovations and lower costs even more. Ultrawideband, for exam- ple, is currently licensed in the United States only for limited, very low-power ap- plications, in part because it spreads a signal across already-crowded portions of the broadcast spectrum. In many developing coun- tries, however, the spec- trum is less congested. In fact, the U.S.-based Dandin Group is al- ready building an ultrawideband com- munications system for the Kingdom of Tonga, whose population of about 100,000 is spread over dozens of is- lands, making it a test bed for a next- generation technology that could trans- form the economics of Internet access.

E-commerce systems that run over the phone or the Internet are enor- mously important in BOP markets be- cause they eliminate the need for layers of intermediaries. Consider how the U.S. start-up Voxiva has changed the way information is shared and business is transacted in Peru. The company part- ners with Telefónica, the dominant local carrier, to offer automated business ap- plications over the phone. The inexpen- sive services include voice mail, data entry, and order placement; customers can check account balances, monitor de- livery status, and access prerecorded in- formation directories. According to the Boston Consulting Group, the Peruvian

Ministry of Health uses Voxiva to dis- seminate information,take pharmaceu- tical orders, and link health care workers spread across 6,000 offices and clinics. Microfinance institutions use Voxiva to process loan applications and commu- nicate with borrowers. Voxiva offers Web-based services, tot), but far more of its potential customers in Latin America have access to a phone.

E-commerce companies are not the only ones turning the limitations of BOP markets to strategic advantage. A lack of dependable electric power stimulated the UK-based start-up Free-

play Group to introduce hand-cranked radios in South Africa that sub- sequently became pop- ular with hikers in the United States. Similar breakthroughs are being pioneered in the use of solar-powered devices such as battery chargers and water pumps. In China, where pesticide costs have often limited the use of modem agri-

cuitural techniques, there are now 13,000 small farmers - more than in the rest of the world combined- growing cotton that has been geneti- cally engineered to be pest resistant.

Strategies for Serving BOP Markets Certainly, succeeding in BOP markets requires multinationals to think cre- atively. The biggest change, though, has to come in the attitudes and practices of executives. Unless CEOs and other busi- ness leaders confront their own precon- ceptions, companies are unlikely to mas- ter the challenges of BOP markets. The traditional workforce is so rigidly con- ditioned to operate in higher-margin markets that, without formal training, it is unlikely to see the vast potential of the BOP market The most pressing need, then, is education. Perhaps MNCs should create the equivalent of the Peace Corps; Having young managers spend a couple of formative years in BOP markets would open their eyes to

the promise and the realities of doing business there.

To date, few multinationals have de- veloped a cadre of people who are com- fortable with these markets. Hindustan Lever is one of the exceptions. The com- pany expects executive recruits to spend at least eight weeks in the villages of India to get a gut-level experience of In- dian BOP markets. The new executives must become involved in some com- munity project-building a road, clean- ing up a water catchment area, teaching in a school, improving a health clinic. The goal is to engage with the local pop- ulation. To buttress this effort, Hindu- stan Lever is initiating a massive pro- gram for managers at all levels - from the CEO down - to reconnect with their poorest customers. They'll talk with the pot>r in both rural and urban areas, visit the shops these customers frequent, and ask them about their ex- perience with the company's products and those of its competitors.

In addition to expanding managers' understanding of BOP markets, com- panies will need to make structural changes. To capitalize on the innovation potential of these markets, for exam- ple, they might set up R&D units in de- veloping countries that are specifically focused on local opportunities. When Hewlett-Packard launched its e-Inclusion division, which concentrates on rural markets, it established a branch of its famed HP Labs in India charged with developing products and services ex- plicitly for this market Hindustan Lever maintains a significant R&D effort in India, as well.

Companies might also create venture groups and intemal investment funds aimed at seeding entrepreneurial efforts in BOP markets. Such investments reap direct benefits in terms of business ex- perience and market development They can also play an indirect but vital role in growing the overall BOP market in sectors that will ultimately benefit the multinational. At least one major U.S. corporation is planning to launch such a fund, and the G8's Digital Op- portunity Task Force is propt)sing a sim- ilar one focused on digital ventures.

54 HARVARD BUSINESS REVIEW

MNCs should also consider creating a business development task force aimed at these markets. Assembling a diverse group of people from across the corpo- ration and empowering it to function as a skunk works team that ignores conventional dogma will likely lead to

should look beyond businesses to NGOs and community groups. They are key sources of knowledge about customers' behavior, and they often experiment the most with new services and new deliv- ery models. In fact, of the social enter- prises experimenting with creative uses

To operate successfully in developing markets, managers

must rethink their business metrics-specifically, the traditional focus on high gross margins.

greater innovation. Companies that have tried this approach have been sur- prised by the amount of interest such a task force generates. Many employ- ees want to work on projects that have the potential to make a real difference in improving the Uves of the poor. When Hewlett-Packard announced its e-Inclusion division, for example, it was overwhelmed by far more volunteers than it could accommodate.

Making internal changes is impor- tant, but so is reaching out to external partners. Joining with businesses that are already established in these markets can be an effective entry strategy, since these companies will naturally under- stand the market dynamics better. In addition to limiting the risks for each player, partnerships also maximize the existing infrastructure - both physical and social. MNCs seeking partners

of digital technology that the Digital Dividend Project Clearinghouse tracked, nearly 80% are NGOs. In Namibia, for instance, an organization called School- Net is providing low-cost, alternative technology solutions - such as solar power and wireless a p p r o a c h e s - t o schtxils and community-based groups throughout the country. SchoolNet is currently linking as many as 35 new schools every month.

Entrepreneurs also will be critical partners. According to an analysis by McKinsey & Company, the rapid growth of cable TV in India-there are 50 mil- lion connections a decade after intro- duction - is largely due to small entre- preneurs. These individuals have been building the last mile of the network, typically by putting a satellite dish on their own houses and laying cable to con- nect their neighbors. A note of caution,

Sharing Intelligence

What creative new approaches to serving the bottom-of-the-pyramid markets have digital technologies made possible? Which sectors or countries show the most economic activity or the fastest growth? What new business models show promise? What kinds of partnerships-for funding, distribution, public relations-have been most successful?

The Digital Dividend Project Clearinghouse (digitaldividend.org) helps answer those types of questions. The Web site tracks the activities of organizations that use digital tools to provide connectivity and deliver services to underserved popu- lations in developing countries. Currently, it contains information on 700 active projects around the world. Maintained under the auspices of the nonprofit World Resources Institute, the site lets participants in different projects share experi- ences and swap knowledge with one another. Moreover, the site provides data for trend analyses and other specialized studies that facilitate market analyses, local partnerships, and rapid, low-cost learning.

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however. Entrepreneurs in BOP markets lack access to the advice, technical help, seed funding, and business support ser- vices available in the industrial world. So MNCs may need to take on mentor- ing roles or partner with local business development organizations that can help entrepreneurs create investment and partnering opportunities.

It's worth noting that, contrary to popular opinion, women play a signif- icant role in the economic develop- ment of these regions. MNCs, there- fore, should pay particular attention to women entrepreneurs. Women are also likely to play the most critical role in product acceptance not only because of their childcare and household manage- ment activities but also because of the social capital that they have built up in their communities. Listening to and ed- ucating such customers is essential for success.

Regardless of the opportunities, many companies will consider the bottom of the pyramid to be Xoo risky. We've shown how partnerships can limit risk; another option is to enter into consortia, imag- ine sharing the costs of building a rural network with the communications com- pany that would operate it, a consumer goods company seeking channels to ex- pand its sales, and a bank that is financ- ing the construction and wants to make loans to and collect deposits from rural customers.

Investing where powerful synergies exist will also mitigate risk. The Global Digital Opportunity Initiative, a part- nership of the Markle Foundation and the UN Development Programme, will help a small number of countries im- plement a strategy to harness the power of information and communications technologies to increase development. The countries will be chosen in part based on their interest and their will- ingness to make supportive regulatory and market reforms. To concentrate re- sources and create reinforcing effects, the initiative will encourage interna- tional aid agencies and global compa- nies to assist with implementation.

All of the strategies we've outlined here will be of little use, however, unless

the external barriers we've touched o n - poor infrastructure, inadequate con- nectivity, corrupt intermediaries, and the like - are removed. Here's where technology holds the most promise. In- formation and communications tech- nologies can grant access to otherwise isolated communities, provide market- ing and distribution channels, bypass intermediaries, drive down transaction costs, and help aggregate demand and

buying power. Smart cards and other emerging technologies are inexpensive ways to give poor customers a secure identity, a transaction or credit history, and even a virtual address - prerequi- sites for interacting with the formal economy. That's why high-tech com- panies aren't the only ones that should be interested in closing the global digi- tal divide; encouraging the spread of low-cost digital networks at the bottom of the pyramid is a priority for virtually all companies that want to enter and engage with these markets. Improved connectivity is an important catalyst for more effective markets, which are criti- cal to boosting income levels and accel- erating economic growth.

Moreover, global companies stand to gain from the effects of network expan- sion in these markets. According to Met- calfe's Law, the usefulness of a network equals the square of the number of users. By the same logic, the value and vigor of the economic activity that will be generated when hundreds of thou- sands of previously isolated rural com- munities can buy and sell from one an- other and from urban markets will increase dramatically-tothe benefit of all participants.

HARVARD BUSINESS REVIEW

Since BOP markets require significant rethinking of managerial practices, it is legitimate for managers to ask: Is it worth the effort?

We think the answer is yes. For one thing, big corporations should solve big problems-and what is a more pressing concern than alleviating the poverty that 4 billion people are currently mired in? It is hard to argue that the wealth of technology and talent within leading multinationals is better allocated to producing incremental variations of ex- isting products than to addressing the real needs-and real opportunities-at the bottom of the pyramid. Moreover, through competition, multinationals are likely to bring to BOP markets a level of accountability for performance and resources that neither international development agencies nor national gov- ernments have demonstrated during the last 50 years. Participation by MNCs could set a new standard, as well as a new market-driven paradigm, for ad- dressing poverty.

But ethical concerns aside, we've shown that the potential for expanding the bottom of the market is just too great to ignore. Big companies need to focus on big market opportunities if they want to generate real growth. It is simply good business strategy to be in- volved in large, untapped markets that offer new customers, cost-saving oppor- tunities, and access to radical innova- tion. The business opportunities at the bottom of the pyramid are real, and they are open to any MNC willing to engage and leam. ^

1. Andru'w Lawlor, Caitlin Peterson, and Vivek Sandell, "Catalyzing Rural Development: TARA- haat.com" (World Resources Institute, July 2tx)i).

2. Michael Best and Colin M. Maclay,"Community Internet Access in Rural Areas: Solving the Eco- nomic Sustainability Puzzle," The Global Intbrnia- tion Technology Rc[)ort 2001-2002: Readiness for tbe Networked World, ed., Geoffrey Kirkman (Ox- ford University Press, 2(H)2), available on-line at httpv'Mww.t;id.harvard.cdu/cr/gitrr_o3O2O2.html.

3. Joy Howard, Erik Simanis, and Chads Simms, "Sustainable Deployment for Rural Connectivity: The n-Logue Model" (World Resources Institute, July 2{X)i).

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