The next business revolution will come from companies that serve the low-income markets of the developing world.
The most vibrant global companies are pursuing strategies to tap the 4 billion consumers at the bottom of the economic pyramid who live on less than $2 a day in developing countries around the world. Bottom-of-the-pyramid (BOP) markets are the most promising source of revenue growth for these organizations going forward. More importantly, the search for creative ways to enter these markets will generate innovations that will drive business success in the coming decades. Already, industry leaders such as Microsoft, Vodafone, Hewlett-Packard, Intel, Procter & Gamble, DuPont, Unilever, ABN AMRO and Citigroup are moving into this new frontier with major BOP initiatives that include new product and packaging designs, microfinancing, and unique marketing techniques. What might have been considered an exercise in corporate responsibility only a decade ago is the new business imperative for the next 50 years.
It is no longer a question of whether the world's most successful companies will enter bottom-of-the-pyramid markets, but of how fast they can move to reach the developing world's underserved and unbanked consumers and entrepreneurs and make them part of the organization's core business. A report by McKinsey & Co. warns that "only by serving the mass market of the emerging world -- and not just its affluent segments -- can Western companies be forced to innovate in the ways required for future success at home." Capturing low-income markets not only requires companies to improve upon products and processes, but it also forces them to emphasize price performance as never before and focus unequivocally on all elements of cost. The innovations and efficiencies developed to serve these markets can be transferred back to the home base to improve processes there.
Within the BOP regions marked by extremely low per capita incomes, people typically pool their resources and dedicate an exceptionally large portion of their income to household purchases. "The poor represent a huge, untapped market," says C.K. Prahalad, Harvey C. Fruehauf Professor of Business Administration in the Stephen M. Ross School of Business at the University of Michigan in Ann Arbor. Prahalad is also author of "The Fortune at the Bottom of the Pyramid" (Wharton School Publishing, 2005), one of this year's most important business books. When companies look for new profit streams, they may find this invisible market far more lucrative than the luxury marketplace, he says. Prahalad estimates that bottom-of-the-pyramid markets represent $13 trillion a year in U.S. purchasing power parity -- a sum greater than the current annual U.S. GDP.
Forced Innovation
The economics of low-income markets are based on small unit packages, low margins per unit and high volume. "With an extraordinary emphasis on price performance, capital efficiency is key," explains Ajay Sharma, senior researcher at the University of Michigan's William Davidson Institute in Ann Arbor. "Processes may need to be reengineered to increase employment intensity and reduce resource requirements." These developments can then promote improvements throughout the organization. For example, Unilever found that the packaging innovations it developed for small units sold in the developing world were readily applicable in advanced markets as well. "Conditions are now ripe for disruptive technologies and innovative ideas to emerge from BOP markets," Sharma predicts.
In January 2005, Microsoft inaugurated a new research laboratory in Bangalore, India, to develop emerging-market products. "The giant U.S. technology companies are investing huge amounts of money in R&D centers in the developing world," says Deepak Amin, CEO of Covelix Inc., a technology development company based in Kirkland, Wash. "No business will invest so much just to tap cheap labor. They are setting up R&D centers to discover how the next generation of computing will take place. They know that this is where the real innovations will come from. And if you don't innovate, you're toast."
Amin is also a director of Drishtee Ltd., a company based in New Delhi, India, that is building village information kiosks in rural parts of India. Consumers and entrepreneurs use these kiosks to buy and sell services and access government programs. "This is the frontier of business computing," he says. "No one knows where this will go when it is scaled for 4 billion people. The PC revolution of the past 25 years came from the top of the pyramid, but that is not where future growth will be. It will come from the BOP markets."
The kiosk market in India is influencing next-generation hardware and software designs geared for sale on a shared-use, cash-only basis with new licensing and service delivery models. Across Asia, Africa and Latin America, companies are devising new financing and distribution channels to open bottom-of-the-pyramid markets for their products. "Companies need to creatively overcome the challenges of local infrastructure, undertake R&D and market research on the needs of the poor, and then design hybrid solutions and innovative business processes," Sharma points out. "Promoting sustainable development in an environmentally sound manner is also imperative."
Recognizing the Opportunities
BOP strategies also uncover opportunities that may not be available in the saturated markets of the advanced nations. For example, Amin is working with entrepreneurs and venture capitalists to develop next-generation software in a specific area. "It is impossible to build and sell this software in the U.S. market because these entrepreneurs cannot dislodge the industry leaders, so they are producing and selling it in the developing world," he says.
"Once they have a position of strength in that world, they can come back and compete with the larger players," Amin elaborates. "They will have changed the rules of the game instead of playing the game better by the same rules. This is classic war strategy. If the large organizations don't go to the innovative areas, they will lose out later on."
Pursuit of underserved consumers is not about serving existing markets more efficiently or making minor modifications to products and business practices that were created for the top of the pyramid. "Pushing existing products and management practices into BOP markets will not work," Sharma says.
But executives who assume that selling in these markets is too expensive should think again. Low-income consumers pay a huge "poverty penalty" -- a premium on everything from rice to credit -- that is often 5 to 25 times what the rich pay for the same products and services. Driving down these premiums can make serving BOP markets more profitable than serving the top, Prahalad argues, and he points to a growing number of leading firms -- from Unilever in India to Cemex in Mexico -- that are profiting by doing precisely that.
Smaller companies are also finding niche bottom-of-the-pyramid markets where stripping away the poverty penalty can create demand and generate profits. Canvas Systems, based in Norcross, Ga., sells refurbished IT equipment in 68 developing countries. "Most of the major technology companies sell new products at much higher prices in developing countries to offset the lack of volume and the trouble involved in operating offices there," notes Sean Murphy, Canvas Systems' co-founder and executive vice president. "New computer equipment is much cheaper in America than in Africa or South America, and this makes our offerings even more attractive.
"Particularly in emerging markets, preowned equipment is in many cases the only technology option customers can afford," he adds. Canvas Systems works with the Export-Import Bank of the United States and other U.S. government programs to provide customers with flexible financing options.
Moving into low-income markets forces companies to abandon their dominant logic. "Over time, successful recipes -- business models, processes, approaches to competition -- become embedded in the organization," Sharma explains. "New mind-sets and approaches are critical." Intel's "Future Vision 2015" project is searching Asia, not Silicon Valley, for what the project's literature calls the "discontinuous innovations" that the company hopes will "disrupt conventional, evolutionary thinking" and produce its next breakthrough technologies. For executives and shareholders who are concerned about where the next business revolution will come from, the bottom of the pyramid is the first place to look.
