The Indian Economy Blog

August 31, 2006

The Pyramid Has a False Bottom?

Filed under: Business — Atanu Dey @ 2:17 pm

Apparently, to be a successful “public intellectual” one of the requirements is that one must invent a catchy tag line. The tag line must have emotional appeal through a reference to some deeply held belief or social conditioning. An example of one such is the title of the book by Thomas Friedman “The World is Flat” which attempts to upset your view of the world that it is round. Another example is “the fortune at the bottom of the pyramid” which the obvious connection to the phrase “the pot of gold at the end of the rainbow.”

C. K. Prahalad is one of the most influential management gurus in the contemporary world and the co-author of the book “The Fortune at the Bottom of the Pyramid” (2004). He has a cult following of mythic proportions among certain segments of the managerial class. I have to confess that I have not been too persuaded by the arguments of that book because I have difficulty squaring the “BOP” proposition with my understanding of basic economics. So it was a pleasant surprise when I read Aneel Karnani’s (Ross Business School at the University of Michigan) working paper of July 2006 “Fortune at the Bottom of the Pyramid: A Mirage” (free download) [Hat tip: Raja Sekhar Malapati.]

Karnani’s paper argues against the BOP proposition. He summaries the BOP proposition as: there are profits to be made by selling to the billions of the world’s poor, and by doing so, bring prosperity to them, thus alleviating poverty, and that multinational corporations (MNCs) should sell to the poor to do good while doing well for themselves.

First there is the disagreement regarding the actual size of the BOP market. The BOP camp estimates that the potential market at PPP terms is US$13 trillion. Karnani estimates a more modest US 1.2 trillion at PPP, and more like US$ 0.3 trillion at the financial exchange rate. That’s an order of magnitude difference there.

Furthermore, Karnani points out that the poor spend most of their income on food; the poor have little disposable income. Therefore, if their incomes don’t rise, they cannot afford to consume more than they actually do. If there are ways of making stuff more affordable to the poor, it is certainly not by selling stuff in smaller packages. Smaller packages in fact have a higher unit cost, not lower. Pretending that smaller packages increase affordability is similar to pretending that selling food in very small packets will solve the hunger and malnutrition problem of the poor. He concludes that the “single serving revolution is a dud.”

The paper takes Prahalad to task for giving examples which do not demonstrate that MNCs do, or even can, sell to the poor. The markets which the poor engage in don’t permit scale economies. Therefore the poor are better served by local small and medium enterprises, argues Karnani.

The poor, he says, are forced to make a different cost-quality tradeoff. They would rather have a more affordable but lower quality good than a higher quality good which is out of their reach. He says that the claim that MNCs can reduce their prices dramatically without sacrificing quality is unrealistic.

Rather brutally, Karnani declares that the “fallacy of the BOP proposition is exacerbated by its hubris”:

Prahalad (2004) states that all the examples used in his book challenge the current paradigm. Selling appliances on credit – as does Casas Bahia – is not even a nobel idea, let alone a new paradigm. But, Prahalad is not content with changing paradigms, and asks us to change “our genetic code”!

The Millennium Development Goals adopted by the UN member states targeted halving of extreme poverty in 25 years. Finding this pace too slow, Prahalad states “I have no doubt that the elimination of poverty and deprivation is possible by 2020.” But why be satisfied with only poverty eradication when so many other problems plague the world? Prahalad and Hammond (2002) argue that the BOP initiative will not only eradicate poverty, but also cure economic stagnation, deflation, governmental collapse, civil wars, and terrorism. And all this in 15 years!

While providing credit to the poor for purchasing high-priced items (Casas Bahia example) makes them worse off because of the burden of additional debt, Karnani agrees that microfinance is a good example of how the poor can be helped. But even there he is cautious and notes that most microfinance institutions are non-profit entities, and are not self-supported.

Karnani denies that the BOP claim that there is untapped purchasing power at the BOP. He says that the way to help is to raise the real income of the poor. The poor must be seen as producers, rather than as consumers. That is, buy from the poor instead of selling to them. He cites Amul and ITC e-Choupals as examples of more efficient markets–where the poor are the producers—that increase real incomes. And if you have to sell to the poor, then make available lower quality goods which can be priced lower so that the poor can have greater choice along the price-quality spectrum.

Is the BOP proposition a harmless illusion or a potentially dangerous delusion, he asks. He argues that the BOP initiative results in the poor spending money on products such as TVs and shampoo that would have been better spent on higher priority needs such as nutrition, education and health. “The problem is that the poor often make choices that are not in their own self interest.”

My position is that it is not only the poor but all people often make choices that are not in their interest. The only distinction is that the rich can afford to make poor choices, which the poor cannot. At least some of the stuff that I buy is not really useful, and often times is positively harmful. But I have much more than $2 a day, and can afford poor choices.

I agree with Karnani that you have to increase the real incomes of the poor by seeing them as producers. This I believe can be done by two ways. First, the “distribution” route: produce (possibly more) stuff, and give them a larger share. This lump-sum transfer will increase their real incomes. Second, the “production” method: help them produce more and also become more productive. The former is unlikely to appeal to the rich.

To do the latter, you have to make markets for the production of the poor more efficient so that they retain more of the value they produce. To make them capable of producing more, you have to educate them. There is where I believe the fortune at the bottom of the pyramid lies. Education has positive returns in today’s world. The return on investment in education is positive. That means, the cost of the education will be more than paid for by the subsequent increase in the real income. But the poor are credit-constrained. So the way to help the poor is to release that credit constraint through financing education. How to do that is a different kettle of fish which we will leave for a later date.

19 Comments »

  1. Atanu,

    I am so happy to see you write on this issue. I read both these books and am also following this co-creation logic that is being touted around (byt the same people you mention) off-late. Although the ideas are grand, I am sorry to say they lack real value for the “poor” in countries like India. If firms like Pfizer answer this call and market life-saving drugs at affordable prices to the poor, I would welcome it. However, what is happening in reality is Coke explots this fully and manages to sell non-ntritive sweetened soda water at exorbitant prices and convinces the porr to actually buy these drinks by employing the “not so bottom of the pyramid” celebrities as endorsers. Having listened to my wife’s rantings (she has taken classes from both P and K at Michigan and favors K to P), I am so convinced that BOP, co-creation etc, are all like you said for the galactically stupid group of managers who act on superficialities without looking at the reality.

    I found the book “End of Poverty” much more enlightening. I also read Dr. Sach’s column on Project Syndicate and found some of those ideas more workable. However, he does not propound theories encouraging capitalistic interventions for development of the poorest of poor.

    Comment by Girish Mallapragada — August 31, 2006 @ 5:03 pm

  2. Atanu, it is not clear that the return on education for the poor is positive.

    For this to be true there has to be a spectrum of opportunities for educated at all levels. This is just not true in a fledgling economy like India. A mere 12th grade education in India has a negative return after factoring in the opportunity costs.

    Your earlier point of investing in increasing efficiencies and reducing participation barriers in the markets in which the poor participate is spot on. There has to be a spectrum of opportunities for the poor to increase their incomes; it is then that they could invest in education.

    It is the entrepreneurs who are failing the poor; it is not the educators.

    Comment by seven_times_six — August 31, 2006 @ 7:23 pm

  3. As someone who is currently working on setting up the Base of the Pyramid Lab in India, and knowing most of the key actors in question, let me toss in my two paise worth. I agree with Karnani that for incomes to really increase, you have to focus on production, not consumption. However, I don\’t see why this has to preclude the poor from consumption either. In fact, most of the poor do consume and I don\’t think you\’re about to prevent them from doing so.

    Karnani\’s assumption that most of the BOP are at subsistence level is off-target as well. In fact, CKP, Hart, Hammond etc are all reasonably clear that they would rather address the needs of the class of people above those living at subsistence level (about a billion, by WB stats, are at subsistence level). In fact, all of the companies trying to enter this space are aiming for this approx 3 billion strong market at the mid level, that isn\’t quite lower middle income, but are certainly not subsistence level either.

    And if you think micro-finance encourages production, not consumption then clearly you don\’t have a clue about micro-finance either and have not spoken with a real practitioner in quite some time.

    I think Karnani (and you, Atanu) miss the central flaw in the BOP argument as CKP etc posit, namely that MNC\’s are the agents of change by selling into the BOP. Not so. In fact, MNC\’s are net negative job creators. Generally speaking, 80% plus of the jobs in an economy are created within the SME sector. So, if you really want to create dramatic growth, you have to get this sector going by removing the fundamental transaction costs that prevent this sector from flourishing currently. Now, MNC\’s could be the catalyst here by providing access to finance and knowledge capital (technoology, best practice etc) but I don\’t think they will be the main actors. Of course, if you get the SME sector going, you also directly address the issue of the BOP becoming producers rather than mere consumers. So, all of our attention at the BOP Lab India are focused on enterprise creation. So, Karnani\’s problem effectively seems to not be with the \”BOP camp\” but with C.K.Prahalad, which is understandable given that he\’s at Ross as well :)

    Girish, to your specific complaint about CKP, I ask you to sit on a lecture done by him personally rather than depend on second hand opinion. I disagree with CKP on several issues, but the man is an incredibly good teacher and he really does get you to think.

    And if you think Jeff Sachs has it figured out and the Millennium Villages are more doable, good luck. I can run some MV numbers past you (yes, I admit to having worked for Sachs as well) back channel, and you explain to me how it can be scaled up in a way that truly addresses the problem :)

    Comment by Reuben — August 31, 2006 @ 10:45 pm

  4. Karnani seems to question the entire biz model of Walmart and Google types. Even if $1.3 trillion market size is true, its to nothing to sneeze at. I also think small shampoo to small food packets is a false analogy simply because the utility of the two is different (one doesn’t need 250ml of shampoo to wash one’s hair everyday).

    As Reuben says, its not consumption vs production – its both because one can’t happen without the other. To me the larger message of Prahalad is that companies should look beyound the rich/high income city centers, and apparent luxury goods, to effectively compete with local giants or SMEs. Not all can do it, but that’s not the point. A few companies that do have that streamlined cost structure and right products will not only help themselves but the (until now) ignored consumers as well.

    Comment by Chandra — September 1, 2006 @ 12:19 am

  5. As a business person, responsible for marketing and selling high tech products, all this “BOP” thing, when I first saw the author CKP ~four years ago on a TV snippet, was really nothing new. It seemed to me that CKP took the proven business wisdom of how to create markets, the vagaries of pricing strategy and fitting the product innovation to create markets etc., and repackaged it as a solution to eradicate poverty. It is a good example of applying what you’ve seen working in one “field” and applying it to solve a bigger problem in another “field”. I like it.

    But I am puzzled when I see that it is being discussed and argued about as if it is an economic, public policy issue. Is it? I don’t think it is. My gut tells me that if it indeed becomes one, then as a government-enforced policy, it would not work.

    First of all, the BOP theme is a way of educating, counselling and showing to corporations, a profile of a segment of people hitherto ignored by corporations, and proposing them to craft a particular kind of products to tap into these people’s wallets. Like a good proposition, instead of saying “tap into these wallets,” it says “here’s how you solve one of their problem, and here’s how, when you solve it, you can profit.” To these business corporations, the BOP is a no-brainer, as a possible strategy. It is the same as bunch of product marketers at Apple going through the same motions while they designed and innovated iPod.

    Everything that CKP discusses under the BOP theme makes sense, and is already familiar to business people. But formulating a realistic strategy to this BOP theme, and executing it profitably is where the problem has always been, all along.

    The cost, quality and price tradeoffs discussed in the paper (oh by the way, the link in the post to Karnani’s paper points to nowhere from my browser: here it is.) take on a different manifestation within the four walls of corporations.

    Corporations, especially with consumer products, make decisions not at this abstract “cost,” “quality” and “price” level. Their decisions are based on, to cut a long story short, where the business unit is in the current quarter in regards to its revenue target, what’s the overhang in the supply, how many products are there in the product line, how painful it is to maintain a product in the line when all instincts are screaming at you to put an end-of-life to it, and a host of other factors. These decisions are made nearly on a day to day basis. They are really not interested in how many poor people are turning into producers. Real world runs on revenue.

    There is nothing new with “selling products cheaper to poor people” and no one said it is. Companies would love to be able to sell profitably into this market. The problem is, they cannot, in a sustainable manner.

    Let me illustrate with an example, from my own business-life. Whenever I see a company just lowering the price in order to expand and gain marketshare, my instinct tells me that stinks. It’s a short term thinking, creates a false expectation in the minds of the consumers that that quality is free or can be bought cheaper, and needlessly belittles the value of the product.

    Having said that, it is also true that if suddenly this Christmas you happen to see a 37-inch HDTV, that once sold for $2K for a known-brand, on the shelf now for $599 for a Taiwanese/a Chinese-brand (a “no name brand”) not only this Taiwanese company has increased its marketshare, but also made an erstwhile “luxury” item accessible to “poor”. The “poor” (or “low end” as we say in consumer electronics market) are where the high volumes exist. But these low price points are also where your (as a product company) demise happens, if you don’t innovate and build something for the next season in the $2K range.

    In these days, when Taiwanese/Chinese manufacturers are blowing everyone to bits (gosh, how did that consulting term crept it? Geez:-|) with $29 DVD players, why should not some BOP-adaptive company come in and start selling low priced goods?

    Quality? How long do you think a “low quality” shampoo will survive in the market? If one corporation has found a way to sell with low quality shampoo satchets, it won’t be long before someone else comes along and offers same price, better quality product, given we don’t mess around with competitive markets and let them thrive. Right? Preaching to the choir, I know.

    So, to argue pro or contra about pricing to poor, or about the packaging in small sachets, or about without the specifics of company’s goals is really arguing in vacuum. In other words, I guess what I am saying is, BOP cannot be applied as a policy, unless the entire government machinary adopts a corporate-like organizational structure.

    And here’s the bottomline. If CKP posited poor people as consumers, then it is perfectly consistent with the entire notion of BOP and who its audience is: poor people are consumers because they are to be offered as a viable market for corporations. There is really no use for CKP to emphasize poor people as producers under this BOP theme because such an emphasis would be of no use to corporations and other business, and for-profit enterprises.

    An interesting question is: would BOP-theme survive, would there be any takers in the private business world, if poor people are presented as producers? Who in the business world would benefit if I give you a scheme to turn poor people into producers? Who would care? Point to ponder.

    Regards,
    Crazyfinger

    Comment by Crazyfinger — September 1, 2006 @ 1:22 am

  6. Not having read CKP in great detail, I wonder if there is a hard definition of BOP for India or is it just a loose term beckoning MNC’s and others to “make it up in volume?” If it is a loose term and a broad concept, then nobody can question the wisdom of marketing beyond the top metros. I am not even sure it is a
    My theory on small packaging as it relates to BOP – while it is true that small packaging is more expensive on a unit basis – the American supermarkets even educate you on that with unit pricing – small packaging conditions one to consume less, big packages force you to consume more or more often. Even open a big bag of potato chips? You eat chips as often as you can so that the darn thing is finished before it goes stale. Secondly, small packaging ties up less money. Open the kitchen cabinets in an American home and you will see almost $1,000 worth of inventory. The poor can’t tie up their meager resources in stocking products they won’t use for weeks to come.

    Comment by Sarat — September 1, 2006 @ 2:03 am

  7. Reuben write above, “And if you think micro-finance encourages production, not consumption then clearly you don\’t have a clue about micro-finance either and have not spoken with a real practitioner in quite some time.”

    If that ‘you’ is not a generic ‘you’ and refers to me, then I have to point out that I have not claimed that “microfinance encourages production” or that it does not encourage consumption. My views on microfinance will not endear me to the Grameen people. BTW, I have never met a real microfinance practitioner and I suspect that if I do, I will probably not like him/her.

    Comment by Atanu Dey — September 1, 2006 @ 10:28 am

  8. Isn’t microfinance at the BOP level just a way to legitimize the loansharking business and eliminate usury? Indian villages have had the violent moneylenders for centuries. Or to judge microfinance more academicallly, isn’t microfinance an equivalent of the credit card for the poor? Credit cards in the west are not only the preferred way to squander your money on travel and dining out. It is how people buy consumer durables, start businesses and basically fuel the economic engine. Hopefully, microfinance will serve the same function in India.

    As for the old style microfinance, I distinctly remember my childhood in the “old quarters” of a midsize Indian city. Across the patch of earth we called our cricket field, there were lots of “jhuggis,” which were visit routinely by pathans. These big, burly guys from Afghanistan were the loansharks – uhmmm, the moneylanders – in my town and they made their weekly rounds of the jhuggis to collect the interest, a chore that frequently required the use of sticks and beating poor men in front of their wives and children. I am told that this is still the state of the art as far as microfinance goes in India’s villages and slums. So what’s wrong with the Grameen Bank concept?

    Comment by Sarat — September 1, 2006 @ 7:09 pm

  9. Reuben,

    Your comment on my opinion about CKP is valid. I have heard he is an excellent teacher, but that does not affect my opinion that many of his ideas are not novel per se, but are old ones recast with “catchy tag lines”. (e.g., the RBV argument by Birger Wernerfelt and CKP’s core competency work). I might be wrong in my evaluation, but is true is CKP is extremely savvy in creating these “managerial” material.

    Coming to Sachs, I might not have the first hand experience that you have. However, in ideology I still feel what CKP and others propose in their BOP argument is prone more to being exploited in the name of marketing to the poor than the MDP.

    Comment by Girish Mallapragada — September 2, 2006 @ 2:07 am

  10. Mmm…going back to basics, doesn’t the argument depend on two critical factors: the goods in question and the price elasticity of demand?

    Comment by Nitin — September 2, 2006 @ 1:06 pm

  11. In the whole thread of discussion nobody considered
    “effect of mass prodiction”
    For example Computers. I agree that the thousand fold price decrease and million times more powerful computers were because of Technological advancement BUT someone had to invest HUGE amount of money in first place. If the computer market would have been 10 or 20 computers per year ( as predicted by some IBM manager for year 1985 ) there would have been no research in computers.
    This is like chicken and egg situation. Difficult to tell which came first. mass market or huge investement.
    But I think any product when mass produced for 1 billion more consumers will have significantly lower prices. And that could free up resource of the poor for
    other (hopefully) better things. e.g. If every family from Great Indian Middle Class decides to buy a washing machine (which should be around 200 million I think ) prices could be slashed to 20 to 40 % of the original price. Now having washing machine can free up 1+ hours a day for each family now this time IFF utilized can provide a boost to entire economy. now here I make my assumptions clear.
    * there is potential market of 200 millin washing m/c in india
    * The time freed could be of a student doing his studies or of a engineer doing work or (civil engg starting salary are about 4K. so they come in almost bottom ) or that of any working women.

    So if we see big picture the ending could be really happy if all decide to buy (useful ) stuff.
    So it turns out to be matter of efficiency boost that poor can get throug consumption of Value Adding commodities. And list of such things can be stretched from roti maker , microwave , washing m/c , hair dryer (yes that can save 5 mins a day ) , a moped (hands down), why stop here ? why not a tractor for farmers ?
    And now talking about lone sharks. Its very wrongful to picture ALL of them in black. and the lone shark rates are 4-15 % pm depending upon the RISK factor not just because they like to suck you dry.

    Please correct me if I am wrong somewhere .

    Comment by ajeet ganga — September 3, 2006 @ 12:39 am

  12. I went back and read both what I wrote and Reuben’s response (“…the central flaw in the BOP argument as CKP etc posit, namely that MNC’s are the agents of change by selling into the BOP. Not so. In fact, MNC’s are net negative job creators. Generally speaking, 80% plus of the jobs in an economy are created within the SME sector. So, if you really want to create dramatic growth, you have to get this sector going”: I don’t have to quote those awkward slashes now, do I?:-) )

    I agree with the “if you really want to create dramatic growth, you have to get this sector going” part.

    However, reading the Chap 4 of the BOP book (CKP’s), it seems to me that CKP also agrees with it, but goes on to say the following:

    However, traditionally, the focus of both business and social developmental initiatives at the BOP has been on one aspect of the ecosystems for wealth creating at a time – social capital or individual entrepreneurs (the focus of so much of the microfinance efforts), small and medium enterprises (SMEs), or large firms (market liberalization or foreign direct investment). There have been few attempts to focus on the symbiotic nature of the relationships between various private sector and social institutional players that can lead to a rapid development of markets at the BOP.” (first paragraph)

    May be I was nitpicking, or missing the devil in the details in my earlier comment, but now it seems to me that CKP’s BOP theme is not simply to view “poor people” as consumers but going beyond that and saying such and such an ecosystem is needed in order to make the poor people producers and entrepreneurs and “oh by the way Mr. MNC, you need to work with these poor people to put this ecosystem in place; it won’t happen if you don’t pitch in; and the reward for you is they can be a market you can tap into.”

    Right or wrong? I think right:-) In fact now it seems to me that it was Karnani who was nitpicking, by looking only at a partial picture of the entire BOP message. ?? I don’t think CKP was saying so strongly that poor people should be treated as consumers only. He too was saying they are to be treated as producers and would-be entrepreneurs.

    P.S. In fact I may even go on to say that put it this way, BOP and RISC have similar parallels, skinning the cat in similar ways. Comments?

    Regards,
    Crazyfinger

    Comment by Crazyfinger — September 3, 2006 @ 2:38 am

  13. It is important to also note the time-variant component of the Bottom of the Pyramid.

    There is an enormous, emergent middle-class in India and China that was not present 20 years ago, and going forward, this part of the bottom of the pyramid will likely surge in numbers and, therefore, market size. About 10 million Indians are getting out of poverty and into the middle class every year. The purchasing power of the Chinese is also increasing very rapidly. I don’t this number is going to approach the size of the American market any time soon, but at least, companies will see huge *increases* in market size. So, whether you believe in the 15 years estimate or not depends on your own analysis of the growth of these markets. In some ways, the BOP principle is an idea whose time has come.

    My own suspicion is that some level of governmental help might be needed to allow SMEs to grow. At least in the area of finance, it is clear that governmental restrictions on MNCs has helped credit to be available to segments of the population that would not have such access otherwise.

    Comment by Doodad — September 5, 2006 @ 6:37 am

  14. I went through the Aneel Karnani paper. For one thing, I did not see satisfactory data to back up the claims. That makes for a pretty shoddy take down. For another, the piece seems to be “personal” for no particular reason, and I am not surprised that people are seeing that as such. Perhaps, it should be seen as a call to clear up some of the numbers and arguments in the BOP book. I think the sarcasm is, however, uncalled for.

    However, the fact is that the penetration of Annapurna salt among the poor is miniscule at best
    How miniscule? Or to put it differently, “how many millions served”?

    At a price premium of 250%, not too many poor people see it as a bargain
    Is this a question of education or economics? Given that salt is a miniscule fraction of the food budget, Annapurna salt might be the right way to go. If the poor are not lapping it up, it might be because they don’t know. But innovation is innovation. It might be something tha might pay off in the longer term.

    “Amul, a large diary cooperative, found an instant market …We doubt too many poor people living on less than $2 per day find this ice cream a bargain.
    “Too many”? Hold the sarcasm please. And again, “how many millions served”? Let us see some freaking numbers. How many unique customers? How many estimated customers among the poor?

    Comment by Doodad — September 5, 2006 @ 8:05 am

  15. The Very definition of BoP is false and senseless. How can a person with $2 a day or $50 a month think in his wildest dream to afford high price tehnologies or leisure items. All thanks to CKP for atleast having initiated the dialogue about BoP. To my understanding of BoP consumers (Rural & Urban Slums) the term BoP should be redined from an individual BoP person to a BoP family. This gives us a good sense of relaxation of seeking fortune@BoP. One can easily take 4-5 working members staying in one roof with a monthly income of $250. This gives the family enough purchansing power to buy MeeToo products available at competitive rates or with the help of microfinance.
    There is a way out to tap these families and this market will always be available to MNC’s who strategically position themselves geographically & demographically in relation to their product offering.

    Comment by Atul Mittal — September 11, 2006 @ 7:11 pm

  16. I think I know why Indians are poor. They pay the highest prices for the lowest quality goods compared to the West. If one objectively looks at the prices for modern goods like cars, tvs, phones, refrigerators, internet access, computers, electricity, petrol, clean water, clean air etc. International living standards cost international money. Hence the lowest standard of living in the world. All this because of illiteracy and inefficient working practices. Also, Indians in general are very socialistic. What they do not understand, is that if all policies are pro-poor, more poor will be created.

    Comment by Aam Aadmi — October 2, 2006 @ 5:36 am

  17. True. That clock is ticking, all right.

    And it seems ever-closer.

    Comment by MikeZ — October 23, 2006 @ 9:13 pm

  18. Aam Admi,i agree with u 100%.
    But i couldn’t download the Aneel karnani paper.

    Comment by charu — November 24, 2006 @ 1:55 am

  19. I do not agree with Karnani for his outright rejection of CKP’s BOP theory. When he says that there is “no fortune” at the BOP he laments the problems of weak infrastructures etc. But at no point CKP mentions that the infrastructure is any good. rather it is CKP who gives instances where unique distribution channels are developed.

    The HLL (now HUL) project “Shakti Amma” is a shining example of BOP innovation. Through no argument in his article can Karnani refute this movement’s success.
    It is an example of woman empowerment, of developing local distributors, of developing skills, of tuning the market according to local needs. It is this concept that is building self reliance in the Indian villages. CKP is talking about a saving-consuming-earning cycle as the process to fight poverty. He emphasizes all these equally and says that “…create capacity to consume for themselves and their families.”

    Karnani says the “single serve revolution is a dud”. But that’s the only way the poor can buy a product of higher quality. If the Single serve package is not available the poor might never be anywhere in the vicinity of buying a better product.

    CKP does mention that rather than charging a premium for the smaller packs (as is generally the case) the company charges the same price as that of larger price. This clearly shows that even if per unit cost might be high the company isn’t charging a higher premium for the smaller unit.

    The problem of lower penetration of the iodized salt lies not only in the price premium but also in the lack of education of the people. The HLL’s campaign of selling health through its soap brand lifebuoy met with success. This was done by spreading awareness by educating people against diseases like cholera. I believe this education for the iodized salt will encourage the poor to buy the salt which is crucial for their life.

    Further, the fact that Unilever replicated the iodized salt in other markets of Africa with similar problems suggests that the solution generated in one place CAN be replicated in other countries’ BOP.

    When Karnani mentions about the “Aravind eye hospital”, he must remember he is talking about a country like India. About the BOP market he says “The poor are often geographically dispersed (except for the urban poor concentrated into slums) and culturally heterogeneous. This dispersion increases distribution and marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases the cost of doing business. Another factor leading to high costs is the small size of each transaction.” He gave this reasoning to point out that there is no fortune at BOP. I believe it is Karnani who is undermining the efforts. Aravind eye hospital is not only an efficient organization rather it is an organization that has achieved efficiency and cost benefit through innovative processes where Karnani feel have no chance of fortune.

    Completely rejecting the BOP does not fit well the success stories of several organizations. Karnani should talk about the empowerment due to e-Governance. He cannot ignore the telecom revolution that has swept India. Even the giants like Vodafone are entering the Indian market with the hope of huge growth. Innovation is driving the costs down. A brand new handset with some other cost benefits is now available for as low as Rs.800(about $5).Even this amount can be given in interest free installment. The companies ARE targeting the BOP.

    I agree with Karnani when he concludes “Certainly the best way for private firms to help eradicate poverty is to invest in upgrading the skills and productivity of the poor, and to help create more employment opportunities for them. This is the win-win solution; this is the real fortune at the bottom of the pyramid.” However CKP ‘s 12 principles of innovation for BOP already mention the above argument quite emphatically. I guess stating Fortune at the BOP as a mirage is a great fallacy!!

    Comment by Gaurav Hazrati — July 31, 2007 @ 11:43 pm

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