strategy+business

The Fortune at the Bottom of the Pyramid

by C.K. Prahalad and Stuart L. Hart

from strategy+business issue 26, first quarter 2002

© 2002 Booz Allen Hamilton Inc. All rights reserved. e-Doc

 The Fortune
SECURITY
AND
S T R AT E GY

Bottomat the

of the

Pyramid

content strategy & competition

by C.K. Prahalad and Stuart L. Hart

Low-income markets present a prodigious

opportunity for the world’s wealthiest
companies — to seek their fortunes and
bring prosperity to the aspiring poor.

With the end of the Cold War, the former Soviet attacks in the United States last September.
Union and its allies, as well as China, India, and Latin The lackluster nature of most MNCs’ emerging-
America, opened their closed markets to foreign invest- market strategies over the past decade does not change
ment in a cascading fashion. Although this significant the magnitude of the opportunity, which is in reality
economic and social transformation has offered vast new much larger than previously thought. The real source of
growth opportunities for multinational corporations market promise is not the wealthy few in the developing
(MNCs), its promise has yet to be realized. world, or even the emerging middle-income consumers:
First, the prospect of millions of “middle-class” con- It is the billions of aspiring poor who are joining the
Illustration by Marco Ventura

sumers in developing countries, clamoring for products market economy for the first time.
from MNCs, was wildly oversold. To make matters This is a time for MNCs to look at globalization
worse, the Asian and Latin American financial crises strategies through a new lens of inclusive capitalism. For
have greatly diminished the attractiveness of emerging companies with the resources and persistence to com-
markets. As a consequence, many MNCs worldwide pete at the bottom of the world economic pyramid, the
slowed investments and began to rethink risk–reward prospective rewards include growth, profits, and incal-
structures for these markets. This retreat could become culable contributions to humankind. Countries that still
even more pronounced in the wake of the terrorist don’t have the modern infrastructure or products to
 C.K. Prahalad Stuart L. Hart
([email protected]) is the ([email protected]) is professor
Harvey C. Fruehauf Professor of strategic management,
of Business Administration at Sarah Graham Kenan
the University of Michigan Distinguished Scholar, and
Business School, Ann Arbor. codirector of the Center for
He is also the founder and Sustainable Enterprise at the
chairman of Praja Inc., a University of North Carolina’s
pioneer company in interactive Kenan–Flagler Business
event experiences, based in School.
San Diego, Calif.

meet basic human needs are an ideal testing ground for the rising middle classes in developing countries, the tar-
developing environmentally sustainable technologies gets of MNCs’ past emerging-market strategies.
content strategy & competition

and products for the entire world. Now consider the 4 billion people in Tier 4, at the
Furthermore, MNC investment at “the bottom of bottom of the pyramid. Their annual per capita income
the pyramid” means lifting billions of people out of — based on purchasing power parity in U.S. dollars —
poverty and desperation, averting the social decay, polit- is less than $1,500, the minimum considered necessary
ical chaos, terrorism, and environmental meltdown that to sustain a decent life. For well over a billion people —
is certain to continue if the gap between rich and poor roughly one-sixth of humanity — per capita income is
countries continues to widen. less than $1 per day.
Doing business with the world’s 4 billion poorest Even more significant, the income gap between rich
people — two-thirds of the world’s population — will and poor is growing. According to the United Nations,
require radical innovations in technology and business the richest 20 percent in the world accounted for about
models. It will require MNCs to reevaluate price– 70 percent of total income in 1960. In 2000, that figure
performance relationships for products and services. It reached 85 percent. Over the same period, the fraction
will demand a new level of capital efficiency and new of income accruing to the poorest 20 percent in the
ways of measuring financial success. Companies will be world fell from 2.3 percent to 1.1 percent.
forced to transform their understanding of scale, from a This extreme inequity of wealth distribution rein-
2
“bigger is better” ideal to an ideal of highly distributed forces the view that the poor cannot participate in the
small-scale operations married to world-scale capabilities. global market economy, even though they constitute the
In short, the poorest populations raise a prodigious majority of the population. In fact, given its vast size,
new managerial challenge for the world’s wealthiest Tier 4 represents a multitrillion-dollar market.
companies: selling to the poor and helping them According to World Bank projections, the population at
improve their lives by producing and distributing prod- the bottom of the pyramid could swell to more than 6
ucts and services in culturally sensitive, environmentally billion people over the next 40 years, because the bulk of
sustainable, and economically profitable ways. the world’s population growth occurs there.
The perception that the bottom of the pyramid is
Four Consumer Tiers not a viable market also fails to take into account the
At the very top of the world economic pyramid are 75 growing importance of the informal economy among
to 100 million affluent Tier 1 consumers from around the poorest of the poor, which by some estimates
strategy + business issue 26

the world. (See Exhibit 1.) This is a cosmopolitan group accounts for 40 to 60 percent of all economic activity in
composed of middle- and upper-income people in developing countries. Most Tier 4 people live in rural
developed countries and the few rich elites from the villages, or urban slums and shantytowns, and they usu-
developing world. In the middle of the pyramid, in Tiers ally do not hold legal title or deed to their assets (e.g.,
2 and 3, are poor customers in developed nations and dwellings, farms, businesses). They have little or no for-
strategy + business issue 26
Exhibit 1: The World Economic Pyramid

Annual Per Capita Income* Tiers Population in Millions

More Than $20,000 75–100

1

$1,500–$20,000 2&3 1,500–1,750

Less Than $1,500 4 4,000

* Based on purchasing power parity in U.S.$

Source: U.N. World Development Reports

mal education and are hard to reach via conventional Institute for Policy Studies. So it is not surprising that
distribution, credit, and communications. The quality MNCs’ views of business are conditioned by their
and quantity of products and services available in Tier 4 knowledge of and familiarity with Tier 1 consumers.
is generally low. Therefore, much like an iceberg with Perception of market opportunity is a function of the

content strategy & competition

only its tip in plain view, this massive segment of the way many managers are socialized to think and the ana-
global population — along with its massive market lytical tools they use. Most MNCs automatically dismiss
opportunities — has remained largely invisible to the the bottom of the pyramid because they judge the mar-
corporate sector. ket based on income or selections of products and serv-
Fortunately, the Tier 4 market is wide open for ices appropriate for developed countries.
technological innovation. Among the many possibilities To appreciate the market potential of Tier 4, MNCs
for innovation, MNCs can be leaders in leapfrogging to must come to terms with a set of core assumptions and
products that don’t repeat the environmental mistakes of practices that influence their view of developing coun-
developed countries over the last 50 years. Today’s tries. We have identified the following as widely shared
MNCs evolved in an era of abundant natural resources orthodoxies that must be reexamined:
and thus tended to make products and services that were • Assumption #1 The poor are not our target con-
resource-intensive and excessively polluting. The United sumers because with our current cost structures, we can-
States’ 270 million people — only about 4 percent of not profitably compete for that market.
the world’s population — consume more than 25 per- • Assumption #2 The poor cannot afford and have
cent of the planet’s energy resources. To re-create those no use for the products and services sold in developed
4
types of consumption patterns in developing countries markets.
would be disastrous. • Assumption #3 Only developed markets appreci-
We have seen how the disenfranchised in Tier 4 can ate and will pay for new technology. The poor can use
disrupt the way of life and safety of the rich in Tier 1 — the previous generation of technology.
poverty breeds discontent and extremism. Although • Assumption #4 The bottom of the pyramid is
complete income equality is an ideological pipe dream, not important to the long-term viability of our business.
the use of commercial development to bring people out We can leave Tier 4 to governments and nonprofits.
of poverty and give them the chance for a better life is • Assumption #5 Managers are not excited by
critical to the stability and health of the global economy business challenges that have a humanitarian dimension.
and the continued success of Western MNCs. • Assumption #6 Intellectual excitement is in
developed markets. It is hard to find talented managers
The Invisible Opportunity who want to work at the bottom of the pyramid.
Among the top 200 MNCs in the world, the over- Each of these key assumptions obscures the value at
whelming majority are based in developed countries. the bottom of the pyramid. It is like the story of the per-
U.S. corporations dominate, with 82; Japanese firms, son who finds a $20 bill on the sidewalk. Conventional
with 41, are second, according to a list compiled in economic wisdom suggests if the bill really existed,
December 2000 by the Washington, D.C.–based someone would already have picked it up! Like the $20
 Exhibit 2: Innovation and MNC Implications in Tier 4

Drivers of Innovation Implications for MNCs

Increased access among the poor to TV and information Tier 4 is becoming aware of many products and services
and is aspiring to share the benefits

Deregulation and the diminishing role of governments More hospitable investment climate for MNCs entering
and international aid developing countries and more cooperation from
nongovernmental organizations

Global overcapacity combined with intense competition Tier 4 represents a huge untapped market for profitable
in Tiers 1, 2, and 3 growth

The need to discourage migration to overcrowded urban centers MNCs must create products and services for rural populations

bill, the bottom of the pyramid defies conventional HLL’s new detergent, called Wheel, was formulated
managerial logic, but that doesn’t mean it isn’t a large to substantially reduce the ratio of oil to water in the
content strategy & competition

and unexplored territory for profitable growth. product, responding to the fact that the poor often wash
Consider the drivers of innovation and opportunities for their clothes in rivers and other public water systems.
companies in Tier 4. (See Exhibit 2.) MNCs must rec- HLL decentralized the production, marketing, and dis-
ognize that this market poses a major new challenge: tribution of the product to leverage the abundant labor
how to combine low cost, good quality, sustainability, pool in rural India, quickly creating sales channels
and profitability. through the thousands of small outlets where people at
Furthermore, MNCs cannot exploit these new the bottom of the pyramid shop. HLL also changed the
opportunities without radically rethinking how they go cost structure of its detergent business so it could intro-
to market. Exhibit 3 suggests some (but by no means all) duce Wheel at a low price point.
areas where an entirely new perspective is required to Today, Nirma and HLL are close competitors in the
create profitable markets in Tier 4. detergent market, with 38 percent market share each,
according to IndiaInfoline.com, a business intelligence
Tier 4 Pioneers and market research service. Unilever’s own analysis of
Hindustan Lever Ltd. (HLL), a subsidiary of Great Nirma and HLL’s competition in the detergent business
Britain’s Unilever PLC and widely considered the best- reveals even more about the profit potential of the mar-
5
managed company in India, has been a pioneer among ketplace at the bottom of the pyramid. (See Exhibit 4.)
MNCs exploring markets at the bottom of the pyramid. Contrary to popular assumptions, the poor can be a
For more than 50 years, HLL has served India’s small very profitable market — especially if MNCs change
elite who could afford to buy MNC products. In the their business models. Specifically, Tier 4 is not a market
1990s, a local firm, Nirma Ltd., began offering deter- that allows for the traditional pursuit of high margins;
gent products for poor consumers, mostly in rural areas. instead, profits are driven by volume and capital effi-
In fact, Nirma created a new business system that ciency. Margins are likely to be low (by current norms),
included a new product formulation, low-cost manufac- but unit sales can be extremely high. Managers who
turing process, wide distribution network, special pack- focus on gross margins will miss the opportunity at the
aging for daily purchasing, and value pricing. bottom of the pyramid; managers who innovate and
HLL, in typical MNC fashion, initially dismissed focus on economic profit will be rewarded.
Nirma’s strategy. However, as Nirma grew rapidly, HLL Nirma has become one of the largest branded deter-
strategy + business issue 26

could see its local competitor was winning in a market it gent makers in the world. Meanwhile, HLL, stimulated
had disregarded. Ultimately, HLL saw its vulnerability by its emergent rival and its changed business model,
and its opportunity: In 1995, the company responded registered a 20 percent growth in revenues per year and
with its own offering for this market, drastically altering a 25 percent growth in profits per year between 1995
its traditional business model. and 2000. Over the same period, HLL’s market capital-
ization grew to $12 billion — a growth rate of 40 per- cial — providing access to credit, and increasing the
cent per year. HLL’s parent company, Unilever, also has earning potential of the poor. A few farsighted compa-
benefited from its subsidiary’s experience in India. nies have already begun to blaze this trail with startling-
Unilever transported HLL’s business principles (not the ly positive results.
product or the brand) to create a new detergent market Commercial credit historically has been unavailable
among the poor in Brazil, where the Ala brand has been to the very poor. Even if those living in poverty had
a big success. More important, Unilever has adopted the access to a bank, without collateral it is hard to get cred-
bottom of the pyramid as a corporate strategic priority. it from the traditional banking system. As Peruvian
As the Unilever example makes clear, the starting economist Hernando de Soto demonstrates in his path-
assumption must be that serving Tier 4 involves bring- breaking work, The Mystery of Capital: Why Capitalism
ing together the best of technology and a global resource Triumphs in the West and Fails Everywhere Else, commer-
base to address local market conditions. Cheap and low- cial credit is central to building a market economy.
quality products are not the goal. The potential of Tier Access to credit in the U.S. has allowed people of mod-
4 cannot be realized without an entrepreneurial orienta- est means to systematically build their equity and make
tion: The real strategic challenge for managers is to visu- major purchases, such as houses, cars, and education.
alize an active market where only abject poverty exists The vast majority of the poor in developing coun-
today. It takes tremendous imagination and creativity to tries operate in the “informal” or extralegal economy,

content strategy & competition

engineer a market infrastructure out of a completely since the time and cost involved in securing legal title for
unorganized sector. their assets or incorporation of their microenterprises is
Serving Tier 4 markets is not the same as serving prohibitive. Developing countries have tried govern-
existing markets better or more efficiently. Managers mental subsidies to free the poor from the cycle of
first must develop a commercial infrastructure tailored poverty, with little success. Even if the poor were able to
to the needs and challenges of Tier 4. Creating such an benefit from government support to start small busi-
infrastructure must be seen as an investment, much like nesses, their dependence on credit from local money-
the more familiar investments in plants, processes, prod- lenders charging usurious rates makes it impossible to
ucts, and R&D. succeed. Local moneylenders in Mumbai, India, charge
Further, contrary to more conventional investment interest rates of up to 20 percent per day. This means
strategies, no firm can do this alone. Multiple players that a vegetable vendor who borrows Rs.100 ($2.08) in
must be involved, including local governmental author- the morning must return Rs.120 ($2.50) in the evening.
ities, nongovernmental organizations (NGOs), commu- Extending credit to the poor so they can elevate
nities, financial institutions, and other companies. Four themselves economically is not a new idea. Consider
elements — creating buying power, shaping aspirations, how I.M. Singer & Company, founded in 1851, pro-
6
improving access, and tailoring local solutions — are the vided credit as a way for millions of women to purchase
keys to a thriving Tier 4 market. (See Exhibit 5.) sewing machines. Very few of those women could have
Each of these four elements demands innovation in
technology, business models, and management process- Exhibit 3:
es. And business leaders must be willing to experiment, New Strategies for the Bottom of the Pyramid
collaborate, empower locals, and create new sources of
competitive advantage and wealth. Price Performance Views of Quality

• Product development • New delivery formats

Creating Buying Power • Manufacturing • Creation of robust products
According to the International Labor Organization’s • Distribution for harsh conditions
(heat, dust, etc.)
World Employment Report 2001, nearly a billion people
— roughly one-third of the world’s work force — are Sustainability Profitability
either underemployed or have such low-paying jobs that
they cannot support themselves or their families. • Reduction in resource • Investment intensity
intensity • Margins
Helping the world’s poor elevate themselves above this
• Recyclability • Volume
desperation line is a business opportunity to do well and • Renewable energy
do good. To do so effectively, two interventions are cru-
 afforded the steep $100 price tag, but most could afford easy to assess. Historically, the bank was an entirely
a payment of $5 per month. manual, field-based operation, a structure that undercut
The same logic applies on a much larger scale in its efficiency. Today, spin-offs such as Grameen Telecom
Tier 4. Consider the experience of the Grameen Bank (a provider of village phone service) and Grameen Shakti
Ltd. in Bangladesh, one of the first in the world to apply (a developer of renewable energy sources) are helping
a microlending model in commercial banking. Started Grameen Bank build a technology infrastructure to
just over 20 years ago by Muhammad Yunus, then a pro- automate its processes. As the bank develops its online
fessor in the Economics Department at Chittagong business model, profitability should increase dramatical-
University, Bangladesh, Grameen Bank pioneered a ly, highlighting the importance of information technol-
lending service for the poor that has inspired thousands ogy in the acceleration of the microcredit revolution.
of microlenders, serving 25 million clients worldwide, in Perhaps the most pertinent measure of Grameen
developing countries and wealthy nations, including the Bank’s success is the global explosion of institutional
United States and Great Britain. interest in microlending it has stimulated around the
Grameen Bank’s program is designed to addresses world. In South Africa, where 73 percent of the popula-
the problems of extending credit to lowest-income cus- tion earns less than R5,000 ($460) per month, accord-
tomers — lack of collateral, high credit risk, and con- ing to a 2001 World Bank study, retail banking services
tractual enforcement. Ninety-five percent of its 2.3 for low-income customers are becoming one of the most
content strategy & competition

million customers are women, who, as the traditional competitive and fast-growing mass markets. In 1994,
breadwinners and entrepreneurs in rural communities, Standard Bank of South Africa Ltd., Africa’s leading
are better credit risks than men. Candidates for loans consumer bank, launched a low-cost, volume-driven
must have their proposals thoroughly evaluated and sup- e-banking business, called AutoBank E, to grow revenue
ported by five nonfamily members of the community. by providing banking services to the poor. Through the
The bank’s sales and service people visit the villages fre- use of 2,500 automated teller machines (ATMs) and 98
quently, getting to know the women who have loans and AutoBank E-centres, Standard now has the largest
the projects in which they are supposed to invest. In this presence in South Africa’s townships and other under-
way, lending due diligence is accomplished without the serviced areas of any domestic bank. As of April 2001,
mountain of paperwork and arcane language common Standard served nearly 3 million low-income customers
in the West. and is adding roughly 60,000 customers per month,
With 1,170 branches, Grameen Bank today pro- according to South Africa’s Sunday Times.
vides microcredit services in more than 40,000 villages, Standard does not require a minimum income of
more than half the total number in Bangladesh. As of customers opening an AutoBank E account, although
1996, Grameen Bank had achieved a 95 percent repay- they must have some regular income. People who have
7
ment rate, higher than any other bank in the Indian never used a bank can open an account with a deposit of
subcontinent. However, the popularity of its services has as little as $8. Customers are issued an ATM card and
also spawned more local competitors, which has cut into shown how to use it by staff who speak a variety of
its portfolio and shrunk its profits over the past few years. African dialects. A small flat fee is charged for each ATM
In addition, Grameen Bank’s rate of return is not transaction. An interest-bearing “savings purse” is
attached to every account to
Exhibit 4: Nirma vs. HLL in India’s Detergent Market (1999) encourage poor customers to save.
Interest rates on deposits are low,
Nirma HLL (Wheel) HLL (High-End Products) but superior to keeping cash in
a jar. The Sunday Times also
Total Sales ($ Million) 150 100 180
reported that Standard Bank is
considering a loan program for
strategy + business issue 26

Gross Margin (%) 18 18 25

low-income clients.
Computerization of micro-
ROCE (%) 121 93 22
lending services not only makes
the overall operation more effi-
Source: Presentation by John Ripley, senior vice president, Unilever,
at the Academy of Management Meeting, August 10, 1999 cient, but also makes it possible to
Exhibit 5: like Citigroup. This would greatly expand the capital
The Commercial Infrastructure at the Bottom of available for microlending beyond the current pool from
the Pyramid donors and governments.
In the United States, microlending has also taken
Creating Buying root over the past decade in poor urban neighborhoods.
Power For example, the ShoreBank Corporation, formerly
• Access to credit
• Income generation
South Shore Bank, has demonstrated the profitability of
banking for the poor in Chicago’s troubled South Side.
Project Enterprise, a Grameen-like program based in
New York City, is aimed at minority entrepreneurs.
Improving Access Shaping Aspirations
• Distribution systems • Consumer education Several multinational banks are beginning to offer
• Communications • Sustainable microbanking services in developing countries.
links development
Citigroup, for instance, is experimenting in Bangalore,
India, with 24/7 services for customers with as little as a
Tailoring Local $25 on deposit. Initial results are very positive.
Solutions
• Targeted product
development Shaping Aspirations

content strategy & competition

• Bottom-up
Sustainable product innovations initiated in Tier 4, and
innovation
promoted through consumer education, will not only
positively influence the choices of people at the bottom
reach many more people — lending money to individ- of the pyramid, but may ultimately reshape the way
uals with no collateral and no formal address. Since Americans and others in Tier 1 live. Indeed, in 20 years,
there is lower overhead and little paperwork, AutoBank’s we may look back to see that Tier 4 provided the early
costs are 30 to 40 percent lower than those at tradition- market pull for disruptive technologies that replaced
al branches. unsustainable technologies in developed countries and
At the 1999 Microcredit Summit, the United advanced the fortunes of MNCs with foresight.
Nations, in conjunction with several major MNCs, such For example, Unilever’s HLL subsidiary has tackled
as Citigroup Inc. and Monsanto Company, set a goal of the lack of practical, inexpensive, low-energy-consum-
making basic credit available to the 100 million poorest ing refrigeration in India. HLL’s laboratories developed
families in the world by the year 2005. Unfortunately, a radically different approach to refrigeration that allows
the success of this undertaking has been slowed by ice cream to be transported across the country in stan-
high transaction costs, a lack of automation, and poor dard nonrefrigerated trucks. The system allows quantum
8
information and communications infrastructures in reductions in electricity use and makes dangerous and
rural areas. polluting refrigerants unnecessary. As a bonus, the new
To address these issues and accelerate the develop- system is cheaper to build and use.
ment of microlending, French banker Jacques Attali, the Electricity, water, refrigeration, and many other
founding president of the European Bank for essential services are all opportunities in developing
Reconstruction and Development and a former chief countries. A U.S.-based NGO, the Solar Electric Light
aide of French President François Mitterand during the Fund (SELF), has creatively adapted technology and
1980s, has created PlaNet Finance. Its Web site, applied microcredit financing to bring electrical service
www.planetfinance.org, links thousands of microcredit to people in remote villages in Africa and Asia who
groups worldwide into a network to help microbanks otherwise would spend money to burn hazardous
share solutions and lower costs. kerosene, candles, wood, or dung for their light and
Ultimately, the development of an automated solu- cooking. SELF’s rural electrification system is based on
tion for tracking and processing the millions of small small-scale on-site power generation using renewable
loans associated with microlending should be possible. If resources. A revolving loan fund gives villagers the finan-
processing and transaction costs can be reduced enough, cial means to operate these electrical systems themselves,
they can then be bundled together and sold in the sec- also creating jobs. Since its founding in 1990, SELF has
ondary market to multinational financial institutions launched projects in China, India, Sri Lanka, Nepal,
 Bringing modern IT equipment to Tier 4
villages makes possible such applications as
tele-education, telemedicine, microbanking,
and agricultural extension services.

Vietnam, Indonesia, Brazil, Uganda, Tanzania, South jeans components (denim, zipper, rivets, and a patch)
Africa, and the Solomon Islands. priced at about $6. Kits were distributed through a net-
content strategy & competition

The success of SELF and other NGOs focused on work of thousands of local tailors, many in small rural
small-scale distributed energy solutions has begun to towns and villages, whose self-interest motivated them
attract the attention of Western companies such as the to market the kits extensively. Ruf & Tuf jeans are now
U.S.’s Plug Power Inc. (fuel cells) and Honeywell Inc. the largest-selling jeans in India, easily surpassing Levi’s
(microturbines). They see the logic in moving into a and other brands from the U.S. and Europe.
wide-open market in Tier 4 rather than trying to force MNCs can also play a role in distributing the prod-
their technology prematurely into applications for the ucts of Tier 4 enterprises in Tier 1 markets, giving
developed markets, where incumbents and institutions bottom-of-the-pyramid enterprises their first links to
stand in their way. With several billion potential cus- international markets. Indeed, it is possible through
tomers around the world, investments in such innova- partnerships to leverage traditional knowledge bases to
tions should be well worth it. produce more sustainable, and in some cases superior,
products for consumption by Tier 1 customers.
Improving Access Anita Roddick, CEO of The Body Shop
Because Tier 4 communities are often physically and International PLC, demonstrated the power of this
economically isolated, better distribution systems and strategy in the early 1990s through her company’s “trade
9
communication links are essential to development of the not aid” program of sourcing local raw material and
bottom of the pyramid. Few of the large emerging- products from indigenous people.
market countries have distribution systems that reach More recently, the Starbucks Corporation, in coop-
more than half of the population. (Hence the continued eration with Conservation International, has pioneered
dependence of the poorest consumers on local products a program to source coffee directly from farmers in the
and services and moneylenders.) As a consequence, few Chiapas region of Mexico. These farms grow coffee
MNCs have designed their distribution systems to cater beans organically, using shade, which preserves songbird
to the needs of poor rural customers. habitat. Starbucks markets the product to U.S. con-
Creative local companies, however, lead the way in sumers as a high-quality, premium coffee; the Mexican
effective rural distribution. In India, for instance, farmers benefit economically from the sourcing arrange-
Arvind Mills has introduced an entirely new delivery ment, which eliminates intermediaries from the business
system for blue jeans. Arvind, the world’s fifth-largest model. This direct relationship also improves the local
strategy + business issue 26

denim manufacturer, found Indian domestic denim farmers’ understanding and knowledge of the Tier 1
sales limited. At $40 to $60 a pair, the jeans were not market and its customer expectations.
affordable to the masses, and the existing distribution Information poverty may be the single biggest
system reached only a few towns and villages. So Arvind roadblock to sustainable development. More than half
introduced “Ruf & Tuf” jeans — a ready-to-make kit of of humanity has yet to make a single phone call.
However, where telephones and Internet connections do affordable, through credit vehicles, at the village level.
exist, for the first time in history, it is possible to imag- Bringing such technology to villages in Tier 4 makes
ine a single, interconnected market uniting the world’s possible a number of applications, including tele-educa-
rich and poor in the quest for truly sustainable econom- tion, telemedicine, microbanking, agricultural extension
ic development. The process could transform the “digi- services, and environmental monitoring, all of which
tal divide” into a “digital dividend.” help to spur microenterprise, economic development,
Ten years ago, Sam Pitroda, currently chairman and and access to world markets. This project, named
CEO of London-based Worldtel Ltd., a company creat- Lincos, is expected to spread from today’s pilot sites in
ed by a telecommunications union to fund telecom Central America and the Caribbean to Asia, Africa, and
development in emerging markets, came to India with Central Europe.
the idea of “rural telephones.” His original concept was
to have a community telephone, operated by an entre- Tailoring Local Solutions
preneur (usually a woman) who charged a fee for the use As we enter the new century, the combined sales of the
of the telephone and kept a percentage as wages for world’s top 200 MNCs equal nearly 30 percent of total
maintaining the telephone. Today, from most parts of world gross domestic product. Yet these same corpora-
India, it is possible to call anyone in the world. tions employ less than 1 percent of the world’s labor
Other entrepreneurs have introduced fax services, force. Of the world’s 100 largest economies, 51 are

content strategy & competition

and some are experimenting with low-cost e-mail and economies internal to corporations. Yet scores of Third
Internet access. These communication links have dra- World countries have suffered absolute economic stag-
matically altered the way villages function and how they nation or decline.
are connected to the rest of the country and the world. If MNCs are to thrive in the 21st century, they must
With the emergence of global broadband connections, broaden their economic base and share it more widely.
opportunities for information-based business in Tier 4 They must play a more active role in narrowing the gap
will expand significantly. between rich and poor. This cannot be achieved if these
New ventures such as CorDECT in India and companies produce only so-called global products for
Celnicos Communications in Latin America are devel- consumption primarily by Tier 1 consumers. They must
oping information technology and business models suit- nurture local markets and cultures, leverage local solu-
ed to the particular requirements of the bottom of the tions, and generate wealth at the lowest levels on the
pyramid. Through shared-access models (e.g., Internet pyramid. Producing in, rather than extracting wealth
kiosks), wireless infrastructure, and focused technology from, these countries will be the guiding principle.
development, companies are dramatically reducing the To do this, MNCs must combine their advanced
cost of being connected. For example, voice and data technology with deep local insights. Consider packag-
10
connectivity typically costs companies $850 to $2,800 ing. Consumers in Tier 1 countries have the disposable
per line in the developed world; CorDECT has reduced income and the space to buy in bulk (e.g., 10-pound
this cost to less than $400 per line, with a goal of $100 boxes of detergent from superstores like Sam’s Club) and
per line, which would bring telecommunications within shop less frequently. They use their spending money to
reach of virtually everyone in the developing world. “inventory convenience.” Tier 4 consumers, strapped for
Recognizing an enormous business and develop- cash and with limited living space, shop every day, but
ment opportunity, Hewlett-Packard Company has artic- not for much. They can’t afford to stock up on house-
ulated a vision of “world e-inclusion,” with a focus on hold items or be highly selective about what they buy;
providing technology, products, and services appropriate they look for single-serve packaging. But consumers
to the needs of the world’s poor. As part of this strategy, with small means also have the benefit of experimenta-
HP has entered into a venture with the MIT Media Lab tion. Unburdened by large quantities of product, they
and the Foundation for Sustainable Development of can switch brands every time they buy.
Costa Rica — led by former President Jose Maria Already in India, 30 percent of personal care prod-
Figueres Olsen — to develop and implement “telecen- ucts and other consumables, such as shampoo, tea, and
ters” for villages in remote areas. These digital town cen- cold medicines, are sold in single-serve packages. Most
ters provide modern information technology equipment are priced at Rs. 1 (about 1¢). Without innovation in
with a high-speed Internet connection at a price that is packaging, however, this trend could result in a moun-
 tain of solid waste. Dow Chemical Company and year since 1974. The per capita availability of milk in
Cargill Inc. are experimenting with an organic plastic India has grown from 107 grams to 213 grams per day
that would be totally biodegradable. Such packaging in 20 years.
clearly has advantages in Tier 4, but it could also revolu-
tionize markets at all four tiers of the world pyramid. Putting It All Together
For MNCs, the best approach is to marry local capa- Creating buying power, shaping aspirations, improving
bilities and market knowledge with global best practices. access, and tailoring local solutions — the four elements
But whether an initiative involves an MNC entering of the commercial infrastructure for the bottom of the
Tier 4 or an entrepreneur from Tier 4, the development pyramid are intertwined. Innovation in one leverages
principles remain the same: New business models must innovation in the others. Corporations are only one of
not disrupt the cultures and lifestyles of local people. An the actors; MNCs must work together with NGOs,
effective combination of local and global knowledge is local and state governments, and communities.
needed, not a replication of the Western system. Yet someone must take the lead to make this revo-
The development of India’s milk industry has many lution happen. The question is, Why should it be
lessons for MNCs. The transformation began around MNCs?
1946, when the Khira District Milk Cooperative, locat- Even if multinational managers are emotionally
ed in the state of Gujarat, set up its own processing plant persuaded, it is not obvious that large corporations have
content strategy & competition

under the leadership of Verghese Kurien and created the real advantages over small, local organizations. MNCs
brand Amul, today one of the most recognized in the may never be able to beat the cost or responsiveness of
country. village entrepreneurs. Indeed, empowering local entre-
Unlike the large industrial dairy farms of the West, preneurs and enterprises is key to developing Tier 4 mar-
in India, milk originates in many small villages. Villagers kets. Still, there are several compelling reasons for
may own only two to three buffaloes or cows each and MNCs to embark on this course:
bring their milk twice a day to the village collection cen- • Resources. Building a complex commercial
ter. They are paid every day for the milk they deliver, infrastructure for the bottom of the pyramid is a
based on fat content and volume. Refrigerated vans resource- and management-intensive task. Developing
transport the milk to central processing plants, where it environmentally sustainable products and services
is pasteurized. Railroad cars then transport the milk to requires significant research. Distribution channels and
major urban centers. communication networks are expensive to develop and
The entire value chain is carefully managed, from sustain. Few local entrepreneurs have the managerial or
the village-based milk production to the world-scale technological resources to create this infrastructure.
processing facilities. The Khira District cooperative pro- • Leverage. MNCs can transfer knowledge from
11
vides such services to the farmers as veterinary care and one market to another — from China to Brazil or India
cattle feed. The cooperative also manages the distribu- — as Avon, Unilever, Citigroup, and others have
tion of pasteurized milk, milk powder, butter, cheese, demonstrated. Although practices and products have to
baby food, and other products. The uniqueness of the be customized to serve local needs, MNCs, with their
Amul cooperative is its blending of decentralized origi- unique global knowledge base, have an advantage that is
nation with the efficiencies of a modern processing and not easily accessible to local entrepreneurs.
distribution infrastructure. As a result, previously mar- • Bridging. MNCs can be nodes for building the
ginal village farmers are earning steady incomes and commercial infrastructure, providing access to knowl-
being transformed into active market participants. edge, managerial imagination, and financial resources.
Twenty years ago, milk was in short supply in India. Without MNCs as catalysts, well-intentioned NGOs,
Today, India is the world’s largest producer of milk. communities, local governments, entrepreneurs, and
According to India’s National Dairy Development even multilateral development agencies will continue to
strategy + business issue 26

Board, the country’s dairy cooperative network now flounder in their attempts to bring development to the
claims 10.7 million individual farmer member–owners, bottom. MNCs are best positioned to unite the range of
covers 96,000 village-level societies, includes 170 milk- actors required to develop the Tier 4 market.
producer unions, and operates in more than 285 dis- • Transfer. Not only can MNCs leverage learning
tricts. Milk production has increased 4.7 percent per from the bottom of the pyramid, but they also have the
 New business models must not disrupt
local cultures and lifestyles. An effective
combination of local and global knowledge
is needed, not a Western system.

capacity to transfer innovations up-market all the way to build a local base of political support. As Monsanto and
Tier 1. As we have seen, Tier 4 is a testing ground for General Electric Company can attest, the establishment

content strategy & competition

sustainable living. Many of the innovations for the bottom of a coalition of NGOs, community leaders, and local
can be adapted for use in the resource- and energy-intensive authorities that can counter entrenched interests is
markets of the developed world. essential. Forming such a coalition can be a very slow
It is imperative, however, that managers recognize process. Each player has a different agenda; MNCs have
the nature of business leadership required in the Tier 4 to understand these agendas and create shared aspira-
arena. Creativity, imagination, tolerance for ambiguity, tions. In China, this problem is less onerous: The local
stamina, passion, empathy, and courage may be as bureaucrats are also the local entrepreneurs, so they can
important as analytical skill, intelligence, and knowl- easily see the benefits to their enterprise and their village,
edge. Leaders need a deep understanding of the com- town, or province. In countries such as India and Brazil,
plexities and subtleties of sustainable development in the such alignment does not exist. Significant discussion,
context of Tier 4. Finally, managers must have the inter- information sharing, the delineation of benefits to each
personal and intercultural skills to work with a wide constituency, and sensitivity to local debates is necessary.
range of organizations and people. • Conduct R&D focused on the poor. It is neces-
MNCs must build an organizational infrastructure sary to conduct R&D and market research focused on
to address opportunity at the bottom of the pyramid. the unique requirements of the poor, by region and by
12
This means building a local base of support, reorienting country. In India, China, and North Africa, for example,
R&D to focus on the needs of the poor, forming new research on ways to provide safe water for drinking,
alliances, increasing employment intensity, and rein- cooking, washing, and cleaning is a high priority.
venting cost structures. These five organizational ele- Research must also seek to adapt foreign solutions to
ments are clearly interrelated and mutually reinforcing. local needs. For example, a daily dosage of vitamins can
• Build a local base of support. Empowering the be added to a wide variety of food and beverage prod-
poor threatens the existing power structure. Local oppo- ucts. For corporations that have distribution and brand
sition can emerge very quickly, as Cargill Inc. found in presence throughout the developing world, such as
its sunflower-seed business in India. Cargill’s offices were Coca-Cola Company, the bottom of the pyramid offers
twice burned, and the local politicians accused the firm a vast untapped market for such products as water and
of destroying locally based seed businesses. But Cargill nutritionals.
persisted. Through Cargill’s investments in farmer edu- Finally, research must identify useful principles and
cation, training, and supply of farm inputs, farmers have potential applications from local practices. In Tier 4, sig-
significantly improved their productivity per acre of nificant knowledge is transmitted orally from one gen-
land. Today, Cargill is seen as the friend of the farmer. eration to the next. Being respectful of traditions but
Political opposition has vanished. willing to analyze them scientifically can lead to new
To overcome comparable problems, MNCs must knowledge. The Body Shop’s creative CEO, Ms.
 Roddick, built a business predicated on understanding MNC managers must learn to work with people who
the basis for local rituals and practices. For example, she may not have the same agenda or the same educational
content strategy & competition

observed that some African women use slices of pineap- and economic background as they do. The challenge
ple to cleanse their skin. On the surface, this practice and payoff is how to manage and learn from diversity —
appears to be a meaningless ritual. However, research economic, intellectual, racial, and linguistic.
showed active ingredients in pineapple that cleared away • Increase employment intensity. MNCs accus-
dead skin cells better than chemical formulations. tomed to Tier 1 markets think in terms of capital inten-
MNCs must develop research facilities in emerging sity and labor productivity. Exactly the opposite logic
markets such as China, India, Brazil, Mexico, and Africa, applies in Tier 4. Given the vast number of people at the
although few have made a big effort so far. Unilever is an bottom of the pyramid, the production and distribution
exception; it operates highly regarded research centers in approach must provide jobs for many, as in the case of
India, employing more than 400 researchers dedicated Ruf & Tuf jeans from Arvind Mills: It employed an
to the problems of “India-like markets.” army of local tailors as stockers, promoters, distributors,
• Form new alliances. MNCs have conventionally and service providers, even though the cost of the jeans
formed alliances solely to break into new markets; now was 80 percent below that of Levi’s. As Arvind demon-
they need to broaden their alliance strategies. By enter- strated, MNCs need not employ large numbers of peo-
ing into alliances to expand in Tier 4 markets, MNCs ple directly on their payroll, but the organizational
13
gain insight into developing countries’ culture and local model in Tier 4 must increase employment intensity
knowledge. At the same time, MNCs improve their own (and incomes) among the poor and groom them to
credibility. They may also secure preferred or exclusive become new customers.
access to a market or raw material. We foresee three • Reinvent cost structures. Managers must dra-
kinds of important relationships: Alliances with local matically reduce cost levels relative to those in Tier 1. To
firms and cooperatives (such as the Khira District Milk create products and services the poor can afford, MNCs
Cooperative); alliances with local and international must reduce their costs significantly — to, say, 10 per-
NGOs (like Starbucks’s alliance with Conservation cent of what they are today. But this cannot be achieved
International in coffee); and alliances with governments by fine-tuning the current approaches to product devel-
(e.g., Merck & Company’s recent alliance in Costa Rica opment, production, and logistics. The entire business
to foster rain forest preservation in exchange for bio- process must be rethought with a focus on functionality,
prospecting rights). not on the product itself. For example, financial services
strategy + business issue 26

Given the difficulty and complexity of constructing need not be distributed only through branch offices
business models dependent on relationships with open from 9 A.M. to 5 P.M. Such services can be provided
national or central governments (e.g., large infrastruc- at a time and place convenient to the poor consumer —
ture development), we envision more alliances at the after 8 P.M. and at their homes. Cash-dispensing
local and regional level. To succeed in such alliances, machines can be placed in safe areas — police stations
and post offices. Iris recognition used as a security device and a few MNCs such as Starbucks, Dow, Hewlett-
could substitute for the tedious personal-identification Packard, Unilever, Citigroup, DuPont, Johnson &
number and card for identification. Johnson, Novartis, and ABB, and global business part-
Lowering cost structures also forces a debate on nerships such as the World Business Council for
ways to reduce investment costs. This will inevitably Sustainable Business Development. But to date, NGOs
lead to greater use of information technology to develop and local businesses with far fewer resources than the
production and distribution systems. As noted, village- MNCs have been more innovative and have made more
based phones are already transforming the pattern of progress in developing these markets.
communications throughout the developing world. Add It is tragic that as Western capitalists we have
the Internet, and we have a whole new way of commu- implicitly assumed that the rich will be served by the
nicating and creating economic development in poor, corporate sector, while governments and NGOs will
rural areas. Creative use of IT will emerge in these mar- protect the poor and the environment. This implicit
kets as a means to dramatically lower the costs associat- divide is stronger than most realize. Managers in MNCs,
ed with access to products and services, distribution, and public policymakers, and NGO activists all suffer from
credit management. this historical division of roles. A huge opportunity lies
in breaking this code — linking the poor and the rich
A Common Cause across the world in a seamless market organized around

content strategy & competition

The emergence of the 4 billion people who make up the the concept of sustainable growth and development.
Tier 4 market is a great opportunity for MNCs. It also Collectively, we have only begun to scratch the sur-
represents a chance for business, government, and civil face of what is the biggest potential market opportunity
society to join together in a common cause. Indeed, we in the history of commerce. Those in the private sector
believe that pursuing strategies for the bottom of the who commit their companies to a more inclusive capi-
pyramid dissolves the conflict between proponents of talism have the opportunity to prosper and share their
free trade and global capitalism on one hand, and envi- prosperity with those who are less fortunate. In a very
ronmental and social sustainability on the other. real sense, the fortune at the bottom of the pyramid rep-
Yet the products and services currently offered to resents the loftiest of our global goals. +
Tier 1 consumers are not appropriate for Tier 4, and Reprint No. 02106
accessing this latter market will require approaches fun-
damentally different from those even in Tiers 2 and 3.
Changes in technology, credit, cost, and distribution are
critical prerequisites. Only large firms with global reach
Resources
have the technological, managerial, and financial
14
resources to dip into the well of innovations needed to The concepts in this article were first articulated in 1998, and have been
made available for discussion in a working paper. For more information,
profit from this opportunity.
contact the authors.
New commerce in Tier 4 will not be restricted to
Stuart Hart, “Beyond Greening: Strategies for a Sustainable World,”
businesses filling such basic needs as food, textiles, and Harvard Business Review, January–February 1997;
housing. The bottom of the pyramid is waiting for high- www.hbsp.harvard.edu/hbr/index.html
tech businesses such as financial services, cellular C.K. Prahalad and Kenneth Lieberthal, “The End of Corporate
telecommunications, and low-end computers. In fact, Imperialism,” Harvard Business Review, July–August 1998;
www.hbsp.harvard.edu/hbr/index.html
for many emerging disruptive technologies (e.g., fuel
cells, photovoltaics, satellite-based telecommunications, “Is the Digital Divide a Problem or an Opportunity?” Business Week
Supplement, December 18, 2000
biotechnology, thin-film microelectronics, and nano-
technology), the bottom of the pyramid may prove to be Robert Chambers, Whose Reality Counts? Putting First Last (ITDG
Publishing, 1997)
the most attractive early market.
Thomas L. Friedman, The Lexus and the Olive Tree: Understanding
So far, three kinds of organizations have led the Globalization (Farrar, Straus and Giroux, 1999)
way: local firms such as Amul and Grameen Bank;
Amartya Sen, Development as Freedom (Alfred A. Knopf, 1999)
NGOs such as the World Resources Institute, SELF,
Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in
The Rainforest Alliance, The Environmental Defense
the West and Fails Everywhere Else (Basic Books, 2000)
Fund, and Conservation International, among others;
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