There are two ways in which large firms tend to engage the BOP markets. The traditional approach of many MNCs is to start from the business models honed in the developed markets—the top of the pyramid and their zone of comfort. This approach to the BOP market inevitably results in fine-tuning current products and services and management practices. There is growing evidence that this approach is a recipe for failure. MNCs and large firms have to start from a deep understanding of the nature and the requirements of the BOP, as outlined in Chapter 2, and then architect the business models and the management processes around these requirements. This approach to the BOP market will not only allow large firms to succeed in local markets but will also provide the knowledge base to challenge the way they manage the developed markets. Let us consider some examples.

BOP consumers in Latin America are careful in their use of diapers. They use one or two changes per day compared to the five or six changes per day common among the top of the pyramid consumers. Because they can afford only one or two changes, they expect a higher level of absorbency in the diapers and an improved construction of the diaper that will accommodate additional load. This means that the firms have to technically upgrade the quality of their diapers for the BOP consumers compared to the products they currently sell to the rich in those markets. Needless to say, the new product built for the BOP market is higher in quality and provides a better price–performance proposition. Similarly, detergent soap, when used by BOP consumers in India washing their wares in running water, becomes mushy. About 20 to 25 percent of the detergent soap can be lost in the process. Therefore, HLL developed a soap with a coating on five sides, which makes it waterproof. The coated soap saves 20 percent wastage even in a hostile user environment. The innovation is of interest to the rich as well. Access to clean water is a major concern at the BOP. Polluted water (particulate, bacterial, and viral pollutants) is common. Boiling water is the only current alternative to eliminating the bacterial and viral pollutants. A focus on solving this problem has to start with a cost target that is no more than the cost of boiled water. Further, the system has to create a quality level that is better than boiled water (removing sediments). The process is of interest to the rich as well.

The quality, efficacy, potency, and usability of solutions developed for the BOP markets are very attractive for the top of the pyramid. The traditional MNC approach and the approach suggested here—top of the pyramid to BOP and from the BOP to the top of the pyramid—are shown in Figure 3.1.

Figure 3.1. Learning from the BOP.

As the foregoing examples illustrate, the demands of the BOP markets can lead MNCs to focus on next practices. The BOP can be a source of innovations for not only products and processes, but business models as well. Let us start with the growth opportunities in local, stand-alone BOP markets first.

Some of the local BOP markets are very large. Large population base is one indicator of the size of the market opportunity at the BOP, not necessarily the per-capita income. For example, China, India, Indonesia, Brazil, Mexico, Russia, South Africa, and Nigeria can potentially be very large emerging BOP markets. If an industry or a firm finds the “sweet spot”—meaning the right business model and the right combination of products and services—these markets could have explosive growth. Consider growth opportunities in China. China today is the world’s largest producer of steel. The growth of the appliances, building, and auto markets has created an insatiable appetite for steel. China’s steel capacity is estimated at 220 million tons compared to 110 million tons in Japan and 90 million tons in the United States. China has also an installed base of over 250 million cell phones. That is larger than the installed base of the United States. China is also one of the largest markets for televisions, appliances, and autos. The growth spurt in China is without parallel. Similarly, India is at the very early stages of a growth spurt in a wide variety of businesses such as two-wheelers (4.8 million during the fiscal year 2002–03), housing loans, and wireless. The housing loan business went from a low of Rs. 19,723 crores during fiscal 1999–2000 ( $ 4.4 billion) to Rs. 51,672 crores ($ 11.5 billion) in 2002–2003. During the latter part of 2003, India was adding about 1.5 million telephone subscribers/month.

Needless to say, this growth was not all derived from the very poor. There are a lot of emerging “middle”-class customers here, but most of them earn less than $1,500 per capita ($6,000 per family of four). This growth is not funneled by the top of the pyramid. What is it that MNCs learn in these markets? The lessons for Samsung and LG (South Korean suppliers of cell phones to India), not just for Reliance and Tatas (Indian providers of service), is that they have to adjust to rapid growth, not 2 to 5 percent per year, but perhaps 50 to 100 percent per year.

Learning to Grow

BOP markets can collapse the time frames taken for products, technologies, and concepts to diffuse in the system. Many of the drivers of change and market growth—deregulation, involvement of the private sector in BOP markets, digitization, ubiquitous connectivity and the attendant change in the aspirations of people, favorable demographics (a young population), and access to credit—are simultaneously present in BOP markets. These drivers interact. The result is the challenge to the “S curve” that is the model for the diffusion of new products and services in the developed world. The changes that played out over 15 years in the developed markets are being collapsed into a short period of just three to five years in many BOP markets. M. S. Banga, CEO of HLL, suggests that the real challenge in BOP markets is that managers have to cope with the “I curve.” The entire management process in most large firms is geared for slow growth, if at all. The I curve challenges the status quo. The S and the I curves, the two approaches to diffusion of innovations (products and services), can be conceptualized as shown in Figure 3.2.

Figure 3.2. Traditional and BOP Growth Patterns. Source: M. S. Banga, CEO, HLL.

This is good news and bad news. A cell phone today is a telephone, a camera, a watch, a computer, and a partial radio and TV. Why would one need a traditional watch (other than as an ornament) if one had a cell phone? The I curve can rapidly propel some innovations and can equally rapidly destroy some traditional markets.^[1]

Rapid growth can also make new demands on firms. For example, HLL wants to build a network of 1 million direct distributors. This means the recruitment and training of about 30,000 to 40,000 people every month. Evaluating applicants; identifying those who could make good HLL distributors; training them in products, businesses models, and the values of the company; and inducting such a large number into the system create new demands on the process of management. Very few firms around the world have experience in inducting this many new recruits (independent distributors) per month.

The micro encapsulation of iodine in salt to preserve the iodine in the harsh conditions of transportation, storage, and cooking in India has found market opportunities in Africa, especially in Ivory Coast, Kenya, and Tanzania. Iodine Deficiency Disorder (IDD) is common across the developing world, and the solution found in India has been transported across other similar markets with IDD by Unilever. Similarly, during the late 1980s, in response to the growing success of Nirma, a local entrepreneurial startup in the detergent business that created a new category, focused on the BOP markets, HLL launched Wheel, intended for the same market segment. Wheel today is one of the largest brands in the HLL portfolio in India ($150 million). The BOP market has grown rapidly. BOP markets in India account for a total of 1.0 million tons of detergents, compared with 300,000 tons for the top of the pyramid. More important, the lessons learned in India were not lost on Unilever. It wanted to protect BOP markets in countries such as Brazil, Indonesia, and China. It took the lessons from developing Wheel in India—from the formulation, manufacturing process, packaging, pricing, distribution, and advertising and promotion—to Brazil. It introduced a similar product oriented toward the BOP called Ala. The product was a runaway success. The product was available in 2,000 small neighborhood stores in less than three months. The detergent team that developed the new business model for the BOP in India also went to Brazil and China to help build the distribution systems that were critical for the success of the business. Today, India is seen as a laboratory for similar “India-like” markets within Unilever. Product ideas and concepts are tried out in India with a global BOP market in mind. Similarly, the idea of single-serve units has become a global phenomenon in the BOP markets. The growth in fast-moving consumer goods businesses in Bangladesh, Nepal, Pakistan, and China has been fueled by similar requirements.

The success of Grameen Bank in developing microfinance in Bangladesh as a successful commercial operation has led to global interest in the process. Grameen Bank was totally focused on BOP customers. The average loan size was less than $20 when it started. There are more than 17,000 microfinance operations that are variants of the Grameen concept around the world, including in the United States. The microfinance revolution now has its own global conference every year.

The success of Jaipur Foot is now exported to a wide variety of countries with similar requirements. The primary demand in all these countries for prosthetics is from BOP customers. They have been available in 19 countries, from Afghanistan to Vietnam. The Aravind Eye Hospital, in a similar vein, is training doctors to establish a low-cost, world-class delivery system for eye care in South Africa, Cambodia, and Vietnam. In an interesting twist of the traditional view of capabilities, the cost and quality advantages of cardiac care in India are allowing it to negotiate terms for the possibility of moving a portion of the patients from the National Health System in the United Kingdom to India. The total cost of the trip for the patient and an accompanying family member, the stays in India, and the cost of patient care will be less than the cost in the United Kingdom. More important, the quality of care is equally good or better. There are no delays in accessing care.

The Indian pharmaceutical industry had to learn to serve the BOP market. Prices were regulated by the government. Further, affordability of the public health system forced very low prices. It also forced them to develop methods for reverse engineering. Controversial as it is, the Indian pharmaceutical industry is able to deliver drugs coming off patents in the United States at a fraction of the cost charged by the established drug companies. However, the focus on the BOP has allowed these firms to invent cost-effective ways to manufacture, test, and distribute.

In the rural areas of countries such as Peru, providing high-quality health care is difficult. More difficult is the surveillance of outbreaks of infectious diseases. These remote regions must be kept under constant surveillance to avoid the spread of disease, be it cholera or SARS. However, these locations are not well-connected for constant communications. PCs are rare, and telephone lines are a luxury. The question for public health professionals in such a situation is simple: How do we connect remote areas to a real-time surveillance system so that the spread of infectious diseases can be monitored using devices that are currently available on location (often simple telephones)? This implies that the system must be simple and device-agnostic. Remote locations must be connected to a central node so that planners and policymakers are fully informed. Such a system, originally developed for Peru, is finding successes in the United States. The system, originally created by Voxiva, was based on three premises:

The system was first deployed in the remote regions of Peru and was a success. Similar problems confront the United States. The CDC and the FDA have to prepare to remotely monitor outbreaks of diseases caused by terrorists or problems in food quality that must be traced rapidly. Blood banks have to be monitored for stock and quality. When the FDA and CDC were looking for a system to help them with remote, real-time surveillance, they found the Voxiva system to be the best. Both of them are now Voxiva customers. Further, as the U.S. Department of Defense was inoculating soldiers with smallpox vaccine as a preventive measure, it needed a system for monitoring soldiers for possible adverse reactions to the vaccine. Voxiva, with its capabilities, was the obvious choice. Voxiva has moved on to sell its platforms for the detection of SARS, HIV, and other public health problems. The underlying platform is low-cost, robust, and simple, needs few skills, and can be grafted onto an existing telecom network.

The most interesting lesson for MNCs from operating in the BOP market is about costs—for innovation, distribution, manufacturing, and general “costs of organization.” Because the BOP forces an extraordinary emphasis on price performance, firms must focus on all elements of cost. Shortage and the cost of capital force firms in BOP markets to be very focused on the efficiency of capital use. MNCs tend to impose their management systems and practices on BOP markets and find that it is hard to make a profit. The choices are simple: Change the management systems to cut costs or lose significant amounts of money. The lessons learned from BOP markets by MNCs are covered in the following sections.

ICICI Bank manages, with 16 managers, a portfolio of 200,000 customers at the BOP. The entire network of management consists of a hierarchy shown in Figure 3.3.

Figure 3.3. The cost of management.

There are only 16 managers (employees) from the ICICI side. Each project manager oversees the work of 6 coordinators. Coordinators are women who are experienced in the development of self-help groups. They are identified and are asked to be coordinators. They helped project managers in approval of loans and help develop new SHGs. The coordinator oversees the work of promoters. The primary responsibility of the promoters is the formation of new SHGs. She must form 20 groups per year. She is financially compensated for the successful formation of new groups. The promoters understand the village culture because they are part of it. They carry credibility because they have been part of a successful SHG. They speak the language of the groups that they deal with. They are also identified from the local communities. As a result, the organizational system that is built in this case is quite unique.

The SHGs and the direct distribution system we have described, such as Shakti Amma, represent an extraordinary innovation that both cuts costs and risks for the firm and at the same time creates an empowered group of new entrepreneurs with sustainable, rising income opportunities. Business management skills, technology, and contacts are pushed down to the local grassroots level. The SHGs perform several of the functions that the firm would have handled in the traditional approach to managing. For example, the SHG, by validating the individuals who will get the loan, by checking the nature and viability of the project, and by taking responsibility for monitoring the progress of the project is, in essence, an extension of the traditional firm. The SHG helps co-create value for the firm—in this case, ICICI. The bank does not have direct contact with the individuals, but monitors the loan indirectly through the SHG. This represents a new model of relationship between the firm and its consumers. The quality of the SHG is the guarantee of the investment. However, the SHG, being so close to its members—same village, same group, frequent meetings, visibility of progress of projects, and, most important, the ability to assess behaviors—is in a great position to alter the risk profiles of the loans. The large bank gains local responsiveness capability at low (or no) cost. The same is true of the Shakti Amma system. The local entrepreneur knows her village and its needs and can also influence the buying decisions of the villagers. She is at once the salesperson, the supplier, the trusted advisor, and the educator for the village. She is the one who can convince the villagers that iodized salt will be a healthy option for the family. HLL is now experimenting with connecting these individual distributors through an Internet network. The I-Shakti project will create the most dramatic opportunity for the BOP consumers to influence the firm and its decisions regarding product features, costs, availability, and the business model in general.

What we see here is the convergence of the traditional roles of the firm and the consumer and the distributor and the consumer. Functions such as advertising, credit management, risk analysis, and market development are assumed by the consumers-entrepreneurs and the consumer-entrepreneurial community (SHG). The boundaries of the firm expand beyond its legal parameters and begin to engage and empower the large and heretofore economically isolated segment of developing country societies known as the “informal sector.” The resources that are available to the firm expand even more dramatically. Access to the 10,000 SHGs is, in its simplest form, a huge resource multiplier to the firm. Whether it is resource leverage through selective access, local knowledge, risk reduction, or reduction in capital needs, the firm benefits. This is at best a win–win situation. The local communities take charge of what they want. They make their own decisions and choices. They are accountable and therefore feel a sense of empowerment and self-esteem. They know they can deal with the large firm on an equal basis. Although the resources are limited for the SHG, the bank cannot unilaterally make decisions. In that sense, there is less asymmetry in power.

MNCs working at the BOP learn rapidly that they have to learn to live with a wide variety of relationships with a large number of institutions. For example, in the case of selling iodized salt, HLL learned very fast that its efforts would impact public policymakers and officials in the health department. NGOs focus on local communities and in many cases conflict with industry practices. HLL had to learn to cope with the agendas of the various parties that might be involved and work with them effectively in a cooperative mode. The case of soap, intended to reduce diarrhea, was more interesting. HLL had to deal not only with state governments and NGOs, but also with the World Bank, which wanted to partly fund the program of education and distribution. It also wanted to be involved in the evaluation of results. As such, the firm had to learn to cope with the differing priorities, time scales, decision cycles, and perspectives of both the causes of the problem and the nature and efficacy of the solution. The reactions of the various groups can vary from open hostility toward the MNC to a willingness to cooperate. At the end of the day, however, MNCs learn how to transform their ideals of good corporate citizenship and social responsibility into their core business of delivering value on a day-to-day business basis. Social sector organizations learn how to scale their still-marginal efforts at “social enterprise” into viable business models serving a mass market.

BOP markets represent 80 percent of humanity. It is reasonable to expect that 4 billion people in search of an improved quality of life will create one of the most vibrant growth markets we have ever seen. Private-sector involvement in development can be a win for both the BOP consumers and the private sector. All of us can learn. The flow of ideas, knowledge, and innovation will become a two-way street—from the developed countries to the developing as well as the reverse. MNCs can help BOP markets to develop. They can also learn from BOP markets.

In the next chapter, we discuss how the large firm can create a private-sector ecosystem and act as a nodal firm. This ecosystem is a prerequisite for developing markets at the BOP.