Doing Business With the Base of the Pyramid

CEO Breakfast
Doing Business With the Base
of the Pyramid
CEO Breakfast
Capitalism at the Crossroads
Saturated markets
Stagnant growth
Environmental degradation
Poverty and inequity
Corporate
Expectations
•double digit returns
•thirst for growth
Antiglobalization
Movement
•protests
•terrorism
Stuart Hart
S.C. Johnson Professor of Sustainable Global Enterprise
Professor of Management
Stuart L. Hart
Must corporations’ thirst for growth and profits serve
only to exacerbate degradation and inequity?
Stuart L. Hart
CEO Breakfast
No!
CEO Breakfast
Many Companies are Beginning to
Experiment with the BOP
Nutristar, Nutridelight (nutritional drink), Pur (water purifier)
Hindustan Lever (detergent for the poor in India and Brazil), Annapurna
(iodized-Salt for the poor)
Making solar power affordable (India)
Banco Real, microcredit in Brazil
Vodacom community services in South Africa, joint venture between Vodafone
and Telkom SA
Solar powered digital camera in India and community information systems
Program in South Africa to help entrepreneurs enter the supply chain and profit
from new business ventures.
Water for all program to periurban areas in Brazil
Stuart L. Hart
Stuart L. Hart

CEO Breakfast
“The aspiring poor present a prodigious
opportunity for the world’s wealthiest
companies. But it requires a radical new
approach to business strategy”
The BOP is where we will:
•Find the most exciting growth markets of the future
•Incubate the sustainable technologies of tomorrow
C.K. Prahalad and Stuart Hart
“The fortune at the bottom of the pyramid”
Strategy+Business, January 2002
Stuart L. Hart
CEO Breakfast
A Tale of Two MNCs
Strategic Logic: Stagnating sales in primary markets
Target Market: Low income consumers in developing
countries
Source: McDonald, London & Hart (2002); Ellison, Moller & Rodriguez (2002)
Stuart L. Hart
Product
CEO Breakfast
Structure
Pricing
Problemsolving
Partners
Outcome
Contrasting BOP Strategies
Nike
• Integrated
• 30-50% gross
margins
• Existing marketing &
manufacturing
• Current retailers
• Failed to hit targets;
never reached the
BOP
Unilever
• Protected, “deep
listening”
• Long-term growth
• 6-8 weeks in villages;
local sales agents
• Small retail outlets
• Path breaking growth;
reached the BOP
CEO Breakfast
The Elusive Quest for Growth
Purchasing Power
Parity in U.S. dollars
Saturation of
current markets
>$15,000 Wealthy 800
Existing capability;
New market
$1,500-15,000
Emerging
Middle Class
1,500
(MOP)
Population in millions
New capability;
New market

Performance
CEO Breakfast
Disruptive Innovation:
Incubating from the Bottom-Up
Performance trajectory of present technology
driven by sustaining technological improvements
Disruptive
Technology
New performance
trajectory
Performance which the
marketplace demands or
can absorb
CEO Breakfast
“Down Markets”: Quirky and Small?
Example: PCs
kids and hippies
“Down Markets”
Base of
the Pyramid
Result:
Incumbents
ignore
Source: Clay Christensen, The Innovator’s Dilemma
Time
Stuart L. Hart
Stuart L. Hart
CEO Breakfast
Base of the Pyramid:
The Great Leap Downward
Example: DG
2B without
power
Philips LED
KX Industries
“Down Markets”
Base of
the Pyramid
Result:
Massive
growth
opportunity
Source: Stuart Hart and Clay Christensen, 2002, “The great leap: Driving innovation from the base of the pyramid”
Stuart L. Hart
CEO Breakfast
Two Complementary Strategies
Middle of the Pyramid (MOP)
•Incremental
•“Take cost out of current model”
•Use existing business structure
•Apply existing business metrics
•Develop internally
Ted London, “How are Capabilities
Created? A Process Study of New
Market Entry,” Ph.D. Dissertation,
UNC, March 2005
Low Income Markets
Base of the Pyramid (BOP)
•Disruptive
•“Invent new low cost system”
•Create separate structure (firewall)
•Devise new metrics
•Develop through partnerships
Growth Oriented
•R&D
•Operating budgets
Learning Oriented
•Philanthropy
•External grants
Stuart L. Hart

Poor
CEO Breakfast
Radical Transactiveness:
Engaging Fringe Stakeholders
Divergent
NGOs
Weak
S. Hart, and S. Sharma, 2004,
“Engaging fringe stakeholders
for competitive imagination”
Suppliers
Adversarial
Competitors
Firm
Non-legitimate
Investors
Customers
Communities Employees Regulators
“Core” Stakeholders
Illiterate
Disinterested
“Fringe Stakeholders”
Isolated
Non-
Human
Stuart L. Hart
Examples:
Grameen
Cemex
CEO Breakfast
Beyond “Marketing to the Poor”
• Remove Constraints (e.g. Cemex)
– Predatory vendors
– Credit Constraints
• Increase Earning Power (e.g. Village Phones)
– Consumer surplus
– Income generation
• Create New Potential (e.g. HLL--Shakti)
– Outreach
– Inreach
• Leapfrog to sustainability (e.g. KX)
– Clean tech
– Indigenous knowledge
Stuart L. Hart
CEO Breakfast
Driving the Millennium
Development Goals (2015)
Halve the proportion of
people living on less than
$1 per day
Halve the proportion of
people who suffer hunger
Promote gender
equality and
empower women
BOP
Reduce child mortality
Improve maternal health
Ensure environmental
sustainability
Develop a global partnership
for development
Halve the proportion of
people without access
to safe drinking water
Achieve universal
Primary education
Combat HIV/AIDs,
malaria, and other
diseases
Stuart L. Hart
CEO Breakfast
Implications for MNCs:
New Skill Development
• Deep listening
• Indigenous knowledge
• Native capability
• Putting the last first
• Engaging fringe stakeholders
• “Radical Transactiveness”
Stuart L. Hart

CEO Breakfast
Q&A: BOP Issues for the Dutch
Private Sector
TOP, MOP or BOP: balancing the investment to
create long term shareholder value
How to develop BOP skills?
Impact on poverty reduction and Millennium
Development Goals
Role of ‘social capital’ in early BOP ventures
Next steps to be taken by Dutch MNCs
Stuart L. Hart