An essay written by a St Andrews postgraduate student at the School of Management based on ‘ Serving the World ’ s Poor, Profitably ’ by C.K. Prahalad and Allen Hammond (Harvard Business Review, September 2002) in October 2013.
Strive for market shares, the willingness or necessity to increase revenues or diversify risk can be key drivers for innovative firms in going abroad (Peng, 2009). Usually, these companies favour markets somewhat similar to their already developed, saturated home markets with a large potential customer base and mass purchasing power (London & Hart, 2004; Peng, 2009). The article ‘Serving the World’s Poor, Profitably’ written by C.K. Prahalad and Allen Hammond, published in the Harvard Business Review in September 2002, stretches the tremendous sales potential for multi-national enterprises (MNEs) in doing business with the very poor. It builds on the socio-economic concept of the bottom-of- the-pyramid (BoP), which refers to nearly four billion potential consumers with an annual income of less than US$ 2,000; that is two-third of the world’s population (Prahalad & Hart, 2002).
The authors emphasize the ‘untapped potential’ (Prahalad & Hammond, 2002: 49) of the aggregated purchasing power of the world’s poor that live in rising economies such as Brazil, China, India and South Africa. However, there are many examples for the failure of MNEs in these markets due to prevailing prejudices, substantial misperceptions, and fundamentally flawed strategic decisions. A prominent example of failure is the mobile telecommunications sector (Prahalad & Hammond, 2002; Karnani, 2012). Strategies that are adopted from operations in developed markets often fail when doing business with the poor (Kay & Lewenstein, 2013).
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Prahalad’s and Hammond’s (2002) controversial proposal is that there is no contradiction between making profits when dealing with the poor and improving their living conditions. This will be critically analyzed in more depth hereafter. Since the poor are willing to spend a large portion of their income for non-essential goods, and available products and services are not as cheap as assumed, these markets offer lucrative business opportunities. ‘Serving the World’s Poor, Profitably’ by Prahalad and Hammond is particularly interesting for three reasons; 1) it was published in 2002, which allows a comparison of the key points to be discussed in the light of social progress, 2) the continuing importance of overcoming poverty in today’s world (UNDP, 2013) and 3) the strong influence of Prahalad’s theses in recent academic discourse in the field of global business strategy (i.e. Yunus, 2008; Karnani, 2012; Simanis, 2012; Kay & Lewenstein, 2013).
Prahalad’s and Hammond’s theses towards benefits for international businesses Prahalad and Hammond (2002) state that the four billion poorest people at the base of the economic pyramid represent a lucrative business opportunity for any large multinational enterprise with economies of scale and established supply-chain operations. Even though the definition of the BoP segment or extreme poverty might vary amongst scholars and institutions in terms of purchasing power parity and over time (i.e. Hammond, Kramer, Tran, Katz, Walker, 2007; Prahalad, 2011; UN, 2013), the massive aggregated buying power itself is beyond debate, even though the power in numbers is debatable (Warnholz, 2007). It follows, that MNEs, which have rather targeted the top of the wealth pyramid, can actually benefit from doing business with the lower tiers of the pyramid in three ways (Prahalad & Hammond, 2002):
- Growth (revenues)
- Costs (outsourcing, cost structure, efficiency of capital, e-business)
- Innovation (good, services, processes)
Growth opportunities in BoP markets eventually result in new revenue streams for thecompany. The authors specifically refer to the often cited Indian success stories of Citibank Suvidha and Hindustan Lever. The key to success might be to focus on the community instead of individual customers, the so-called ‘network-customer’ (Prahalad & Hammond, 2002: 52). The high competition on price in these markets requires the MNE to re-build its cost structure in terms of price-performance trade-offs, capital modeling and by making use of IT to eliminate intermediaries. Automatically, companies will come up with new innovations driven by cost pressure and distribution challenges (Prahalad & Hammond, 2002; Prahalad, 2011). Simultaneously, global poverty is reduced, because these companies offer jobs to the local people and provide them with basic goods for consumption (Prahalad & Hammond, 2012). Nevertheless, one could argue that the authors ignore many of the present threats of the markets and limitations for the MNEs.
A study conducted by Monitor Group in India in 2009, cited by Karnani (2012) and Simanis (2012), reveals that only few businesses actually operate profitably in BoP markets. Karnanis’ (2012: 9) radical assumption is that ‘BOP activities are either profitable but not socially beneficial, or socially virtuous but not profitable’. This might lead to the conclusion that some of the benefits don’t exist. In fact, costs for the operation of the business in these markets might be very high (Simanis, 2012). However, it is difficult to discuss Prahalad’s and Hammond’s theses towards international businesses in more depth, because they are extremely vague in their explanation. When it comes to corporate strategy for BoP market entry, the authors see multiple layers of educating young executives on-site so that they can engage with the poor. Venture funds for investments in local businesses, and departments aiming at identifying and implementing growth opportunities along with the establishment of unconventional partnerships with non-governmental organizations or established companies will help MNEs to effectively manage market entry risk (Prahalad & Hammond, 2002).
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- University of St Andrews – School of Management
- Prahalad Doing business with the poor Hammond Bottom of the pyramid Base of the pyramid Corporate Social Responsibility Poverty Premium Emerging markets BoP opportunity