Stuart L. Hart | Redefining the bottom of the pyramid
New Delhi: Over the last few weeks, in its special series ‘India’s Bread and Butter Economy’, Mint has analysed and reported on the latest round of consumption data put out by the National Sample Survey Office (NSSO), which hints at a fundamental transformation in the consumer economy led by rural India. Traditionally, the Indian consumer market has tended towards an inverted pyramid structure. However, now this is altering and tending towards the conventional pyramid structure with more consumers at the bottom of the pyramid (BoP)—those who got bumped above the poverty line recently form part of this layer.
It’s an issue that Stuart L. Hart, the Samuel C. Johnson Chair in Sustainable Global Enterprise and professor of management at Cornell University’s Johnson School of Management, first flagged nearly 15 years ago when he co-authored a paper titled The Fortune at the Bottom of the Pyramid with the late professor C.K. Prahalad. Hart has since written several papers and books, including Capitalism at the Crossroads and Next Generation Business Strategies for the base of the Pyramid.
On the phone from Rio, where he was part of the BoP global network summit of corporate and entrepreneur initiatives from across the world, Hart spoke on the altered reality of BoP 2.0 and India’s false dawn in discovering the rural markets.
In the 15 years since you wrote your seminal piece, have you seen this sizeable poor joining the market economy?
If you go back to the original piece that the late C.K. Prahalad and I did, unfortunately because of the title, intent and meaning gets ascribed to it which if you actually read the piece, isn’t there. Part of what has been read into is the idea that BoP is just about selling stuff to poor people, whether they need it or not. That obviously was never the intention. The reality is if you take that approach typically you don’t succeed. It may work for a while and especially in some selected products, in particular those that are addictive.
So have you had reason to revise your view about the potential of this consuming class?
Core to the whole concept of BoP businesses, and incidentally, the original title of the paper that Prahalad and I wrote was Raising the Bottom of the Pyramid. The title The Fortune at the Bottom of the Pyramid, the editor came up with, and I was somewhat conflicted about it for all the reasons we now know since it can be interpreted to mean there’s a big bag of money out there, let’s go take it from the poor. And that was never the intent. The only way that works is for more and more businesses to move into this new mode we are discussing and if that happens we can accomplish two goals, which is to reduce inequality, which is absolutely crucial, and to leapfrog to next generation environmental sustainability at the same time, which is equally crucial.
What we are discovering is that in what we are now categorizing as BoP 1.0, taking what already exists at the top of the pyramid, adapting it by taking some costs out of it, putting it in a single serve package and creating a distribution channel that takes the product to a rural area, in general that approach has not been particularly successful. Even from a business point of view, let alone whether it serves the poor very well. It is an easier play for the company because it doesn’t require the same level of internal innovation or investment but it also isn’t well-suited or well-embedded and is ultimately not well-accepted as a value proposition by the poor themselves. So a lot of business initiatives that have been launched this way tend to not be successful. They end up being like the walking wounded.
But to get to a greater level of success in terms of mutual value, now the new buzzword is shared value. That requires a different approach which takes more time, requires more front-end investment, necessary embedding and trust-building in the community and a kind of joint creation of value with local people and local partners. This is a value proposition that is wider and deeper than just selling a cheap product, and in the few cases it has happened either by intuition or by design or where the business by its inherent nature allows people to do that for themselves, like microfinance or rural telephony which are the only two really successful BoP businesses. By their very nature they are also enabling technologies and not really an end product. I have talked about this as “completing the unfinished symphony”. Co-creation really means you don’t come with a finished product, you only come with a concept and it is completed together.
Where have you seen this implemented most successfully?
Everywhere in the world and certainly in India. If I look at rural telephony, we have gone from less than a billion people to now six billion inside of a decade, which is pretty astonishing. The cellphone revolution can be traced back to the Grameenphone but it has morphed a lot, the technology has changed a lot, costs have come down and business models have changed. Telephone services have skyrocketed. Now the next frontier is Internet services and that’s coming as well.
To me the key is that product developers who are looking to sell end-products with preconceived ideas about what the problem is and what the value proposition is from the outside-in typically have struggled.
So it really isn’t about going with an idea and saying this is what I can do but about going with a blank sheet?
I think it is about creating a market that doesn’t yet exist. Which is the fundamental distinction between more top of the pyramid business, which is about how to compete in an established market where you already have the necessary market infrastructure in place, whereas with the base of the pyramid the challenge is about creating a new market often with the market infrastructure needed. And the only way to create a new market is by engaging people in doing something new and different that they are not accustomed to. A big part is to get people to adopt something as part of their lifestyle, change their behaviour and see it as a better way to live. Often well-intentioned business people that want to sell water coolers or solar cookers make the assumption that it is obvious to people in rural communities. And it isn’t. It takes a lot more than just coming up with a concept that allows someone to cook without electricity: that’s a case of framing the value proposition from the point of view of the seller. It is obvious to the seller but it is not obvious to the potential customer.
In India we have seen companies increasingly finding growth by marketing goods and services to this bottom of the pyramid. But we have yet to see them transform the lives of these people, which was really the spirit of your argument. Are there any examples of corporations that have been successful in this new framework?
Not many. I think that’s the next frontier, getting to the next generation of BoP businesses that have really done that. It is mostly failure stories. We have learnt a lot in the last 10 years and it is now time to get on to the next generation of businesses which create social and economic value. There have been companies out there that have been marketing goods and services without being transformative. As you say in India there have been cash transfer schemes that move money down the pyramid and there’s money to spend and then boom, there are products there which get bought. I would see that as very much of a BoP 1.0. It is in some ways the unintended consequence of a well-intended scheme. In some ways these direct transfer schemes forestall all that we are talking about since they let people just take the money and spend it and that’s not transformative.
There are clear limits to that approach. At the end of the day it can’t just be about consumption. The business model itself has to be generative, it has to create wealth for the community, generate employment and create livelihoods, create consumer surplus and save time.
In a number of instances we found that this bottom of the pyramid market is being served by local entrepreneurs rather than multinationals. Who do you think is better suited to initiate BoP 2.0?
My view is it is all of the above. We have started a new institute in Bangalore called the Emergent Institute where we are including both kinds—emerging entrepreneurs coming from the rural areas and the slums and we also look to engage corporate intrapreneurial teams. There is a different dynamic to each. The corporate angle carries with it lot more of the organizational innovation. With the entrepreneurs it is about finding the necessary finance at the right time, especially in the early stage.
Both Brazil and India, where you have set up the Emergent Institute to nurture businesses for a more sustainable world, are countries with vast income inequalities despite their rapid growth. Would you say they need new innovation models?
Absolutely. Growing inequality has really negative consequences for society. Extreme toxic inequality destroys countries, governments and turns them into failed states. Reducing that chronic inequality can only improve things and we have had ample evidence over time in different parts of the world to show that is the case. The goal obviously is not complete equality of income. That’s a pipe dream. We know there is an ideology called communism that didn’t work. There are always differences and there have to be because people are different. But toxic inequality only leads to social unsustainability and reducing that can only create a more stable society.
If we can do that and at the same time leapfrog through technologies that don’t destroy the underlying natural capital that we all depend upon, then there is actually a chance to create a better way of living. That’s when the logic around ‘trickle optimization’ and ‘reverse innovation’ comes into play. We have the opportunity to create a more desirable, more sustainable way of living, starting first in the underserved space and then one day make its way up and change the way we live.
Would you say this is a part of the process of evolution of capitalism?
That’s the title of my book! Before the 19th century, the term capitalism didn’t even exist. During the 19th century the very form of the business enterprise changed dramatically leading to the modern industrial corporation with limited liability and joint stock and all the corporate structure that we have today with all of its pluses and minuses. That was a huge metamorphosis of the economic and societal system in the 19th century almost everywhere in the world. I think we are in the midst of the next great transformation and the capitalist enterprise will evolve to another level.
But are corporate leaders seriously thinking about these changes?
Like anything else, it is a normal distribution curve. On the right hand side there are leadership teams of corporations that are definitely thinking this way. It is their personal passion and mission in life to move the enterprise they are part of in this direction. But certainly toward the middle of the bell curve there are companies that have wrapped themselves in the terminology and used its protective colouring and published glossy social responsibility reports but there is really not much change in the core of what they do.
In India, the Tatas are certainly serious about this and there are several examples of enterprises within that group. And I even look at a company like ITC which is still in the cigarettes business but over the last 20 years its portfolio has certainly shifted and moved in the direction of what we are talking about.
I am working now with Novelis which was bought by Hindalco. The CEO (of Novelis) Philip Martens’s whole strategic intent is to disruptedly innovate and change the aluminium industry. The strategy is that within 6-7 years Novelis will essentially divorce itself from mined bauxite aluminium and build itself around re-used, take-back collection systems which will include lots of livelihood generation systems in terms of formalizing waste packing and so forth. In the process, by moving to above-ground aluminium for beverages, electronics, cars, even with all the energies to take back the alloys with all their variations, it still uses 95% less energy than mining bauxite for aluminium and 95% less greenhouse gases, it is actually cheaper. It yields an enormous potential competitive advantage, creates a lot more jobs and livelihoods, especially in the lower income classes. The whole mission of the company is to create this kind of disruption.
The whole strategy has to be to be an industry disruptor. There are players out there like that. Not large numbers but you don’t actually need large numbers because you can tip the world with 2%.
What about companies like Unilever and Coca-Cola?
Unilever is serious as well. It has lots of initiatives going on. Certainly they were among the early players in the BoP business through Hindustan Lever and they’ve learnt a tremendous amount over the last 20 years. Paul Polman (Unilever CEO) has stepped out and taken some actions that are radical.
With Coke and Pepsi, yeah there are some initiatives that are happening in both of those companies but would they be in the category with Novelis? Probably not since they are in a different category altogether. But what Novelis does will eventually affect Coke and Pepsi as well. For instance, Novelis has developed something called the EverCan. Right now you have different alloys for the top and bottom of a can which after you’ve collected the can makes it much more complicated to recycle and reuse the aluminium because you have to cut the bottom and the top off and separate them from the body. Novelis figured out how to make a can without different alloys.
What do you think Prahalad would have made of all this?
It’s been three years since he passed away. I think C.K., were he still alive, would be moving on to what he saw as the next challenge. He was probably not someone who would have dedicated the rest of his life to BoP. I think he would have felt like he had accomplished what he set out to accomplish, which was to raise this on the corporate agenda, and that is done. So had he been alive he would be on to what he sees as the next frontier.
To read the rest of the stories in this series, go to www.livemint.com/ruralconsumption.