Growth Strategies For Fmcg Companies In India

Published Date: 02 Nov 2017

This project explores the emerging strategies followed by FMCG companies in order to tap the Indian market, especially in the bottom of the pyramid. Initially, the BOP framework, developed by CK Prahlad and Hart at the end of the last century suggesting that corporations could profitably serve the 4 billion people in the world who were at the bottom of the pyramid, is discussed in detail. This is followed by thorough analysis of strategies being followed by the major FMCG companies in India to tap the BOP customers.

In India, FMCG majors such as Hindustan Unilever and ITC have been pioneers in reaching out to people in the bottom of the pyramid. Through unique strategies and a vision to capture the markets of the future, these Indian behemoths continue to lead the rest of the companies in the sector with respect to market development at the BOP. This research project has studied the critical elements of the strategies employed by Indian FMCG firms, in particular HUL and ITC, as well as others like Procter & Gamble and Nestle, through extensive discussions with the middle management at these companies. These strategies have then been discussed in the light of the framework provided by CK Prahlad in his landmark work: The fortune at the Bottom of the Pyramid (2004).

Further, several other strategies followed by the companies like introduction of new products, branding activities, competitive advantage gained through corporate social responsibility is also discussed.

Towards the end, the strategies of two giants of FMCG industry- HUL and ITC, have been discussed in detail, including the historical context, their business models, achievements, and future plans and strategies to win in the BOP markets.

Introduction

C. K. Prahalad has worked for years to find a new way to solve the problem of poverty. Teaming up first with Stuart Hart (Prahalad and Hart 2002) and then Allen Hammond (Prahalad and Hammond, 2002; Hammond and Prahalad 2004), he developed a set of ideas about what have come to be known as "bottom of the pyramid" (BOP) initiatives. When Prahalad began to pitch the idea that consumers who lived at the bottom of the economic pyramid should be treated as ‘individuals’ who could be brought into the picture as ‘co-creators’ to solve their own economic problems, he was treated with disbelief by the academic community. The traditional idea that the poor will always be ‘wards of the state’ was hard to shake-off.

Prahlad has looked at the BOP as a viable and profitable growth market, suggesting that treating the BOP as a market can lead to poverty reduction, particularly if NGOs and community groups can join with MNCs [multinational corporations] and local companies as business partners. The development of markets and effective business models at the BOP can transform the poverty alleviation task from one of constant struggle with subsidies and aid to entrepreneurship and the generation of wealth. When the poor at the BOP are treated as consumers, they can reap the benefits of respect, choice, and self-esteem and have an opportunity to climb out of the poverty trap.

Figure 1: The BOP premise

Source: C.K. Prahalad and Stuart Hart, 2002. The Fortune at the Bottom of the Pyramid, strategy+business, Issue 26, 2002.

While he intends to draw on businesses' capabilities, he does not ask them to play a controversial social welfare role. Rather, he asks business to do better at what it already does so well: create wealth. Prahalad asks business to focus on those who make less than $2 per day, not as aid recipients but as customers: "the poor represent a significant latent purchasing power that must be unlocked". By serving this $13 trillion market, Prahalad concludes, "I have no doubt that the elimination of poverty and deprivation is possible by 2020".

While the idea was met with initial skepticism in the academic circles, it has steadily gained ground over the last few years as more and more companies have started to target customers at the bottom of the pyramid in order to sustain high growth rates. Over the last decade, tapping the bottom of pyramid has emerged as a central theme for much of the industry in emerging markets, more so in India where more than 350 million people survive on $2/day or less. A growing number of global companies have been drawn to the seductive idea that money can be made by developing and marketing products for those at the bottom of the pyramid, some four billion people around the world. Not only are these companies attracted by the prospect of discovering markets with untapped growth potential, but they’re also aim to have an impact, in a global society characterized by deep divisions between the haves and the have-nots.

The key, according to Prahalad and Hart, is to see these impoverished people as customers worthy of a corporation's attention. To do so requires a profound change in how business people think about product and market development, as well as their return on investment. They argue that this will require a significant change in the dominant logic of the MNCs' managers.

Literature Review

The market for products and services delivered to the poor people of the world is huge. Consumers at the very bottom of the economic pyramid – those with per capita incomes of less than $1,500 – number more than 4 billion. For more than a billion people – roughly one-sixth of the world’s population – per capita income is less than $1 per day. The 20 biggest emerging economies include more than 700 million such households, with a total annual income estimated at some $1.7 trillion, and this spending power is approximately equal to Germany’s annual gross domestic product (Prahalad and Hart, 2002). India has 171 million low-income households with a combined $378 billion in income. But the success of multinational corporations in penetrating these low-income customers has been patchy at best, with most companies based in the developed world choosing to focus on the middle and upper income segments of the developing world. The business world seized the opportunity at the bottom of the economic pyramid. The causes are: corruption, poor infrastructure, non-existent distribution channels, illiteracy, lack of robust and enforceable legal frameworks, religious or racial conflict, and war or violent insurgencies that stifle the enthusiasm of companies in serving people living in poverty. Indeed, most large firms have elected to leave this consumer segments to local companies or government agencies and focus on the ‘‘low hanging fruit’’ – the middle and upper classes. But while the vast majority of corporations have seen these challenges as insurmountable barriers, other have quietly pursued strategies of experimentation in developing unique product and service propositions for the world’s most needy consumers. Research has revealed that these companies are not exclusively those at home in countries such as India, China or the Philippines. Multinationals those have accepted the challenge of serving the poor and have been able to do so profitably. At the heart of virtually all of these organizations’ success has been the development of an approach that delivers the 4As – availability, affordability, acceptability and awareness.

The 4 As are defined as follows:

Availability – the extent to which customers are able to readily acquire and use a product or service. Distribution channels in bottom of the economic pyramid (BOP) markets can be fragmented or non-existent and the task of simply getting products to people can be a major hurdle to overcome. Companies need to explore alternative methods of delivering their products and services to even the most isolated BOP communities.

Affordability – the degree to which a firms goods or services are affordable to BOP consumers. Many low-income consumers in developing countries survive on daily wages, meaning that cash-flow can be a significant problem. Companies need to be able to deliver offerings at a price that enables consumption by even the poorest consumers.

Acceptability – the extent to which consumers and others in the value chain are willing to consume, distribute or sell a product or service. In BOP markets, there is often a need to offer products and services that are adapted to the unique needs of both customers and distributors. Companies might need to respond to specific national or regional cultural or socioeconomic aspects, or to address the unique requirements of local business practices.

Awareness – the degree to which customers are aware of a product or service. With many BOP customers largely inaccessible to conventional advertising media, building awareness can be a significant challenge for companies wishing to serve low-income consumers in the developing world. To overcome these constraints companies must explore alternative communication channel

By leveraging the 4As companies can achieve growth and profit, two elusive goals in many developed markets. The strong financial performance of Hindustan Lever is well documented, and the Haier Group is now among the top five appliance makers in the world, with self-reported 2004 revenues of more than US$10 billion. Smart Communications Inc. – in early 2005 Philippine Long Distance Telephone Company (PLDT), Smart’s parent organization, revealed a net profit of US$512 million for the full year 2004, up from US$38 million the previous year. But beyond financial success for companies such as Haier, Hindustan Unilever and Smart, delivering the 4As has also enabled companies to provide significant social good. Low income consumers have benefited from access to products and services uniquely tailored to meet their needs, and often at a lower cost than in the past. (Garrette & Karnani 2010)

The UN Millennium Project has turned the spotlight on measures to end poverty for about four billion people who live in poverty. Such people who are economically at the bottom the pyramid (BOP) have been a challenging market for firms that seek to make profit. This market is traditionally considered the domain of governments, aid agencies, nonprofits, NGOs and other do-gooders. Yet this is a market that merits attention even by for-profits. The BOP is severely constrained by lack of income and hence only certain products or services that are more utilitarian would be viable. If the cost of producing a reasonable quality product is still high, then BOP would be unable to afford it and hence there is no fortune at BOP.

Increasing consumption is not necessarily sustainable (Landrum, 2007). No matter what the income level is, human beings consume. Consumption, however, has been has been more semantically related to consumerism, the pursuit of material goods or the satisfaction of higher order needs after subsistence needs are met (Ger, 1997; Clarke et al., 2003). In spite of marketers creating "new" expectations and aspirations, unless a need is being satisfied, marketing to this segment will not be successful. Consumption as noted by Clarke et al. (2003), includes both the creative or production aspect. Thus, it is not merely products offered to BOP that constitutes consumption, but also those produced by BOP that can be sold within that market or to the top of the pyramid (TOP). Both advocates of fortune at BOP as well as those who consider it as hype agree that this is an important aspect to consider when marketing to this segment. However, no one has suggested whether there are explicit linkages between these two types of consumption. Characterization BOP consumption by classification of the various products they consume in terms of broad categories has to be delved into. Examination of what motivates BOP consumption is imperative. Motivation and Marketing theories are enablers.

An overview of categories of consumption and innovations in the same provides insights to what and why BOP consumes. By cataloguing the various needs and examining BOP examples, consumption patterns were identified. In spite of having income and resource constraints, BOP consumers are sophisticated and creative. BOP consumers are motivated not just by survival and physiological needs but seek to fulfill higher order needs either to build social capital, for cultural reasons or as a means to compensate for deficiencies in other areas of their lives. Though service in critical infrastructural areas is needed by governmental and aid agencies, firms that do want to serve BOP markets should understand how individual markets function. While survival and safety needs are indeed critical, building bonds with community and higher order needs such as self-esteem and self-fulfillment lead to greater productivity and profit opportunities. Advances in information and communication technologies have enabled BOP to connect to the global economy. Providing "marketplace" services and education are crucial services that enable greater sustainability of BOP marketing. Mobilizing community efforts, creative pricing methods, innovative product designs, tapping into cultural and locally prevalent ways of communicating are some of the successful marketing strategies for this segment. (Subrahmanyan & Gomez-Arias 2008)

Market-based solutions to alleviate poverty have become increasingly popular in recent years. In his book Fortune at the Bottom of the Pyramid, C.K. Prahalad argues that private companies, especially large multinational companies, can make significant profits by marketing to the people living at the "bottom of the pyramid" (BOP) and can simultaneously help eradicate poverty. The BOP proposition of "doing well by doing good" is, of course, very appealing and has attracted much attention. At the same time, this proposition is controversial in the current management literature. Karnani argues that the BOP opportunity is a "mirage" and that its logic is "riddled with fallacies." Jaiswal contends that the "accounts of corporations succeeding at the BOP sometimes strain credulity." There are very few examples of profitable businesses that market socially useful goods in low-income markets and operate at a large scale. There are many examples of businesses that profit by exploiting the poor. The poor are vulnerable by virtue of lack of education or lack of information, and by virtue of economic, cultural, and social deprivations. Banerjee and Duflo show that the poor spend a "surprisingly large" fraction of their income on alcohol and tobacco. Many companies exploit this tendency and make significant profits from the sale of alcohol and tobacco to the poor. Products such as tobacco are easy to analyze: they are profitable businesses that are socially bad for the poor; and they clearly do not fit the BOP proposition. The problem with the consumer challenges in Marketing Socially Useful Goods to the Poor focused BOP approach is that it does not differentiate between priority and non-priority areas.

The real challenge is to design market-based solutions for alleviating poverty, which implies profitable businesses that provide socially beneficial products and services to the poor that genuinely improve the quality of their lives. Only publicized initiatives like Grameen Bank and Aravind Eye Care—attained a scale sufficient to transform a ‘business model’ into a ‘solution’. However, it is ironic, and instructive, that both these examples are not-for-profit organizations and cannot be classified as commercial successes or as market-based solutions. The article discusses the BOP businesses that are unquestionably socially virtuous and investigate how to develop profitable strategies in that context. Three BOP initiatives that have not been commercial successes—Procter & Gamble, Essilor, and Danone – are analyzed. All three companies have significantly down-scaled their initial plans and converted their efforts into small experimental operations.

Examining these three cases in-depth yields several interesting insights on the key success factors for BOP initiatives. The overarching lesson from the analysis of cases is that, far from triggering a revolution in business thinking, developing BOP strategies requires firms to get back to the basic principles and rules of economics and business. The context is different in BOP markets from more affluent markets, but durable business principles are still an effective guide to strategy development. Context changes, the logic of business does not change. The generous and well-intentioned social objectives of BOP initiatives must not hide the fact that these opportunities present tough economic and strategic challenges. The desire to do well should not blind managers to the realities of underlying economic forces that determine business success and failure. Companies, academia, civil society, and governments have devoted increasing efforts and attention to generating market-based solutions to alleviate poverty. In spite of this, there are very few examples of profitable businesses that market socially useful goods in low-income markets and operate at a large scale. Combining social virtue with profitability, while achieving scale, is a major challenge. The desire for a positive outcome should not blind managers and policy makers to the difficulty of the challenge.

The dominant lesson drawn from the case studies is that developing BOP strategies requires firms to get back to the basic principles and logic of economics and business: focused objectives, understanding the customers, and appreciating the role of economies of scope and scale. The biggest difference between BOP and affluent markets is the obvious but under-emphasized fact that the poor have very low purchasing power. Designing the business model to serve BOP markets has to start with this basic insight rather than a minor adaptation of the business model successful in affluent markets. Firms must shift from creating needs in existing markets to creating markets out of unmet needs.

There is no fortune at the bottom of the pyramid. Marketing socially useful products to the poor offers only limited business opportunities. However, companies that make the relevant trade-offs will profit from seizing these opportunities. The current situation of BOP businesses might be analogous to the "New Economy" fad in the late 1990s. There were then many dot-com gurus calling for a change in the business paradigm, and myriads of start-up firms launched new "business models" that denied basic economic principles. However, after the bubble burst, a few winners did emerge, such as Amazon and Google. Tomorrow’s BOP champions are probably hidden somewhere in the current experiments that firms are launching. (Anderson & Billou 2007)

Sachets have been marketed by firms as a strategy to increase trials and market penetration especially in the economically underprivileged societies of the emerging markets. Very often the existence of an economic underclass is assumed to be a necessary prerequisite for the successful implementation of sachet marketing strategy. The article challenges the stance, and provides a managerially relevant theoretical framework to evaluate the sachet marketing strategies of firms marketing in India. It is proposed that sachet marketing strategy does not necessitate the prevalence of poverty, and the critical success factors are an extensive retail distribution, favorable socio-cultural factors, and higher perceived value by the consumers, and technology to reduce packaging costs.

Sachet marketing, or the practice of serving products and services in small, affordable sizes, is widely used to tap the lower-end market, nowhere more successfully than in India, and in a few other south-east Asian nations such as Philippines and Indonesia. The importance of the single serve shampoo sachets in India can be gauged by the fact that it makes up more than 95% of industry sales in units, constituting 60% of sales value.

The sachet has become an important device for reaching the untapped market of the economic underclass. If poverty was the main reason for the success of sachet marketing, it should have seen much more widespread popularity in countries much poorer than India -Pakistan or Vietnam. The term "sachet marketing" connotes marketing single-use shampoo sachets which are sold for a few cents in underdeveloped and emerging markets. Sachet Marketing is defined as the entire marketing strategy involving designing, packaging, and selling a product/service in a small pack size at an affordable price point to consumers. The "affordability" aspect of sachet marketing can be either in terms of lower price point. The focus of sachet marketing is not just on the product design or pricing, but rather on the entire marketing system: from pricing and packaging to delivery, distribution, and usage occasion.

Sachet marketing has been applied to almost every product and service category in India. Numerous factors, historical, cultural, and not just economic, have contributed to the success of sachet marketing in India. The success of sachet marketing is due to its enthusiastic adoption by Indians from all economic brackets, and not just the lowest ones. Sachet marketing strategy in India is being used to drive volumes rather than value (and profits) for the company, but unless companies adopt means to increase value to consumers (especially rural consumers) and simultaneously reduce internal operational costs (e.g. distribution and packaging costs), they are unlikely to be successful for shoring up their bottom-line in the long run. (Singh, Ang & Sy-Changco 2009)

Reasons for choosing the FMCG Industry was chosen

The Fast Moving Consumer Goods (FMCG) sector is a corner stone of the Indian economy. This sector touches almost every aspect of human life. The FMCG producers now realize that there is a lot of opportunity for them to enter into the rural market. The sector is excited about the rural population whose incomes are rising and the lifestyles are changing. There are as many middle income households in the rural areas as there are in the urban. Thus the rural marketing has been growing steadily over the years and is now bigger than the urban market for FMCGs. Globally , the FMCG sector has been successful in selling products to the lower and middle income groups and the same is true in India. Over 70% of sales come from middle class households today and over 50% of the middle class is in rural India. Also with a near saturation and cut throat competition in urban India, many producers of FMCGs are driven to chalk out bold new strategies for targeting the rural consumers in a big way. But the rural penetration rates are low. This presents a tremendous opportunity for makers of branded products who can convert consumers to buy branded products.

Many companies including MNCs and regional players started developing marketing strategies to lure the untapped market. While developing the strategies, the marketers need to treat the rural consumer differently from their counterparts in urban because they are economically, socially and psycho-graphically different to each other.

Impulse to go Rural

There are many reasons that compel the FMCG companies to enter the uncharted territory of rural India. Some of the attractions are discussed below;

Large Population

The rural Indian population is large and its growth rate is also high. Over 70% India’s one billion plus population lives in around 627,000 villages in rural areas. This simply shows the great potentiality rural India has to bring the much needed volumes and help the FMCG companies to bank upon the volume driven growth.

Table 1

Area

Households

Population

Rural

72.6

74.6

Urban

27.4

25.4

All India

100

100

Source: Census 2001

Rising Rural Prosperity

India is now seeing a dramatic shift towards prosperity in rural households. As per the National Council for Applied Economic Research (NCAER) study, there are as many ‘middle income and above’ households in the rural areas as there are in the urban areas. There are almost twice as many ‘lower middle income’ households in rural areas as in the urban areas.

Table 2

Income Group

2001-02

2006-07

Total

Rural No.

%

Total

Rural No.

High

1.48

0.41

27.7

2.96

0.7

Middle

69.18

4.83

64.8

90.25

59.85

Low

32.39

29.52

91.42

20.41

95.8

Total

102.95

74.76

72.6

114.52

80.96

Despite the high rural share in these categories, the rural penetration rates are low, thus offering tremendous potential for growth.

Growth in market

The purchasing power in rural India is on steady rise and it has resulted in the growth of the rural market. The market has been growing at 3-4% per annum adding more than one million new consumers every year and now accounts for more than 50% of volume consumption of FMCG. The growth rates of lot of FMCG are higher in rural markets than urban markets. (Raj & Selveraj, 2007)

Methodology

Since this is an exploratory research to broadly determine the emerging bottom of pyramid strategies, the case study methodology has been employed. Since the research subject is relatively new, the literature review was conducted to develop the theoretical context for the project. Furthermore, the findings in the literature were adopted and used in the analysis.

In order to study the different strategies of FMCG firms, interviews were conducted with middle level managers of Hindustan Unilever Limited, Procter &Gamble, ITC, Nestle and Amul. These interviews dwelt upon

The current target customers for different products of that company

Reach of distribution channel

Historical initiatives to tap into the bottom of pyramid markets

Current strategies to reach BOP consumers

Future plans to reach BOP consumers with existing and yet to be introduced/ developed products

Through these interviews, common insights gained about the emerging BOP strategies, based on an organization’s learning from previous attempts, were identified and described in the context of the BOP framework proposed by CK Prahlad.

Out of these companies, the two companies which had spent significant effort in reaching BOP consumers were HUL and ITC. The entire distribution strategy, together with historical context, present strategies and future plans, is presented here.

Bottom of Pyramid Framework

CK Prahalad’s proposes that if we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity can open up. Four billion poor can be the engine of the next round of global trade and prosperity. They can be a source of innovations. Serving the BOP consumers will demand innovations in technology, products and services, and business models. More important, it requires large firms to work collaboratively with civil society organizations and local governments.

Market development at the BOP can also create millions of new entrepreneurs at the grass roots level—from women working as distributors and entrepreneurs to village-level micro enterprises. These micro enterprises will be an integral part of the market-based ecosystem. It requires organizational and governance innovations as well.

The economic pyramid of the world is given below:

Figure 2: The economic pyramid

Source: C.K. Prahalad and Stuart Hart, 2002. The Fortune at the Bottom of the Pyramid, strategy+business, Issue 26, 2002.

The distribution of wealth and the capacity to generate incomes in the world can be captured in the form of an economic pyramid. At the top of the pyramid are the wealthy, with numerous opportunities for generating high levels of income. More than 4 billion people live at the BOP on less than $2 per day.

The dominant logic in MNC’s at the time, according to Prahalad, was as follows:

Table 3

Assumption

Implication

The poor are not our target customers, they cannot afford our products

Our cost structure is fixed; with our cost structure, we cannot serve the BOP markets

The poor do not have use for products sold in developed countries

We are committed to a form over functionality. For example, the poor might need sanitation, but can’t afford detergents in formats we offer. Therefore, there is no market in the BOP.

Only developed countries appreciate and pay for technological innovations.

The BOP does not need advanced technology solutions; they will not pay for them. Therefore, the BOP cannot be a source of innovations.

The BOP market is not critical for long-term growth and vitality of MNCs.

BOP markets are at best an attractive distraction.

Intellectual excitement is in developed economies; it is very hard to recruit managers for BOP markets.

We cannot assign our best people to work on market development in BOP markets.

Adapted from C.K. Prahalad and Stuart Hart, The Fortune at the Bottom of the Pyramid, strategy+business, Issue 26, 2002

However, he argues that

There is money at the BOP.

By virtue of their numbers, the poor represent a significant latent purchasing power that must be unlocked. For example, all too often, the poor tend to reside in high-cost ecosystems even within developing countries. In the shanty town of Dharavi, outside Mumbai, India, the poor pay a premium for everything from rice to credit. Compare the cost of everyday items of consumption between Dharavi and Warden Road (now redesignated B. Desai Road), a higher-income eighborhood in Mumbai. The poverty penalty in Dharavi can be as high as 5 to 25 times what the rich pay for the same services. Large-scale private-sector businesses can "unlock this poverty penalty.

The BOP Markets are brand conscious

The experience of Casas Bahia in Brazil and Elektra in Mexico—two of the largest retailers of consumer durables, such as televisions, washing machines, radios, and other appliances—suggests that the BOP markets are very brand-conscious. Brand consciousness among the poor is universal. In a way, brand consciousness should not be a surprise. An aspiration to a new and different quality of life is the dream of everyone, including those at the BOP. Therefore, aspirational brands are critical for BOP consumers. However, BOP consumers are value buyers. They expect great quality at prices they can afford. The challenge to large firms is to make aspirational products affordable to BOP consumers.

The BOP Market is connected.

The spread of wireless devices among the poor is proof of a market at the BOP. The Indian market has 700 million+ mobile customers, and it is still growing at a fair clip. Connectivity also allows the BOP consumers to establish new patterns of communication away from their villages. With cell phones and TV, the BOP consumer has unprecedented access to information and opportunities to engage in a dialogue with the larger community. As a result, word of mouth among BOP consumers is becoming a potent force for assessing product quality, prices, and options available to them.

The BOP Consumers readily adopt advanced technologies.

The spread of wireless devices, PC kiosks, and personal digital assistants (PDAs) at the BOP has surprised many a manager and researcher. For example, ITC decided to connect Indian farmers with PC’s in their villages. The e-Choupal network allowed the farmers access to information that allowed them to make decisions about how much to sell and when, thus improving their margins.

The task of converting the poor into consumers is one of market development. Market development involves both the consumer and the private-sector firm. In order to develop the market, firms need to

Create the capacity to consume

To convert the BOP into a consumer market, we have to create the capacity to consume. Cash-poor and with a low level of income, the BOP consumer has to be accessed differently. Creating the capacity to consume is based on three simple principles best described as the "Three As":

Affordability: Whether it is a single-serve package or novel purchasing schemes, the key is affordability without sacrificing quality or efficacy.

Access: Distribution patterns for products and services must take into account where the poor live and their work patterns. Most BOP consumers must work the full day before they can have enough cash to purchase the necessities for that day.

Availability: Often, the decision to buy for BOP consumers is based on the cash they have on hand at a given point in time. They cannot defer buying decisions. Availability (and therefore, distribution efficiency) is a critical factor in serving the BOP consumer.

Provide dignity and choice

When the poor are converted into consumers, they get more than access to products and services. They acquire the dignity of attention and choices from the private sector that were previously reserved for the middle-class and rich.

Build trust

Both sides—the large firms and the BOP consumers—have traditionally not trusted each other. The mistrust runs deep. However, private-sector firms approaching the BOP market must focus on building trust between themselves and the consumers.

Based on research conducted by Prahalad and Hart, 12 principles of innovation were suggested that, taken together, constitute the building blocks of a philosophy of innovation for BOP markets.

Focus on price performance of products and services. Serving BOP markets is not just about lower prices. It is about creating a new price-performance envelope. Quantum jumps in price performance are required to cater to BOP markets. Traditional approaches to reducing prices by 5 to 10 percent will not suffice. Companies should focus on an overall price-performance improvement of 30 to 100 times.

Innovation requires hybrid solutions. BOP consumer problems cannot be solved with old technologies. Most scalable, priceperformance- enhancing solutions need advanced and emerging technologies that are creatively blended with the existing and rapidly evolving infrastructures.

As BOP markets are large, solutions that are developed must be scalable and transportable across countries, cultures, and languages. How does one take a solution from the southern part of India to the northern part? From Brazil to India or China? Solutions must be designed for ease of adaptation in similar BOP markets. This is a key consideration for gaining scale.

The developed markets are accustomed to resource wastage. For example, if the BOP consumers started using as much packaging per capita as the typical American or Japanese consumer, the world could not sustain that level of resource use. All innovations must focus on conserving resources: eliminate, reduce, and recycle. Reducing resource intensity must be a critical principle in product development, be it for detergents or ice cream.

Product development must start from a deep understanding of functionality, not just form. Marginal changes to products developed for rich customers in the United States, Europe, or Japan will not do. The infrastructure that BOP consumers have to live and work in demands a rethinking of the functionality anew. Washing clothes in an outdoor moving stream is different from washing clothes in the controlled conditions of a washing machine that adjusts itself to the level of dirt and for batches of colored and white clothes.

Process innovations are just as critical in BOP markets as product innovations. In developed markets, the logistics system for accessing potential consumers, selling to them, and servicing products is well developed. A reliable infrastructure exists, and only minor changes might need to be made for specific products. In BOP markets, the presence of a logistics infrastructure cannot be assumed. Often, innovation must focus on building a logistics infrastructure, including manufacturing that is sensitive to the prevailing conditions. Accessing potential consumers and educating them can also be a daunting task to the uninitiated.

Deskilling work is critical. Most BOP markets are poor in skills. The design of products and services must take into account the skill levels, poor infrastructure, and difficulty of access for service in remote areas.

Education of customers on product usage is key. Innovations in educating a semiliterate group on the use of new products can pose interesting challenges. Further, most of the BOP also live in "media dark" zones, meaning they do not have access to radio or TV. In the absence of traditional approaches to education—traditional advertising—new and creative approaches, such as video mounted on trucks and traveling low-cost theatrical productions whose job it is to demonstrate product usage in villages, must be developed.

Products must work in hostile environments. It is not just noise, dust, unsanitary conditions, and abuse that products must endure. Products must also be developed to accommodate the low quality of the infrastructure, such as electricity (for example, wide fluctuations in voltage, blackouts, and brownouts) and water (for example, particulate, bacterial, and viral pollution).

Research on interfaces is critical given the nature of the consumer population. The heterogeneity of the consumer base in terms of language, culture, skill level, and prior familiarity with the function or feature is a challenge to the innovation team.

Innovations must reach the consumer. Both the highly dispersed rural market and a highly dense urban market at the BOP represent an opportunity to innovate in methods of distribution. Designing methods for accessing the poor at low cost is critical.

Paradoxically, the feature and function evolution in BOP markets can be rapid. Product developers must focus on the broad architecture of the system—the platform—so that new features can be easily incorporated. BOP markets allow (and force) us to challenge existing paradigms. For example, challenging the gridbased supply of electricity as the only available source for providing good-quality, inexpensive energy is possible and necessary in the isolated, poor BOP markets.

Data Analysis: Emerging BOP Strategies

Varying Definitions of BOP

A key aspect that has emerged over the last decade with respect to BOP has been the liberal way in which it has been interpreted. Some companies have talked about the Next Billion (Bhan & Tait 2009). Some have focused on the Next 4 Billion. Some focused on the Bottom Billion. There is also significant debate on who are at the Bottom of the Pyramid—people living on less than $2/day or $1/day? What about people earning more than $2/day but still in poverty without adequate access to world class goods and services? For example, in the telecom sector, the BOP in 2000 consisted of almost 95% of the population that was deprived of basic access to telephony.

There is also a growing focus on the Middle of the Pyramid, or the aspiring middle class. A recent study by the Economist concluded that half the world can be classified as the emerging middle class; defined as a population living on $2–13 at 2005 Purchasing Power Parity prices. They have discretionary income and spend on education, health, energy, transportation, and personal care. This market by some estimates includes 2.6 billion people in 2005 and is rising fast. Asia alone is expected to have approximately 60 percent of the global middle class. Most of the growth that we have seen in the FMCG sector in recent years can be attributed to the section of the pyramid rather than truly the bottom of the pyramid. Further, a majority of MNC’s have focused on the middle pyramid so far, including Procter & Gamble, Nestle and Reckitt Benckiser. Only a few companies such as HUL and ITC have gone truly rural in their reach, although as is covered later in the case studies, they see it more as an investment for the future rather source of present profits.

The 4 billion people who constitute the Bottom of the Pyramid are not a monolith. For those who want to engage in this opportunity, there is no single universal definition of the Bottom of the Pyramid that can be useful. The definition must fit the focus for productive engagement. Companies can and do choose to serve any segment of the 4 billion. No institution—a firm or nongovernmental organization—needs to serve all of the Bottom of the Pyramid. They can pick and choose. Most FMCG firms till today have direct reach up to villages with population of 5000 people.

The concept of the emerging consumer allows each firm to decide which segment of the Bottom of the Pyramid it wants to serve. Some firms, such as Unilever that have a long history of working in developing markets, now focus on "Straddling the Pyramid"—participating across the entire spectrum of opportunities often with the same category of products. It is fair to say that the idea of the Bottom of the Pyramid as an opportunity has firmly taken root in the FMCG sector.

Innovation

The process of innovation for the BOP has forced a new set of disciplines. First, the focus is on price performance. Innovations must become value-oriented from the consumer’s perspective. The BOP focuses attention on both the objective and subjective performances of the product or service. Markets at the BOP also focus on the need for 30 to 100 times improvements in price performance. Even if the need is only for 10 to 20 times improvement, the challenge is formidable. Serving the BOP forces a new business model on MNCs. Management systems developed for a price performance level cannot be fine-tuned to cope with the demands of the BOP markets. And most MNCs have now adapted to the needs of the BOP.

According to Mr. Banga, former CEO of HUL, 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. Mr. Banga suggests that the real challenge in BOP markets is that managers have to cope with the "I curve."

Figure 3: The S-Curve and I-Curve

Source: CK Prahalad, Fortune at the Bottom of the Pyramid Revised, 2009

The I-curve has different implications for scaling. The timing of investments, investment intensity, and the pace of market and distribution development become crucial, as is the rate at which costs must be brought down to fuel growth of the market.