Monday, September 14, 2009

Part 3: Review of Chapter 3: BOP: A Global Opportunity

Working towards providing a solution in real terms for the MNCs to help them target their products at BOP market, Prahalad has taken the first step in this chapter. In this chapter, he has talked about the drawbacks of the existing strategies of the company and the hurdles that they have to cross to tap the largely potential BOP market. In this chapter, he argues about the four sources of opportunity for large firms to invest in BOP markets:
1. Large customer base.
2. Local innovations can be globalized
3. BOP solutions can be used in developed markets
4. BOP markets can change management practices
The first thing that is talked about is the traditional approach of the companies to develop products for the BOP markets. Very truly, Prahalad has argued that the companies have been making some modification here and there and doing some fine-tuning to the products and services for developed markets to serve the BOP markets. This approach is definitely a recipe for failure because the requirements of the BOP customers are different from those of the upper end customers. In such a case, the big firms should find innovative solutions for the BOP customers, which can then be transported to similar markets in the world.
Another advantage of developing solutions specifically for the BOP markets is the innovation required for these products. As mentioned in previous chapters, BOP customers are conscious about value-for-money. So, to cut down the costs exponentially but maintaining the level of service, breakthrough innovations are imperative. As Prahalad says, “The BOP can be a source of innovations for not only products and processes, but business models as well.”
But a major hurdle to the shift in paradigm is the steep learning curve that the firms will have to undergo. As is quoted in the book, “MS Banga, CEO of HLL suggests that the real challenge in BOP markets is that managers have to cope with the “I curve”.” Traditionally, the firms have been following a S-shaped learning curve, but to bring in innovation for serving the BOP markets, they need to pace up the innovation process and the curve has to be a much steeper I-curve.
If the companies are able to cross this hurdle of fast innovation cycle, the resulting innovations could be used not only in the local BOP market, but for similar markets across the globe. Solutions to the BOP problems like Iodine Deficiency Disorder have been served through this approach only where the solution was taken from India to Ivory Coast, Kenya and Tanzania. Similarly, the innovations of Jaipur Foot and Aravind Eye Care have been studied across the world and replicated wherever possible. Apart from the global application of the BOP solutions, these solutions can even be implemented to the upper end of the market because these innovative products provide more value-for-money and ensure lesser wastage of resources.
The major lessons that the MNCs can learn from the BOP markets are
1. Capital Intensity: High R&D and selling expenses can be a big challenge to the current assets of the firms while trying to capture the BOP markets.
2. Sustainable Development: Minimal wastage of resources and continuous strive for higher efficiency are imperative to keep the costs to the minimum.
3. Innovations: “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.”
4. Self Help Groups: Business management skills, technology and contacts can be pushed down to the grassroots level.
In the end, Prahalad emphasizes that through this process of transformation, the large corporate and MNCs will eventually learn to transform their ideals of good corporate citizenship and social responsibility into their core business.

Monday, September 7, 2009

Part 2: Review of Chapter 2: Products and Services for the BOP

The second chapter of the book (CK Prahalad’s “The Fortune at the Bottom of the Pyramid”) talks primarily about the product innovation strategies that the companies should develop to serve the BOP customers. Prahalad emphasizes the fact that “the basic economics of the BOP market are based on small unit packages, low margin per unit, high volumes and high return on capital employed” as opposed to the top of the pyramid. To make the retailing for BOP consumers feasible, Prahalad suggests that the products and processes need to be developed through the process of innovation. For product innovation, he suggests twelve principles which are briefed below.

1. High price performance or value-for-money
2. Hybrid solutions with cutting edge technologies
3. Scalable and transportable solutions across countries
4. Effective resource utilization
5. Rethinking of functionality
6. Process innovations
7. Deskilling
8. Education to customers by creative media
9. Products for hostile environment
10. Research on interface
11. Accessibility of innovation
12. Rapid feature and functional evolution

Prahalad claims that these twelve principles cover all the industries but every industry might not find every step very useful. So, the companies or organizations that are targeting the BOP markets, should pick and chose the principles that are applicable to their particular industry.
Quite ironically, none of these principles seems to focus on collaboration among the private sector players to provide innovative solution packages to the BOP customers. Collaboration and Co-optation are the two important tools for marketing the products in the BOP markets. A television set cannot be marketed to someone in the Himachal mountains unless there is no electricity and Tv tower. Neither can mobile phone be sold to a person from the rural areas of Orissa where there’s no mobile network available. Mr. Vipul Nair, Consultant, Diamond Consultants said in an interview to UTVi, “…you need electricity to charge your mobile phone, if you want to use it. (But) when electricity has not reached a place, how will the mobile telephony?” So, rather than developing their own supply chains from scratch, companies should collaborate and sell their products through common supply chains. This innovation will definitely help the customers when they will get access to more products, but it’ll increase the efficiencies of the companies as well.
In his elaboration of the first principle, Prahalad mentioned that “Building the savings habit and giving them access to the basic building blocks of financial services must precede providing them with access to low-cost loans or rain and crop insurance.” I completely agree with this point and I pointed this out in the review of the first chapter as well. Rather than sucking the blood out of the poor, BOP customers, the companies should focus on developing the living standards and providing them with jobs, before turning them into potential loyal customers. But sadly, the cart is often put before the horse in the capitalist world.
One issue that I raised in the previous post and that has been further re-emphasized is that issue of defining the BOP market. Prahalad has been referring the entire Indian and entire Chinese market as the BOP market, throughout his literature. On the contrary, when he defined the BOP in the beginning, he defined it on the basis of PPP. How can this irony be resolved? What is the exact size of the BOP market? It’s necessary to know for the companies before venturing into the market.
While talking about the sustainable development, Prahalad says that the MNCs and other big companies are in real dilemma in concern with the packaging problem. The dilemma rises out of the fact that packaging is necessary to preserve the food but recycling is not possible because of poor recollection mechanism. I have a solution for this: The companies should start offering a little discount on the next unit of a product if customer returns the packaging of the previous pack. This will have two benefits. First, the collection will become much easier from the points of sale, rather than collecting them individually from the houses. Second, the customer loyalty to the product will also be maintained and increased. I really believe that this idea can work wonders if implemented properly.
A major anomaly in the explanation of principles is observed where CK Prahalad says that since most of the BOP markets are media black, companies need to find creative ways to educate them about the products. In the previous chapter however, while trying to emphasize that the BOP customers have money to spend, he mentioned that 85% of households living in the slums of Dharavi (Mumbai, India) have Tv at home. I don’t know which fact to trust and how to make an opinion about it.
The major disappointment has occurred from the fact that all the examples in Prahalad’s text revolve around the 7-8 case studies prepared by his students and most of them come from India. Aravind Eye Care, Jaipur Foot, ITC e-choupal, HLL's Shakti and ICICI’s retail banking are the only examples that Prahalad seems to have relied upon for his research. The motive of reading the book from a Harvard professor to get an over-view of the efforts being made by the governments, companies, NGOs and individuals across the globe, has not been fulfilled. But at the same time, it’s a good read for the Indians who did not know that these institutions actually occurred in India and have achieved the levels of innovation that only few in the world have ever achieved.