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Business: Get Rich by Catering to the Poor

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December 2007
Business: Get Rich by Catering to the Poor

Here’s one for a revolutionary idea: who ever heard of catering to the poor as a corporate success strategy? That is exactly what Coimbatore Krishnarao (C. K.) Prahalad—the Paul and Ruth McCracken Distinguished University Professor of Corporate Strategy at the University of Michigan Ross School of Business—is preaching in his recent book, “The Fortune at the Bottom of the Pyramid.”

Not surprising, considering what Mark V. Hurd, CEO of Hewlett-Packard says of Prahalad. “The best way to describe C.K. is, he’s an out-of-the-box guy who is pragmatic.” Hurd, who previously ran NCR Corp where Prahalad is a board member, adds, “It’s quite an art to get a board filled with past and current CEOs to think of the world in a different way.”

Could that be the reason why Prahalad is a globally recognized business consultant whose client list includes AT&T, Cargill, Citicorp, Oracle, TRW and Unilever? His research focuses chiefly on next practices, corporate strategy and the role of top management in diversified multinational corporations. His current work addresses a complex emerging market, the world’s poor and the innovative business models that could help end world poverty.

In 2005, Professor C. K. Prahalad earned the third spot on Suntop Media’s “Thinkers 50” list, ranking behind Harvard strategy specialist, Michael Porter, and Microsoft founder, Bill Gates. Prahalad has been a top ten management thinker in every major survey for over ten years. He is a member of the blue ribbon commission of the United Nations on Private Sector and Development. He is the first recipient of the Lal Bahadur Shastri Award for contributions to Management and Public Administration presented by the President of India in 2000.

This distinguished corporate guru is the author of a number of well known works in corporate strategy including The Core Competence of the Corporation (Harvard Business Review, May-June, 1990). Prahalad and colleague Gary Hamel helped spark a management revolution in the 1990s with their idea of “core competence,” which says that companies must identify and focus on their competitive strengths. Their 1994 book, Competing for the Future, is regarded as a classic. A decade later he co-wrote The Future of Competition, which argued that the traditional “company-centric” approach to product innovation is giving way to a world in which companies “co-create” products with consumers.

At the same time, Prahalad has been working to convince executives that today’s needy masses, so often dismissed as subsisting largely outside of the global economy, are actually its future. Prahalad’s 2004 work on that topic, The Fortune at the Bottom of the Pyramid, has been hailed as one of the most important business books in recent years and turned Prahalad into a celebrity in the field of international development.

Professor Prahalad was recently in Atlanta speaking at a TiE Conference, and took the time to talk to Khabar. Following are excerpts from the interview.

You have been honored with several awards over the years in your career, both in U.S. as well as in India. Which one has given you the greatest sense of accomplishment and why?

I think probably the award—I can’t call it an award—but my being given a Distinguished University Professorship is probably the most satisfying. To be recognized by other academics is probably the highest honor you can get. The Distinguished University Professorship is given for few people, maybe 30 people at University of Michigan out of 4,000 staff and faculty. So, it is a very small subset of people and most of the people who get this award are from hard sciences, mathematics or biology, or physics or chemistry. Very rarely do they give it to somebody from the Management field, especially Business Management, and that means quite something to be honored.

You have coined the word “core competency” in the management field. What exactly do you mean by it, and how can one apply that?

It is nothing more than the accumulated intellectual capital. This intellectual capital is held by individuals as teams. If you understand what it is, it can be continuously reapplied to new opportunities. Take for example, Sony’s forte in miniaturization. Every product that they create has elements of miniaturization, whether it is a transistor radio, or camcorder or digital camera. [The intellectual capital needed to offer] miniaturization requires a deep understanding not only of the technology, materials, manufacturing and design, but also a lot about ergonomics and how the human interface works. So that you don’t make it so small that people cannot use it. But neither is it so large that people cannot carry it with them.

So, this is a combination of multiple skills, or harmonization of multiple skills.

Would you say that it is always acquired, or is it something that is also a part of a nature of an individual or a group of individuals?

I think it’s not just one individual who can do it. So, the definition applies to a small or large team collectively knowing how to do these things, rather than one person. One person has skills, but the team can create the competence.

Another terminology you and Gary Hamel have used is “strategic intent.” In which way is strategic intent different than business dreams?

Strategic intent is a long term perspective of what you want to accomplish. The best way of explaining that is when Kennedy said, “let’s put a man on the moon and bring him back safely by the end of the decade.” That is a strategic intent. You don’t know exactly how to do it, but you say that’s what you want to accomplish. It’s a statement of what the company aspires to and inspiration for action for the organization.

For example, Unilever has a strategic intent called vitality. Vitality covers everything that they should do, whether it is developing a soap or food, it must add to the vitality of the person. So “vitality” is an overarching theme, which informs every decision whether it’s in product development or marketing to make sure the focus is on the “vitality” of the individual.

If you could create the most powerful strategic intent for this world, what would that be?

To me, the most important thing we have to do is to democratize commerce, so that every person in the world has the right to participate, both as micro-consumers and micro-producers. As a micro-consumer, he or she has choices, as well as world class quality at affordable prices. At the same time, they get paid the same wage for their efforts, and therefore, they can participate in the global economy. That, to me, would be the challenge for this century.

You talked about how information was an all powerful tool for any positive change. Can “information” hold sustainable growth if it is not backed with “beliefs” and “personal values”?

I think values are critical. They are so ingrained and critical that there is no need to talk about it all the time. It’s like saying that profit must be the life blood of business. The answer is yes. And of course, if we don’t have strong values and morality in business, you can do silly things. Countries can do silly things as well. Nazi Germany had a lot of technology, so did Russia. Without values and morality, it will collapse by itself.

Often, organizations don’t involve the younger or the junior person in the team to come up with their strategic intents. Do you think they should be involved in that process?

Young people should be involved for a simple reason. They are closer to technology, they are closer to customers, and they are closer to competitors in terms of knowing what the competitors are doing. If you don’t involve them you are going to get a sterile and less sophisticated view of what can be done. It is not top management versus middle management. The question is, how you mix the two so that this process becomes non-hierarchical. I think what you should do is to get people who are smart, and who can think, wherever they are in the organization, whatever position. And you put the best minds available on the job, rather than worry about what hierarchical position they have.

In your latest book, you have given several examples of the successful partnering between business and Non Governmental Organizations (NGOs) in co-creating new consumers, services, and markets. Yet, why are most Multi-national Corporations (MNCs) not excited about this potential, but instead, continue to spend large amounts on research and development, which also does not give them quick returns. What are the fears?

I think more and more multi-national companies are accepting the idea, and they are working with NGOs. Just 10 years ago, it was a very adversarial relationship, and to grow from there to a more collaborative relationship takes time. What we tried to do in that article is try to show why it is necessary, and how some companies are starting to think a little bit faster, and develop a collaborative relationship within the civil society and company. So, without ever thinking of the other as an adversary, and to say that we are collaborating without losing our identity as well, is a hard thing to do. I believe that in the next 10 years it will be very common.

The basic premise of “fortune at the bottom of the pyramid”—that companies can prosper by targeting the poor as a market—seems to be counter-intuitive. Even if there is a need and a want, they still don’t have the resources. Can it work in a competitive capitalism, where companies are always chasing instant profits?

[The assumption of the “fortune at the bottom of the pyramid” premise is that] 80% of the humanity cannot be excluded. For those who do not believe there is a huge opportunity here, look at cell phones in India. India is creating seven million new subscribers per month. Who are these people? They are not rich people. They are your shop fellow, cab driver, vegetable vendor. These are the people are who are promoting this enormous growth. To see whether companies are becoming rich by this strategy, look at [the success of] Vodafone. The market capitalization of cell phone companies is more than 80 billion dollars. If that is not real money, I don’t know what is. And already, three billion people are connected around the world. [This phenomenon] is true in Sub-Saharan Africa, it’s true in South Africa, it’s true in China, Philippines, Thailand, Indonesia, Brazil, everywhere. It’s not just an Indian phenomenon.

So, if you understand how to serve poor people, and create financial services and business models [accordingly], then there is a huge opportunity to do good and do well. The message is not targeting poor people. The message is to take them out of the unorganized sector where everything that they get is very poor quality and [where they are subject] to local monopolies. For example, nobody objects to money lenders charging 400% for poor people, but everybody objects to large banks providing money at 30%. So, I just say, whose side are you on? If you care about the poor, the 30% is a whole lot better than the 400%. The message is make capitalism inclusive, create opportunities for all people to enjoy the benefits of globalization.

How many years do you think it would take organizations to reach out to this market, which you define as roughly about four to five billion people globally?

I would project about 10 years. Today, because of the cell phone, small entrepreneurs at the village level can set up shop and then call in the orders. The question is whether they have the physical infrastructure to take it to those markets. So, I believe within ten years it will happen because of the information and physical infrastructure being built through the cell phones.

Can the Grameen Bank (A revolutionary institution that extends micro loans to the poor for entrepreneurship) model be duplicated in the West? For example, to transform lives of those who seemingly can’t get off welfare in the U.S.?

Well, I think it can be done. Grameen Bank is starting a division called Grameen America. There is a fair number of poor people who need a bit of support, but the mechanisms don’t exist as of today. All that exists is organized financial systems which are very expensive, check cashing, and financial brokers. They are all quite expensive. So you have to get organized systems, but in order to lend money to people who do not have a credit history requires new tools and new capabilities. And I think those ideas may be coming from the rest of the world, from places such as Brazil or India or Bangladesh.

Can small business operators benefit from studying your corporate strategies? If so, how?

Yes, but all companies start small. That’s true for Google, IBM, and everybody. So, if you want to be big, you ought to think about what are the principles on which I am going to create this organization, and therefore, the idea of competing for the future or co-creation is all a part of the thinking right from the start.

Do you think corporations are losing the art of creating due to an over-emphasis on skills and information?   

I think creativity is the ability to see new patterns. So if there is a lot of information, and people understand how to use that information, it must enhance creativity, not reduce it. Because what you are saying is there a multiple things going on in the world. How do I connect them and see new patterns of opportunities or new threats? That is very critical. For example, to say that five billion people can be consumers or producers is one thing, but to see that it will have a huge environmental impact is the natural outcome of that information. Then ask the next question: if there is an enormous impact environmentally in terms of water, energy, pollution and wastage per capita, then how do I develop products and services that are less stressful on the environment?

So I think to be able to connect these things and see new opportunities is what creativity is all about. Information is not negative, but if you see the level of information as stand alone pieces, then you are not going to be advantaged. You need to see them as connectors and visualize new patterns.

I understand that information can be like noise, and separating noise from signals is hard. But that is not to say, information is bad. We must ask, do we have the sophistication to separate the noise from the signal?

Do you think that it creates challenges like Attention Deficit Disorders in people?

It can. Everything that is new has both positive and negative sides. It’s like a balance sheet.

Would you like to share any parting message of wisdom as a business strategist?

I just want to say that the opportunities for making a difference today are more than ever. The question is only, ‘How do we exercise our power responsibly?’ How do we make the life of all people, poor or not, more hopeful, more enjoyable, and full of vitality. How do we make a difference, and to me that’s a challenge. I think each one of us can look at what we do and ask ourselves, does it make a difference? Will it make a difference?

By MOHAN KAPUR


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