Serving the poor is good business, says strategy guru Prahald

Serving the poor is good business, says strategy guru Prahald
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BY MAILEEN HAMTO
Special to the Rice News

Multinational companies have traditionally focused production and marketing efforts on consumer purchasing power, a tried-and-true approach to profit-making in an increasingly competitive global business environment.

As global markets continue to be defined by consumer wealth, 5 billion people worldwide live in abject poverty — a “valid and vibrant market” that remains underserved, said C.K. Prahalad, the Harvey C. Fruehauf Professor of Corporate Strategy at the University of Michigan, Ann Arbor.

In India, new and innovative business approaches are changing the business landscape — serving the needs of the poor and remaining profitable at the same time.

Prahalad said the formula for success in serving the world’s very poor — those who earn less than $2,000 a year — requires focus on sustainable development, scalability, innovation and technology. Addressing a full Herring Hall at the Jesse H. Jones Graduate School of Management’s Neuhaus Lecture Oct. 1, Prahalad challenged the crowd that consisted largely of M.B.A. candidates to “create new priorities and fresh approaches” to define success in the world’s emerging markets.

Through imagination and innovation, a number of successful, fundamentally different business models have revolutionized the economic realities of being poor in India, Prahalad said.

The success of Amul, a large network of Indian milk-producer cooperatives involved in milk collection, processing and global marketing, illustrates this.

Creating a system that allows families in rural India to sell fresh milk at competitive prices has secured Amul the distinction of being the largest producer of dairy products in India. Moreover, the system also has given women — who make up the bulk of cooperative participants — a new and important role in the village economy.

Multinational companies shy away from poor markets because cost structures do not allow for profitability in business opportunities involving the poor. “If the cost structure is a problem, fix it,” Prahalad advised. “Servicing the poor is good business and one that provides returns that are better than working with the rich.”

He noted how the world-class Aravind Eye Hospital in Madurai, India, which serves cataract patients — the majority of whom cannot pay for the operation — maintains a gross margin of 40 percent. The hospital does not depend on donations and has never turned anyone away. Fast Company magazine reports that those who can afford to pay are charged $10 for the operation, compared to an average cost of $1,650 if the operation were performed in the United States.

The hospital’s founder, 82-year-old Govindappa Venkataswamy, keeps operational costs low by slashing costs and enhancing efficiency. Performing an average of 200 cataract operations every day, Aravind is the largest provider of eye surgery in the world.

As in health care, providing the poor access to the latest technology is a business opportunity not fully explored by many multinational companies, Prahalad said. Yet, an inventive approach to providing access has spurred the proliferation of “Internet cafes” — pay-for-use Internet-access centers in rural and urban areas of India.

Charging users an average of 10 cents per hour of use, the Internet hubs are becoming increasingly popular among Indians, young and old alike. “This proves that ownership is not required for access,” Prahalad explained. “Where Internet connections are limited, a single Internet connection can have 20 or 30 users.”

Access to credit is another privilege the poor often are denied and one required to escape poverty, Prahalad said. Recognizing a niche for micro-lending among the rural poor in Bangladesh, the Grameen Bank offers small loans averaging $15. By removing the need for collateral and creating a banking system based on mutual trust, accountability, participation and creativity, Grameen Bank has grown to serve 2.3 million borrowers, 98 percent of whom are women. Low default rate on Grameen loans has fostered growth of the bank.

Providing affordable products to the poor is yet another way of providing service to this underserved market, Prahalad said.

Nirma, a manufacturer of personal-care and laundry products in India, saw an opportunity to target the low-income market with a new formulation, process, packaging and distribution model focused on the poor. Using a lower fat-to-water ratio and indigenous oils in formulating soap, the company dramatically cut production costs. By creating a more environmentally sound product that is cheaper than any other product on the market, Nirma forced Hindustan Lever, the Indian subsidiary of Unilever, to recognize the need to create and market soap and laundry detergent for India’s poor.

Following Nirma’s lead in adjusting the production, packaging, distribution and marketing processes, Hindustan Lever was able to tailor the price of personal care and laundry products to the very poor. Lessons learned from the success of the initiative in India also proved transferable to markets in other parts of the world.

“Finding novel approaches to create new markets requires strong management and entrepreneurship skills,” Prahalad said, debunking the notion that working with the poor presents no intellectual challenges.

“With imagination, experimentation and innovation, we can work on creating businesses that allow creation of wealth, while doing good by helping the underserved as well.”

—Maileen Hamto is assistant director of public relations at the Jesse H. Jones Graduate School of Management.