Re-posted from the Harvard Business Review Blog Network. See the original post here.
Why Entrepreneurs Will Beat Multinationals to the Bottom of the Pyramid
by Paul Polak and Mal Warwick
C.K. Prahalad and Stuart Hart’s seminal book The Fortune at the Bottom of the Pyramid gained a wide audience when it was published in 2004 and has continued to be widely read ever since. Its iconic phrase, “bottom of the pyramid,” entered the English lexicon. The book was a call to action to the world’s largest companies to develop new products for the four billion people living on $4 a day or less—a market representing what was in effect the new frontier for corporate expansion.
What was the result of this stirring cry a decade ago?
On the fifth anniversary of the book’s publication, Professor Prahalad was interviewed by Knowledge@Wharton. He was asked “what impact have your ideas had on companies and on poor consumers?” Prahalad asserted that the impact had been “profound,” citing the $200 laptop computer, the spread of cell telephones, and Kenya’s M-PESA text- messaging funds transfer service. But the concept of the $100 laptop was a project that emerged from MIT, not a large company, and was judged a failure; cell phones spread rapidly through developing countries was a result of local entrepreneurship, not multinational initiative; and M-PESA was a Kenyan innovation.
Five years further along, there is scant evidence that multinational corporations have expanded any further into the bottom-billions market. We believe they’re unlikely to do so, and that entrepreneurs working solo or in teams are far better positioned to go serve these customers. The reason is that multinationals face the constant temptation to apply their substantial resources to extend the reach of their existing businesses, rather than starting from scratch. Entrepreneurs, by contrast, start from scratch almost by definition. For reasons we’ll describe, that approach is essential to successfully serving the bottom of the pyramid.
The tendency for too many multinationals is to design products for the bottom of the pyramid by stripping features from existing products. But this approach seldom works. In our experience, products and processes must be designed not merely to reduce prices by, say, 30% below developed world prices, which might be achieved by removing features; success requires prices close to 90% less. As you can imagine, this puts pressure on product design, and this focus has become the centerpiece of “zero-based design” which seeks to build inexpensive products from the ground up. Entrepreneurs, unconstrained by pressure to expand existing brands and product lines, are better positioned to utilize this approach.
This zero-based design approach also avoids a reliance on preexisting business models. One of the greatest challenges at the bottom of the pyramid is “last mile” distribution. A large number of the world’s poor live in villages without much infrastructure. Delivering products in this environment adds to the cost, making it further unlikely that preexisting product lines can be tweaked and brought to market successfully. By designing products from the ground up, entrepreneurs are better positioned to consider the challenges of distribution early on, and account for them in their products and business model.
Moreover, most multinational corporations are, inevitably, bureaucratic enterprises riddled with barriers to doing things differently. If someone far down the chain of command does devise a great solution to a problem the company had never before considered, it’s a fairly sure bet that his idea will be vetoed somewhere up the line. (Remember the two guys named Steve who took their idea for a personal computer to HP? Whatever happened to them?) The difficulty is compounded if the proposed project requires a wholly fresh approach to design, marketing, and distribution and must be carried out in an exotic locale in an unfamiliar language and confounding culture. Somewhere up the ladder in the corporate hierarchy, someone is sure to balk.
Finally, success in nascent markets requires a commitment to agility and constant refinement. This means not only tweaking products, but everything about the business. Here again, entrepreneurs are able to incorporate their learning more quickly, as opposed to multinationals whose teams often have to run changes up the flag pole.
For all these reasons we believe it will be new companies more than old ones that help those living on a few dollars a day move out of poverty. Of course, we’d love to be proven wrong – there’s certainly plenty of room at the bottom of the bottom of the pyramid for experimentation and collaboration. For companies of any size serious about these markets, it is critical to remember that lessons learned selling to richer consumers likely do not apply.