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November 18, 2004
Book Review--The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits
    by William Baue

C. K. Prahalad seeks to solve global poverty by turning the bottom of the socioeconomic pyramid from victims of globalization into its beneficiaries through consumerism.


In 1952, Nazi concentration camp survivor Samuel Klein settled in Brazil and established an innovative and insightful business model: instead of serving wealthy clients, he catered to the poor, whose sheer numbers made up for their limited financial means. Over the past half-century Mr. Klein's home furnishings company, Casas Bahia, has become the largest retail chain in Brazil by offering direct financing to poor customers, who now make up 84 percent of the country's population.

As with microfinance, Casas Bahia charges interest slightly higher than market rates to compensate for customers' limited or poor credit histories. This represents a preferable alternative to the so-called "poverty penalty"--for example when local lenders (known as "coyotes") are able to charge 300- to 600-percent interest rates because the poor lack access to more reasonable terms.

Mr. Klein's Casas Bahia exemplifies the case University of Michigan Business Professor C. K. Prahalad makes in his book, The Fortune at the Bottom of the Pyramid. The top of the socioeconomic pyramid, which most companies market to, is inhabited by relatively few (75 to 100 million people) compared to the bottom of the pyramid (BOP), which is inhabited by four billion people who live on less than $2 a day. Instead of solving poverty through philanthropy, which can disempower the poor, Mr. Prahalad proposes alleviating poverty through "inclusive capitalism" that bootstraps the BOP upward through consumerism.

According to Mr. Prahalad, the current economic structure creates a lose-lose situation for the BOP and companies alike, as the former are systematically trapped in poverty that prevents the latter from capitalizing on the sizeable (to say the least) market. He proposes transforming this into a win-win situation by removing the structural obstacles inhibiting the poor (such as coyotes, which exemplify the "poverty penalty") from benefiting from economic growth. The book thus mixes liberation theology with market economics.

"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 will open up," Mr. Prahalad states.

The book is divided into three sections: the first outlines Mr. Prahalad's BOP theories; the second provides 12 extensive case studies; the third presents specifics from these case studies via video clips contained on an accompanying compact disc. This last section seeks to document how the poor themselves feel about BOP economics.

The challenges inherent in implementing BOP economics are daunting. For example, companies cannot simply apply top-of-the-pyramid marketing and distributing strategies, but rather must incorporate completely new tactics to reach the BOP. Moreover, companies must also collaborate much more extensively with governments, nongovernmental organizations (NGOs), and BOP consumers themselves than with top-of-the-pyramid markets.

Mr. Prahalad cites examples demonstrating how solving such challenges can introduce new business models that eclipse the profitability of traditional models, but he remains somewhat vague in addressing some of the challenges. For example, he sings praises for the development of single-serve packaging, which caters to (and capitalizes on) BOP consumers' day-to-day cash flow patterns. While he acknowledges the environmental havoc that such packaging creates, he is at a loss when it comes to proposing solutions to this problem.

"More than 13 billion single-serve packages are sold annually in India and this trend is growing rapidly," Mr. Prahalad states. "MNCs [multinational corporations] involved in the BOP markets have the ability and the motivation to find solutions to the problem of packaging in emerging markets."

However, MNCs have a much longer history of externalizing environmental problems than solving them, so Mr. Prahalad may be falling prey to wishful thinking. This is not to say that Mr. Prahalad's BOP theories should be abandoned due to environmental considerations. However, for BOP theories to be truly sustainable, they must devote more fully-developed solutions to the attendant environmental problems they create.

 

 
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