| By Gavin Chait,
on 30 March 2007
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 Milk me please, I'm worth it
A warning to company strategists: be prepared to challenge yourself, ignore past successes and re-invent the future. If you’re not going to then don’t be surprised if some other upstart comes along and does so, taking your market out from under you in the process.
Limitations are often the source of fertile and profitable new ideas. Who would have thought that people would ignore the convenience of conversation for preference in sending more expensive short-messages on their cell phones? Who would have thought that this would stimulate a multi-billion Dollar industry?
C K Prahalad, speaking in Johannesburg at a conference organised by Global Leaders, declares that, “the essence of entrepreneurship is that aspirations overcome resource limitations.” And aspirations drive innovations.
The challenge is in seeing the aspirant poor as a potential market and not as a bottomless pit requiring donations and hand-outs. The aggregated wealth of the poor is US$ 5 trillion, according to a study conducted on behalf of the World Bank. “Children are told, ‘Eat your veggies, there are starving people in Ethiopia!’ and so they grow up associating poverty with starvation and impossible despair,” says Prahalad. “It is very difficult to transform that type of thinking into ideals around investment; that the aggregated wealth of the poor is significant.”
It is possible, though. Companies are reinventing themselves and their products to take advantage of opportunities presented by the poor. Prahalad gives the example of Gujarat Cooperative Milk Marketing Federation (GCMMF), now the biggest milk producer in the world.
GCMMF buys their milk directly from individual village subsistence farmers – more than 2.5 million of them across India. The milk is valued according to fat content and volume. They collect an average of 6.3 million litres per day, supply 2 340 million tons of animal feed per day back to the farmers, and earn $ 840 m annually in revenue with $ 30 m exported. Clearly there is wealth at the bottom of the pyramid, both in earning and sales potential.
Much of this requires a significant change in the way in which a company is prepared to work: a highly decentralised approach; partitioning of the task (on site / off site, decentralised payments and services); world class centralised facilities to aggregate and control the products as they arrive.
More impressively, though, is the way in which expensive services and products can be reinvented to serve the poor. Aravind Eye Care in Madurai, India, is a pure example of what is possible. Cataract surgery in the developed world costs around $ 2 – 3 000 depending on the nature of the intervention. A comparison between the Royal College of Ophthalmology and Aravind Hospital by the UK National Survey in 2001 declared that Aravind was superior on virtually every level. Aravind Eye Care charges between $ 50 and $ 300 per operation.
“It’s easy to get a 5 – 10% cost reduction,” says Prahalad, “but you have to completely rethink your strategy to get a 50x reduction in price.”
It is essential to build new strategic capital and disruptive business models. Set the price you want to charge, set your profit margin and then, whatever is left, you have the cost price that you must meet in order to offer your product. Aravind has been profitable since they started.
The most startling result, though, is this: products developed to be used by the poor rapidly become innovations that can be used by the rich. Cheap ophthalmic surgery, hotels or cell phone charges rapidly get disseminated. Companies that are able to produce this much of a strategic advantage have no problems convincing customers around the world to shift their allegiance. If a new upstart is offering you a 5% price change you may not be interested; but 50 times less for the same quality?
Says Prahalad: “We need to create inclusive capitalism. If we exclude the poorest we will get social unrest and outrage – the poor will become so agitated that the rich are targeted. The informal economy is essentially a local monopoly; inefficient and abusive of an asymmetry of information.”
There are profits to be made by developing products that are aimed at the poor. If we improve consumption at the bottom of the pyramid we also improve livelihoods.
“Ultimately,” says Prahalad, “Every person must be seen as a consumer who can afford world class products and services. Even the poorest must be allowed to shape their own experiences, act as a producer and have access to global markets.”
By allowing the poorest to co-create products and services you also create opportunities in every market around the world.
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