The BoP as a Source of Competitive Advantage
Friday, July 24, 2009 at 05:25PM It was a revolutionary idea that Prahalad put forward over 10 years ago when he reframed the world’s poor not as a target for aid, but as a huge potential economic market to be tapped. More recently that point of view has become more nuanced as multi-national corporations (MNC’s) have gained experience in the Base of the Pyramid (BoP): to grow sustained profits, companies needed to shift thinking about the poor not just as a market demographic to be exploited but as co-creators for building local capacity and systemic solutions to poverty.
That shift of mind has created a new source of competitive advantage. Companies are designing new products, solutions, value chains, and business models that survive and thrive in the BoP’s significant price, energy, and distribution constraints. These products can be introduced into mature markets with a few modifications at very disruptive price points or service levels, a practice termed “Trickle Up Innovation” in articles in Fast Company and BusinessWeek. Suddenly BoP markets are not just adjacencies used to marginally increase global sales, but sources of competitive advantage that offer companies places to develop, test, and export disruptive innovation.
Recently McKinsey Quarterly’s What Matters ran Iqbal Z. Quadir’s response to the question “Will Asia become the center for innovation in the 21st century?” He asserts that the massive BoP markets in Asia are now an asset that the region can use to become the leader in innovation globally. He provides 5 reasons, which I paraphrase below:
-
The entrepreneurial and inventive nature of the Asian BoP market will develop breakthrough innovations from existing technologies
-
The need to address the BoP in Asia will create innovations in products, forms of employment, and distributions schemes
-
Innovations in energy and materials are needed to serve these markets cost effectively (not sure how this is much different than #2)
-
The relative absence of existing 20th century infrastructure will allow Asia to leapfrog to 21st century technologies and communications networks
-
Continuing governmental and economic liberalization will unleash masses of human capital currently under-leveraged.
A Global Opportunity
Looking at this list I couldn’t see much to disagree with as factors that may spur disruptive innovation. What I didn’t understand was why the author felt this list allowed Asian companies to exclusively develop trickle up innovation. US and Europe headquartered MNC’s have a large and growing R&D presence in Asia that allows them to directly participate in these markets, experience the constraints and design new products. Last I checked, some of the best examples of trickle up innovation were by some of these companies. GE’s India-based R&D group developed a low-cost ECG machine now being marketed in the U.S. Grameen Danone created a minimal refrigeration distribution channel for the Indian market that it is now moving into developed markets due to its lower energy and carbon footprint. The US-based OLPC push to develop ultra-cheap computers for the developing world has created a new netbook category currently enjoying the fastest growth of any PC segment. The pay-as-you-go SIM card model for cell phones developed in Europe is spurring new applications in developing regions around mobile banking.
Even if Asia could somehow wall off its valuable BoP resource, the constraints of poverty are not the provenance of Asia alone. While WRI’s definitive study “The Next 4 Billion” lists Asia as the single largest BOP market at $3.7 trillion, Latin America and Africa have a $1 trillion potential market combined. Even these days, that’s a lot of money. Just south of the U.S. lies Mexico, in which 75% of the population is considered part of the Base of the Pyramid. In fact, there are plenty of underserved communities in the U.S. that may not have the infrastructure challenges of the BoP, but certainly exhibit cost constraints, language barriers, and distribution challenges. While at the Waitt Foundation, I helped fellow directors plan and run a meeting that brought together public and private stakeholders together at MIT to explore how appropriate technologies could be developed for these communities. It is a ripe market that remains largely untapped.
Some of these issues work across income. Energy and sustainability issues are not constrained to the BoP; they will impact all value chains at almost every income level. The high end luxury market for “green” products is booming, and one only need look to Tesla and Fisker Automotive to see the levels of investment in this category.
Quadir’s list does succeed in pointing out why a substantial portion of disruptive innovation will come from the BoP. The bigger point is that this resource is there to be developed by anyone, providing they also heed the design principles and business strategies of developing products for the BoP, and have the ability and courage to introduce the resulting disruptive innovation back into their core markets. That is fodder for further posts...
