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CASE 3-3 Marketing to the Bottom of the Pyramid

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Question;Case 3-3 for International Marketing. There will be questions at the end of the case to answer in a typed essay 4-5 pages double spacedCASE 3-3 Marketing to the Bottom of the PyramidProfessor C. K. Prahalads seminal publication, The Fortune at theBottom of the Pyramid, suggests an enormous market at the bottom of the pyramid (BOP)a group of some 4 billion peoplewho subsist on less than $2 a day. By some estimates, these aspirational poor, who make up three-fourths of the worlds population, represent $14 trillion in purchasing power, more thanGermany, the United Kingdom, Italy, France, and Japan put together. Demographically, it is young and growing at 6 percent ayear or more.Traditionally, the poor have not been considered an importantmarket segment. The poor cant afford most products, they willnot accept new technologies, and except for the most basic products, they have little or no use for most products sold to higherincome market segmentsthese are some of the assumptions thathave, until recently, caused most multinational firms to pay little orno attention to those at the bottom of the pyramid. Typical marketanalysis is limited to urban areas, thereby ignoring rural villageswhere, in markets like India, the majority of the population lives.However, as major markets become more competitive and in somecases saturatedwith the resulting ever-thinning profit marginsmarketing to the bottom of the pyramid may have real potentialand be worthy of exploration.One researcher suggested that American and European businesses should go back and look at their own roots. Sears, Roebuckwas created to serve the lower-income, sparsely settled rural market. Singer sewing machines fashioned a scheme to make consumption possible by allowing customers to pay $5 a month instead of$100 at once. The worlds largest company today, Walmart, wascreated to serve the lower-income market. Here are a few examplesof multinational company efforts to overcome the challenges inmarketing to the BOP.Designing products for the BOP is not about making cheapstuff but about making technologically advanced products affordable. For example, one company was inspired to invent the Freeplay, a windup self-powergenerating radio, when it learned thatisolated, impoverished people in South Africa were not gettinginformation about AIDS because they had no electricity for radiosand could not afford replacement batteries.BOP MARKETING REQUIRESADVANCED TECHNOLOGYThe BOP market has a need for advanced technology, but tobe usable, infrastructure support must often accompany thetechnology. For example, ITC, a $2.6 billion a year Indian conglomerate, decided to create a network of PC kiosks in villages.For years, ITC conducted its business with farmers through amaze of intermediaries, from brokers to traders. The companywanted farmers to be able to connect directly to informationsources to check ITCs offer price for produce, as well as pricesin the closest village market, in the state capital, and on theChicago commodities exchange. With direct access to information, farmers got the best price for their product, hordes ofcat29974_case3_01-019.indd 10intermediaries were bypassed, and ITC gained a direct contactwith the farmers, thus improving the efficiency of ITCs soybean acquisition. To achieve this goal, it had to do much morethan just distribute PCs. It had to provide equipment for managing power outages, solar panels for extra electricity, and asatellite-based telephone hookup, and it had to train farmersto use the PCs. Without these steps, the PCs would never haveworked. The complex solution serves ITC very well. Now morethan 10,000 villages and more than 1 million farmers are covered by its system. ITC is able to pay more to farmers and at thesame time cut its costs because it has dramatically reduced theinefficiencies in logistics.The vast market for cell phones among those at the BOP isnot for phones costing $200 or even $100 but for phones costing less than $50. Such a phone cannot simply be a cut-downversion of an existing handset. It must be very reliable and havelots of battery capacity, as it will be used by people who do nothave reliable access to electricity. Motorola went thorough fourredesigns to develop a low-cost cell phone with battery life aslong as 500 hours for villagers without regular electricity andan extra-loud volume for use in noisy markets. Motorolas lowcost phone, a no-frills cell phone priced at $40, has a standbytime of two weeks and conforms to local languages and customs.The cell-phone manufacturer says it expects to sell 6 million cellphones in six months in markets including China, India, andTurkey.BOP MARKETING REQUIRESCREATIVE FINANCINGThere is also demand for personal computers but again, at very lowprices. To meet the needs of this market, Advanced Micro Devicesmarkets a $185 Personal Internet communicatora basic computer for developing countriesand a Taiwan Company offers asimilar device costing just $100.For most products, demand is contingent on the customerhaving sufficient purchasing power. Companies have to devisecreative ways to assist those at the BOP to finance larger purchases. For example, Cemex, the worlds third-largest cementcompany, recognized an opportunity for profit by enablinglower-income Mexicans to build their own homes. The companys Patrimonio Hoy Programme, a combination buildersclub and financing plan that targets homeowners who makeless than $5 a day, markets building kits using its premiumgrade cement. It recruited 510 promoters to persuade newcustomers to commit to building additions to their homes. Thecustomers paid Cemex $11.50 a week and received buildingmaterials every 10 weeks until the room was finished (about70 weekscustomers were on their own for the actual building). Although poor, 99.6 percent of the 150,000 PatrimonioHoy participants have paid their bills in full. Patrimonio Hoyattracted 42,000 new customers and is expected to turn a$1.5million profit next year.12/10/12 12:40 PMCases 3 Assessing Global Market OpportunitiesOne customer, Diega Chavero, thought the scheme was a scamwhen she first heard of it, but after eight years of being unable tosave enough to expand the one-room home where her family of sixlived, she was willing to try anything. Four years later, she has fivebedrooms. Now I have a palace.Another deterrent to the development of small enterprises atthe BOP is available sources of adequate financing for microdistributors and budding entrepreneurs. For years, those at the bottom of the pyramid needing loans in India had to depend on localmoneylenders, at interest rates up to 500 percent a year. ICICIBank, the second-largest banking institution in India, saw thesepeople as a potential market and critical to its future. To convertthem into customers in a cost-effective way, ICICI turned to villageself-help groups.ICICI Bank met with microfinance-aid groups working withthe poor and decided to give them capital to start making smallloans to the poorat rates that run from 10 percent to 30 percent.This sounds usurious, but it is lower than the 10 percent daily ratethat some Indian loan sharks charge. Each group was composedof 20 women who were taught about saving, borrowing, investing,and so on. Each woman contributes to a joint savings account withthe other members, and based on the self-help groups track record of savings, the bank then lends money to the group, which inturn lends money to its individual members. ICICI has developed10,000 of these groups reaching 200,000 women. ICICIs moneyhas helped 1 million households get loans that average $120 to$140. The banks executive directory says the venture has beenvery profitable. ICICI is working with local communities andNGOs to enlarge its reach.BOP MARKETING REQUIRESEFFECTIVE DISTRIBUTIONWhen Unilever saw that dozens of agencies were lending microcredit loans to poor women all over India, it thought that thesewould-be microentrepreneurs needed businesses to run. Unileverrealized it could not sell to the bottom of the pyramid unless itfound low-cost ways to distribute its product, so it created a network of hundreds of thousands of Shakti Amma (empoweredmothers) who sell Levers products in their villages through anIndian version of Tupperware parties. Start-up loans enabled thewomen to buy stocks of goods to sell to local villagers. In one case,a woman who received a small loan was able to repay her start-uploan and has not needed to take another one. She now sells regularly to about 50 homes and even serves as a miniwholesaler, stocking tiny shops in outlying villages a short bus ride from her own.She sells about 10,000 rupees ($230) of goods each month, keepsabout $26 profit, and ploughs the rest back into new stock. Whilethe $26 a month she earns is less than the average $40 monthlyincome in the area, she now has income, whereas before she hadnothing.Today about 1,300 poor women are selling Unilevers products in 50,000 villages in 12 states in India and account for about15 percent of the companys rural sales in those states. Overall,rural markets account for about 30 percent of the companysrevenue.In another example, Nguyen Van Hon operates a floatingsundries distributorship along the Ke Sat River in Vietnams Mekong Deltaa maze of rivers and canals dotted with villages. Hisboat is filled with boxes containing small bars of Lifebuoy soapcat29974_case3_01-019.indd 11and single-use sachets of Sunsilk shampoo and Omo laundrydetergent, which he sells to riverside shopkeepers for as little as2.5cents each. At his first stop he makes deliveries to a half dozensmall shops. He sells hundred of thousands of soap and shampoopackets a month, enough to earn about $125five times his previous monthly salary as a junior Communist party official. Itsa hard life, but its getting better. Now, he has enough to payhis daughters schools fees and soon... will have saved enoughto buy a bigger boat, so I can sell to more villages. Because ofaggressive efforts to reach remote parts of the country throughan extensive network of more than 100,000 independent salesrepresentatives such as Hon, the Vietnam subsidiary of Unilever realized a 23 percent increase in sales last year to more than$300million.BOP MARKETING REQUIRESAFFORDABLE PACKAGINGAs one observer noted, the poor cannot be Walmartized. Consumers in rich nations use money to stockpile convenience. We goto Sams Club, Costco, Kmart, and so on, to get bargain prices andthe convenience of buying shampoos and paper towels by the case.Selling to the poor requires just the opposite approach. They donot have the cash to stockpile convenience, and they do not mindfrequent trips to the village store. Products have to be made available locally and in affordable units, fully 60 percent of the value ofall shampoo sold in India is in single-serve packets.Nestl is targeting China with a blitz of 29 new ice creambrands, many selling for as little as 12 cents with take-homeand multipack products ranging from 72 cents to $2.30. It alsofeatures products specially designed for local tastes and preferences of Chinese consumers, such as Nestl Snow Moji, a ricepastry filled with vanilla ice cream that resembles dim sum, andother ice cream flavors like red bean and green tea. The ice creamproducts are distributed through a group of small independentsaleswomen, which the company aims to expand to 4,000 womenby next year. The project is expected to account for as much as24 percent of the companys total rural sales within the next fewyears.BOP MARKETING CREATESHEALTH BENEFITSAlbeit a promotion to sell products, marketing to BOP doeshelp improve personal hygiene. The World Health Organization(WHO) estimates that diarrhea-related diseases kill 1.8 millionpeople a year and noted that better hand-washing habitsusingsoapis one way to prevent their spread. In response to WHOurging, Hindustan Lever Company introduced a campaign calledSwasthya Chetna or Glowing Health, which argues that evenclean-looking hands may carry dangerous germs, so use moresoap. It began a concentrated effort to take this message into thetens of thousands of villages where the rural poor reside, often withlittle access to media.Lifebuoy teams visit each village several times, using a GloGerm kit to show schoolchildren that soap-washed hands arecleaner. This program has reached around 80 million rural folk,and sales of Lifebuoy in small affordable sizes have risen sharply.The small bar has become the brands top seller.12/10/12 12:40 PMPart 6Supplementary MaterialQUESTIONS1. As a junior member of your companys committee to explorenew markets, you have received a memo from the chairperson telling you to be prepared at the next meeting to discusskey questions that need to be addressed if the companydecides to look further into the possibility of marketing tothe BOP segment. The ultimate goal of this meeting will beto establish a set of general guidelines to use in developing amarket strategy for any one of the companys products to bemarketed to the aspirational poor. These guidelines neednot be company or product specific at this time. In fact, thinkof the final guideline as a checklista series of questions thata company could use as a start in evaluating the potential of aspecific BOP market segment for one of its products.2. Marketing to the BOP raises a number of issues revolvingaround the social responsibility of marketing efforts. Write aposition paper either pro or con on one of thefollowing:a. Is it exploitation for a company to profit from sellingsoaps, shampoo, personal computers, and ice cream, andso on, to people with little disposable income?b. Can making loans to customers whose income is lessthan $100 monthly at interest rates of 20 percent to purchase TVs, cell phones, and other consumer durables bejustified?c. One authority argues that squeezing profits from peoplewith little disposable incomeand often not enough toeatis not capitalist exploitation but rather that it stimulates economic growth.Sources: C. K. Prahalad, The Fortune at the Bottom of the Pyramid (Philadelphia: Wharton School Publishing, 2004), Stefan Stern, How Serving the Poorest Can Bring RichRewards, Management Today, August 2004, Kay Johnson and Xa Nhon, Selling to the Poor: There Is a Surprisingly Lucrative Market in Targeting Low-Income Consumers,Time, April 25, 2005, Cris Prystay, Indias Small Loans Yield Big Markets, Asian Wall Street Journal, May 25, 2005, C. K. Prahalad, Why Selling to the Poor Makes for GoodBusiness, Fortune, November 15, 2004, Alison Maitland, A New Frontier in Responsibility, Financial Times, November 29, 2004, Normandy Madden, Nestl Hits Mainlandwith Cheap Ice Cream, Advertising Age, March 7, 2005, Ritesh Gupta, Rural Consumers Get Closer to Established World Brands, Ad Age Global, June 2002, Alison Overholt,A New Path to Profit, Fast Company, January 1, 2005, Patrick Whitney, Designing for the Base of the Pyramid, Design Management Review, Fall 2004, C. K. Prahalad andStuart Hart, Fortune at the Bottom of the Pyramid, Strategy & Business 26 (2002), C. K. Prahalad and Aline Hammond, Serving the Worlds Poor, Profitably, Harvard Business Review, September 2002, The Invisible Market, Across the Board, September/October 2004, Anuradha Mittal and Lori Wallach, Selling Out the Poor, Foreign Policy,September/October 2004, G. Pascal Zachary, Poor Idea, New Republic, March 7, 2005, Calling an End to Poverty, The Economist, July 9, 2005, Susanna Howard, P&G,Unilever Court the Worlds Poor, The Wall Street Journal, June 1, 2005, Rajiv Banerjee and N. Shatrujeet, Shoot to the Heart, Economic Times, July 6, 2005, David Ignatius,Pennies from the Poor Add Up to Fortune, Korea Herald, July 7, 2005, Rebecca Buckman, Cell Phone Game Rings in New Niche: Ultra Cheap, The Wall Street Journal,August 18, 2005, p. B4, Its Good Business, but a Strategy that Saves Lives as Well, The Boston Globe, June 10, 2007, Global Executive: See the Poor as Entrepreneurs, Consumers, Star Tribune (Minneapolis, MN, July 30, 2007, The Right Package, It Started With Shampoo but Now Sachets Have Overtaken Shop Shelves, India Today, December31, 2007, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, South Asian Journal of Management, April 1, 2007, The Legacy that Got Left onthe ShelfUnilever and Emerging Markets, The Economist, February 2, 2008.

 

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