Stuart L. Hart: Bottom of the Pyramid

he events of Sept. 11 are a real catalyst for an area of opportunity that strategic management professor Stuart L. Hart simply calls the bottom of the pyramid. It is globalization for good, and this visionary idea, Hart argues, now holds more promise than ever.

"Existing developed world markets are saturated. If a global company is going to continue to grow, its leaders have to figure out how to penetrate new markets. The best markets are the 4 billion people - two-thirds of the world's population - at the bottom of the economic pyramid," said Hart, director of the School's Center for Sustainable Enterprise, which studies how corporations can develop business practices that are environmentally and socially sustainable.

"Multinational corporations (MNCs) can help people rise out of poverty while also making a profit, but doing so requires a major shift in attitude and throwing cookie-cutter business models out the window. It requires a radical new approach to business strategy, one that takes into account the cultures and lifestyles of the people of the developing world. Think of it as visualizing a theme park, or an active market, where today there is only a swamp," Hart said.

"Just as it takes imagination, good engineering and a sound financial plan to create a theme park out of a swamp, it takes imagination, creativity and product innovation to engineer a market infrastructure out of an unorganized sector."

Hart and University of Michigan professor C.K. Prahalad have written a working paper and an article in the First Quarter 2002 issue of Strategy + Business, "The Fortune at the Bottom of the Pyramid," that examines why now is the perfect time for MNCs to look at globalization strategies from a radically new perspective. The article was distributed at the World Economic Forum in February.

In the past, this huge segment of the world's population has remained largely invisible to the corporate sector. The quality and quantity of products available to these bottom-tier markets are generally very low. But it is a market that also is wide open for technological innovation, meaning that global corporations could become leaders in leapfrogging to profitable new technologies that don't repeat the environmental mistakes of the past, Hart said.

If all of this sounds too pie-in-the-sky, Hart and Prahalad show that pioneering companies already have successfully reached the bottom of the pyramid. They have, in fact, made it a corporate strategic priority.

Hindustan Lever Ltd. (HLL) in India, a subsidiary of Great Britain's Unilever PLC, drastically altered its business model in 1995 after facing stiff competition from a small local firm called Nirma Ltd. HLL introduced a new detergent, Wheel, which was formulated to greatly reduce the oil-to-water ratio in the product. Wheel addressed an environmental issue as it met a market need: Poor Indian people often wash their clothes in rivers and other public water systems. HLL decentralized the production, marketing and distribution of the product to take advantage of the large labor pool in rural India. The company also changed the cost structure of its detergent business so that it could introduce Wheel at a low price point, thereby making it more affordable.

Today, Nirma and HLL are close competitors in the detergent market, with 38 percent market share each. HLL registered a 20 percent growth in revenues per year and a 25 percent growth in profits per year between 1995 and 2000, according to Hart. Over the same period, HLL's market capitalization grew to $12 billion - a growth rate of 40 percent per year.

Hart asserts that the poor can be a profitable market, a market in which profits are driven by volume and capital efficiency.

So how do the events of Sept. 11 open up opportunities for these markets? Is it easier now for corporate leaders to think more creatively?

"Sept. 11 raises the stakes in such a way that these issues can no longer be put aside as discretionary, nice-to-do things," Hart said. "There's a larger, growing perception that the globalization process is not going well. If we expect the globalization of business to flourish, it has to change or early signs suggest it ultimately will fail."

A focus of the Center for Sustainable Enterprise is its Base of the Pyramid Co-Laboratory, a Kenan-Flagler-based consortium that assists in jump-starting business model innovation at the base of the economic pyramid.

"If business sets its sights on the very poor in ways that incorporate economically sustainable and ecologically sound practices, that strategy will go a long way toward establishing business practices that will enable companies to grow globally. At the same time, this will create greater market stability by helping to set aright a world badly out of balance," Hart said.

Web Links to Articles: http://www.strategy-business.com/press/article/?art=229761&pg=0 (requires registration) http://www.hbsp.harvard.edu/products/hbr/janfeb97/97105.html

More info: "The Bottom of the Pyramid," by Stuart L. Hart, Tomorrow magazine, January/February 2001