Open Forum

New Delhi, 26 May 2010

Selling To The Poor

FROM POVERTY TO PROSPERITY

By Dharmendra Nath (IAS, Retd.)

Selling to the poor. This is the central theme of C K Prahalad’s work. Economists are notorious equivocators. On the one hand this, on the other that. So somebody wished for a single-handed economist. Prahalad, Professor at the University of Michigan, who passed away recently, almost certainly fits this bill.

He spoke loud and clear on matters that concern all of us. His was a grass-root approach. He started off on corporate business strategy with the concept of core competency. Companies should never confuse their roots with the leaves and the fruits. One can lop off leaves and fruits without harming the tree but we cannot do the same to its roots. His more powerful work, however, was yet to come. It relates to the fortune at the Bottom of the Pyramid theory which is a very significant and an eminently workable contribution to the anti-poverty literature.

By all means give the poor skills, give them jobs, give them assets. All are very valid approaches, though they involve government expenditure. What Prahalad uniquely taught us about them is to look at them also as consumers who can provide their own funding. They too consume, though not as much individually. In the aggregate that constitutes a massive buying power. He drew attention to the importance of tapping into it as a driving economic force.

At first glance the whole thing may sound like a contradiction in terms. How can the poor provide the resources and the driving force of the economy? But when we look at it more closely we realize that the small purchasing power of a very large number of small people multiplies into a very large sum indeed. That is a largely untapped pool of un-actualised demand. Tapping into it is the key idea of Prahalad. Today, it is the source of a lot of retail revolution we see around us.

Effective demand is demand backed by buying power. People may demand any thing but unless the demand is backed by the power to buy, the demand does not materialize. It remains ineffective, unactualised. So it does not make a difference and does not enter into economic calculations.

Prahalad noticed that the power to buy or not to buy is not absolute. It is a matter of degrees. You may have inadequate buying power in most cases. He concentrated on inadequate buying power and actualizing it so that it acts as an effective demand. We are amazed at the all-round windfalls this approach could generate.

He studied the lower end of the market. His message was, look at the needs of the less well-off and try to find what you can sell to them and in what quantities. You design a product around an acceptable price – a price acceptable to them - so that you are in tune with the consumer right from the beginning. This set off a flood of much-needed small packs and sachets in the FMCG market.

Demand for these things was always there but was on stand by and no one understood its potential. Consumers too were frustrated. They felt left out. Prahalad made it the driving force of a virtuous cycle leading to more production, creation of more jobs and even more consumer demand. The entrepreneur enriched himself and besides creating economic prosperity for all he also made their lives better. He called it the strategy of selling to the poor.

Services too can be provided on similar lines. Aravind Eye Hospitals practice it. They started with Madurai, now they are in five locations. Their secret is large volume and streamlined operation. Sulabh Shauchalaya is another instance. They have evolved over the years providing a much-needed service at such reasonable rates. At another level Ginger Hotels of the Tata group are another instance. They are in 27 locations within the country today. Key concept is affordable pricing. Dormant demand has thus been actualized and that has created a lot of economic activity.

The entrepreneurial eye on the lookout for gainful economic activity can through this approach transform a landscape of poverty into one of prosperity over a period of time. Hordes of entrepreneurs are now following up that lead. It was a long ignored opportunity.

As a poverty eradication – or poverty alleviation strategy, if you will, it does not go quibbling into numbers of the poor or who should be called poor and be in the entitled group. Instead, it goes straight to the heart of the matter. You operate it and you see benefits flowing.

The communist system of central planning put us in the questionable habit of collecting a lot of statistics, much of which is not needed and in any case much of which is plain fudged to suit the situation. If we can move away from that habit then we will begin to see the advantages of systemic reform which operates on its own strength and creates its own evidence in the form of solid achievement. It is powered from within.

The approach is universal and benefits whoever can. No outlays of government funds are involved. Its corollary of corruption is cut out. Other weaknesses of government programmes such as slackness and lack of commitment get eliminated. It is a truly path-breaking anti-poverty strategy relying on the resources already available within the society.

We can see that service to the poor does not mean burdening them with outside help; rather it should be an attempt to find how they can help themselves. Its basis is inner motivation and voluntary participation both at the giving and the receiving ends.

We can also learn from another of Prahalad’s related messages. It says that to bring about improvement in a given situation the important thing is to concentrate on where you want to be rather than where you are. We should therefore not shed tears over poverty; rather we should set our sights on the goal and look for opportunities in the existing situation. Most problems carry the seeds of their solution within them.

Prahalad’s down-to-earth approach and his contribution to the theory and practice of social and economic transformation – from poverty to prosperity - is a great step forward whose benefits will keep flowing in the years to come.--- INFA

(Copyright, India News and Feature Alliance)