Serving the World's Poor, Profitably

Serving the World's Poor, Profitably - An Article Summary per Prahalad and Hammond

Written for Thunderbird School of Global Management, Spring 2012

Summary

“The willingness of big, multinational companies to enter and invest in the world’s poorest markets” is the one factor that Prahalad and Hammond argue is key to alleviating poverty, securing safety, and completing recovery from the global recession.  Interestingly, the authors make this notion and compliment it by saying that MNCs, if they do so, will greatly “enhance their own prosperity in the process”.  This is because the market in question contains over 4 billion people; although the segment earns less than $2,000 per year, the assumption that there is no market potential and that “the poor” do not spend on anything besides basic needs is flawed and narrow – the aggregate buying power of this segment is very large and their spending behavior is actually quite similar to middle-class consumers.  The article points out and overcomes many misperceptions about the poor than establishes the business case for MNCs.

Because growth is very difficult to obtain in mature markets, the article offers several factors that are favorable regarding investment in products and services for the poor.  Poor markets are under-served although the segment is hungry for low-priced, high quality products and services - aggregate prices can be 10 to 500% more for varying items, from water and food to phone calls and credit.  Also, there are plenty of cost saving opportunities by investing a company’s operations and the workforce of the poorer regions of the world.  And because the market is under-served, companies are already making significant innovations to serve this niche.

Lastly, a main theme of the article is the fact that managers must rethink their misconceptions, “The biggest change…has to come in the attitudes and practices of executives.”  They must appreciate the vast potential of the poor market and invest internally in people who are comfortable developing these markets.  Without these psychological changes, MNCs will continue to only slowly dip their toes in the water.

Integrate

In the article, “Tap Your Subsidiaries for Global Reach” Bartlett and Ghoshal identify the major reasons companies fail to compete globally through their subsidiaries.  Namely, MNCs often lack the ability to adapt to market preferences in the “host country”, lack the resources to scrutinize data and create responses in multiple world markets, and lack the motivation and empowerment in overseas subsidiaries’ managers.  In respect to “serving the world’s poor profitably” Prahalad and Hammond identify that a shift in mindset of manager’s is preliminarily necessary, followed by structural, organizational changes.

Bartlett and Ghoshal have also identified that “strategic leader” subsidiaries are partners of headquarters and highly competent groups located in important markets that help recognize demand shifts, develop and implement new strategies.  Without a doubt, these two articles align well and are demanding the same thing and strategy of MNCs – to invest in poor markets and to do so by tapping local knowledge through host country research and development groups, sales units, and distribution.  MNCs have tremendous economies of scale and undisputedly powerful supply chains that if adapted well, could provide for cost-effective products and services in the poorer markets of the world.