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Management Guru Discusses 'Creative Capitalism'
CK PRAHLAD
Journal of International Affairs
December 24, 2008 - C.K.
Prahalad is a management thinker and author of the
best-selling The Fortune at the Bottom of the Pyramid:
Eradicating Poverty through Profits and the recently
published The New Age of Innovation. He is a world-renowned
expert on business strategies geared toward poor or "bottom
of the pyramid" markets. Prahalad's groundbreaking ideas
have influenced large corporations, multilateral
institutions and famed philanthropists such as Bill Gates.
He is currently the Paul and Ruth McCracken Distinguished
University Professor of Strategy at the University of
Michigan. Prahalad spoke with Emily Gouillart of the Journal
of International Affairs about the increasingly undeniable
role of the poor as an integral part of global finance, the
"co-created" future of international markets, the financial
boom in his home country of India and the responsibilities
that the "top 1 billion" have in shaping the future of
globalization.
Journal: Bill Gates, who cites you as a major influence in
his philanthropic work, has built a foundation that relies
on partnerships with large corporations to supply resources
and technology to the poor. What role has co-creation played
in his foundation's work, and has he applied its principles
correctly? Do you think his anti-poverty model is
sustainable?
Prahalad: What Bill Gates has been talking about is
"creative capitalism," a concept that states that large
firms and companies - that represent the institutional
embodiment of capitalism - must focus at least some
attention on the 5 billion poor. If we do not address this
problem, we will lose the social legitimacy of the
institution called the private sector. Bill Gates' work is
in keeping with future trends, albeit at a very critical
time. The original work on "bottom of the pyramid" (BOP) was
all about bringing the disciplines of markets and the
private sector-especially its organizational capability,
technological prowess and the capacity to scale-to the
problem of poverty alleviation. If you want to reach out to
BOP markets, there is a vital creative component that
requires bringing scale and organizational resources to the
problems that we now recognize cannot be solved by
subsidies, government intervention or aid from
multilaterals. There will still be a sliver of maybe a
billion people-the very bottom billion-that will require
philanthropy and subsidies. But even in philanthropy, we can
bring in the discipline of markets and create solutions that
are scaleable and cost-effective. The phenomenon that we
have witnessed thus far is an "ideological divide" that
forces well-meaning people-whether they represent
multinationals, non-governmental organizations (NGOs) and
the civil society sector, philanthropists or
businesspeople-to be adversarial with each other coming
together. This has prevented them from working together.
Creative capitalism calls for a new kind of reconciliation
across the ideological divide. It is the new convergence of
the role of civil society, philanthropy, public sector and
private sector around problems that have been intractable
for a long time.
So the Bill Gates model does represent the new convergence
of a co-created world?
Yes, it is a convergence where independent interest groups
are acknowledging past shortcomings and are now joining
together to find solutions to this problem. They are saying,
"We have tried, but now we have to look at the poor as a
problem to be solved, not as a constituency to provide
legitimacy to our independent institutional frameworks."
That is the future. That is co-creation.
You have said that global Financial institutions struggle to
achieve co-creation because they only look at the "big
picture. " You also cite the example of Grameen Bank as a
company that has been innovative by addressing "one customer
at a time" on a large scale. If the World Bank asked you to
consult on a poverty eradication program or Millennium
Development Goal initiative in a developing country, what
would you suggest they do to have a more granular approach?
Can this be done at an institutional level?
Ultimately, all solutions that work must be locally
responsive. There is no universal silver bullet. Four
billion people represent enormous variety in cultures,
literacy and media and business capacities, so everything
must remain locally focused. An institution like the World
Bank, with its particular cost structure, may not be able to
make change at the most granular level, but it can still
have success through partnerships. These institutions need
to identify and make use of multiple layers of partners as
an integral part of their institutional structure. For
example, they could lend money to a local community bank.
Next, they would insure that that community bank succeeds
and lends money to, say, a local self-help group or a
merchants' group. It is the local self-help group that can
tailor resources to address the unique local needs, to
co-create the right actions with those in the know.
That said, the ultimate responsibility for these huge
expenditures belongs to the World Bank, and they must spell
out explicit principles. It cannot simply give money to one
government and let them decide how to spend it. It may
decide what projects to spend on, but solutions for
sustainability depend on ity-building at the grassroots
level. It must identify points of departure. Global
financial institu- tions, including the World Bank, must
learn to collaborate and co-create with local institutions
while still setting firm principles. Principles are about
more than reducing corruption that is the lowest level of
ambition. Capability- building must be the overarching
principle. This is part of democratization for global
finance.
You speak frequently about the problem of "elitism" when
CEOs or other leaders formulate strategies to help the poor.
Can you give us a scenario, either real or imagined, where
this could or did take place-and what you believe should
have been done differently?
When I talk about elitism, I don't want it to be interpreted
as being inherently negative-usually it is only a matter of
perspective. For example, you can ask a simple question of a
group of corporate executives in the United States: How much
do you pay per minute for cell phone time? I must have asked
this of 5,000 senior executives in the United States and
Europe. Their answer- they cannot tell me. The cost of a
cell phone minute is inconsequential for them as a component
of their total spending, within their portfolio of products
and services. But for a poor person in South Africa, or in
India, cell phone cost-the per-minute cost-is quite
relevant. So in talking about elitism, this represents one
kind-where people are simply unaware of the problems that
the poor people face. That problem can be reasonably easily
solved, because once you talk about it and sensitize them,
they generally recognize the new things they must worry
about.
The second form of elitism, which is more difficult to
solve, is the belief that we have the right and the
obligation to decide what the poor can and cannot have. For
example, a lot of people look at the BOP work-which is about
creating an opportunity for poor people to get access to
world-class products and services at affordable prices-as
promoting consumerism. [People in the developed world] have
no problem having forty-five types of packaged coffee on the
supermarket shelf for themselves, but they resent the idea
that poor people can have even two types of coffee or might
be allowed the patterns of consumption that accompany
world-class quality. The idea is that [the poor] should
survive in their current fashion, perhaps by remaining
totally isolated [from global markets]. This form of elitism
is a bigger problem to me, because then we are assigning to
ourselves the right to tell ordinary people what they can
and cannot have. My ideology is simply that the poor should
have the right to make choices that you and I enjoy, and
therefore should be referred to and treated as consumers
with the same dignity and self-esteem that we want ourselves
to be granted. So whether they are micro- producers,
micro-consumers, micro-investors, micro-innovators or
micro-entrepreneurs, I only want them to be given the same
choice and the same respect. Not allowing that is the form
of elitism that I worry about most. Ignorance of the nature
of the problem at the BOP is acceptable to me-it can be
cured-but ideological elitism is something more difficult.
You once showed a journalist a store in a small town in
India where the shampoo brands included many of the "gas
station" brands found in western countries, but few luxury
brands. What are the industries or corporations that you
wish would reach out more? What is the untapped resource?
Many people gravitate toward the example of the shampoo, but
I think that's just the starting point. Take cell phones.
You and I have the same cell phone. I can be very poor, but
if I have a phone it still makes me connect with other
people. You may have more bells and whistles, a better
camera, but I have the same core functionality that you
have. It is the same for shampoo, yes, but it really should
be the same for education and health care. What we need to
do is to strip away all the bells and whistles from these
products and services, identify the core functionality and
make sure that that functionality is available at a
world-class level and at affordable prices. Now, if somebody
wants to pay more money to have a camera with a cell phone
at the BOP, my attitude is, "Sure, let them have it." But if
they just want a basic cell phone, it must provide the same
quality of service for voice and connectivity that you and I
have-and texting as well, given how important that medium
has become. Once we do that, the cell phone becomes the
device through which the BOP customers can organize
themselves and conduct their business. Cell phone
connectivity in the BOP translates to the advancement of
banking and commerce, the exact kind; of growth they need.
Cell phones aren't just for conversation-if you are a BOP
consumer, you need them to settle small transactions and to
make remittances. With [increased cell phone availability]
we see more and more benefits, and a huge opportunity for
creating wealth. The key issues are providing affordable
world-class products and services and protecting the the
element of choice. These are the fundamental parts of
democratizing commerce. Do you have an opinion on the
efforts to bring hand-crank laptops and things ike that to
rural areas, especially in terms of their effectiveness?
Even if the philosophy is in keeping with your way of
thinking, do you have a sense of the success and failure of
initiatives like these?
There has been a tremendous amount of experimentation, which
is good news. People are assuming that the poor have more
time, and so they can use that additional time to: crank,
pedal, and so forth to be able to enjoy the benefits of
laptops and cell phones. That said, why not go beyond and
apply this philosophy to other innovations that are not yet
widespread in other parts of the world-for example, one can
easily bring solar panels to these regions. Both experiments
are important, but the fact that they are very experimental
is significant. The real key, however, is connectivity. In
the transitional phase of world-class communication
services, if we have someone cranking or pedaling to get an
electric charge, that's okay but not in the long-term.; Not
only should we not accept that, but we should take it one
step farther. If we think through the bottom of the pyramid
opportunities, I believe we will have technological
breakthroughs that will reduce the cost of solar panels,
increase the efficiency of storage and so on. In the case of
laptops, it is also important to be able to read in ambient
light in these areas- here when you bring your laptop
outside on a sunny day, you cannot read. But for BOP
customers who live in villages, it will be a greater
priority for them to be able to read in outdoor and ambient
light. But we must think through how to do it right. We must
view the bottom of the pyramid market as an opportunity for
innovation. The goal is to avoid pushing the poor backwards,
technologically. That said, all experimentation that is
transitional and helping the poor to improve their quality
of life is welcome.
Is intellectual property a problem for these kinds of
innovations? What are the bureaucratic drawbacks to this
kind of advancement?
When you consider a market of 5 billion people as a new
opportunity, the sheer scale brings down costs. The reason
that cell phones are possible to make for 25 dollars and
still bring profit to the companies is because of scale.
Sheer scale will find new ways of production and new ways of
reducing costs. Remember, most BOP consumers do not care
about the camera. They just want good reception and the
ability to text. The intellectual property (IP) debate can
become quite simple. I am not suggesting that we throw away
intellectual property rights, only that we should scale it
up large enough so that even if you collect a small
licensing fee, the sheer volume will make up for it. I think
we need to ask the question: Is this tradeoff real or not?
Second, this debate has been going on about AIDS drugs and
others-if 2 million people the every year in Africa alone,
and we sit around talking about intellectual property
rights, is that even ethical? We need to remind ourselves of
the magnitude of the problem and therefore acknowledge the
true role of intellectual property regimes. We need new
regimes that understand the limits of IP protection and,
under specific circumstances, we must be able to put such
innovations in the public domain.
Remember, the world is going toward open-source. We need to
be constantly searching for conditions that protect the
rights of innovators and, at the same time, adjusting to
special cases such as the HIV/AIDS issue in Africa. Of
course, it is controversial to suggest that we in the United
States are very selective in our commitment to patent
protection. After September 11 , when there was a fear of
anthrax attacks, botii the United States and Canada, in
their desire to stockpile [anthrax medication] Cipro, were
willing to violate patent rights. They were willing to force
a price reduction and start production if necessary. We said
it was justified in the interest of "national defense" and
"national security." However, for an African state with 30
percent of its people dying of AIDS, they have a national
security threat that is beyond comparison. So we cannot take
both sides of the street-when we are threatened we are
willing to violate IP, and when other people are threatened
we are willing to treat IP as sacred. When millions of
people are experiencing needless death-and it is needless,
because we know how to solve it-pricing and IP must give
way. This is not an issue of the public versus private
sector; this is a moral issue.
What does the shrinking of credit markets in developed or
"Northern " countries mean for available credit in
developing "Southern" countries? In light of the current
credit crisis, how do you see the shrinking of these
Northern markets impacting the Southern countries?
The credit crunch in and of itself is unlikely to affect
poor countries because their economies are not as
interconnected as those in the rest of the world. That said,
I am concerned that the credit crunch is going to force
large private sector companies to become less
experimental-much more focused on their basic core business
and unwilling to experiment at the margin, even if the
expenditure for doing so is low. All these initiatives, the
corporate social responsibility initiatives, are
experimenting to build a new way of doing business. Some may
view these new priorities as marginal and dispensable,
rather than as something to be protected for the long haul.
That is a bigger worry. That said, the poorer economies will
not take a huge hit as a result, and the large emerging
markets like China and India have enough assets for now.
India, especially, is not as exposed to pricing in developed
markets and will not be influenced in the same ways.
Are there companies that have seen their "bottom of the
pyramid" market initiatives become their core business, even
if that was not the case in the past? Do you think this is
common, or at least likely, enough to prevent the phenomenon
of corporate social responsibility initiatives being treated
as expendable?
It is not about them being expendable. We tend to forget
that Wal-Mart was created to serve an ordinary,
lower-middle-class market, not to serve the rich. It is the
world's largest company, and it stays that way because of
ordinary people. The Model T was also built for ordinary
folks. Take companies like Procter &. Gamble or Unilever. In
the developed markets they cater to the well-to-do and to
what we call "the middle class" in the United States, which
are extremely well-to-do by the BOP standard. Yet when they
expand to India, Brazil or Mexico, their primary and
sometimes only markets are bottom of the pyramid. Unilever,
for sure, uses a strategy of "straddling" the pyramid-not
focusing exclusively on the bottom or top. British Petroleum
would call it the "emerging consumer market," not the bottom
of the pyramid.
Essentially, people recognize that while the bottom of the
pyramid focused attention on the needs of 5 billion people,
ten years later that can no longer be considered an
"initiative." Everybody recognizes the power of this market,
and even if CEOs and leaders hold different views on how to
access those markets, nearly all are changing their
strategy. I should also note that for most companies, this
is happening very rapidly. They now understand that at some
stage they must go beyond die 1 .5 billion they have always
served. There will always be a range in the choice and
degree to which they expand their market horizon to new
classes of consumers and cost structures.
What are some of the discrepancies that make granular
thinking so important? Are they mostly cultural in nature?
They often are, for sure. Take the example of India. Between
the states of Bihar and Karnataka, the differences are quite
stark. Both are very poor states and are often lumped
together when we talk about India, but the cultural
differences are huge. Take the example of children in
school. This matters. In most parts of rural India, the
children are teachers of the parents because they are going
to school and their parents never did. Hygienic practices
like washing your hands before eating are taught in schools.
Children learn it first, so that they can pass these lessons
on to their parents. This can have a significant impact on
the quality of health. The number of children in school can
be critical for improving public health. The number of
children in school is different in Bihar and Karnataka.
There is no one solution for India. Each one must be
granular.
You left India as a young man because the environment there
was not hospitable to your globally focused ideas about
markets and finance. How long did it take before you found
yourself able to truly apply your work to India's evolution?
I would say it was around 1993, when India started opening
up market-wise. India was experimenting then with what it
calls a "mixed economy," which was neither total socialism
nor a pure market-oriented view of the world. The public
sector, private sector, the state and federal governments
were all involved in running businesses. I call it
"mixed-up" rather than "mixed." But from 1992 to 1993, when
India really had a foreign exchange crisis, it opened up the
markets under duress. That created a whole new dynamic
within the country. The initial fear was that powerful
multinational firms would destroy all local firms and
industries.
What one found instead was that Indian private sector
companies were resilient and were becoming strong and
competitive. Over a period of about ten years, not only have
the multi-nationals not had free reign as was feared, but
Indian firms have become stronger and have grown rapidly.
The foreign direct investment (FDI) out of India last year
was higher than the FDI to India, which is completely
different from what a theorist would suggest is needed for
development. And there are now Indian multi-nationals, such
as Tata and Reliance. The information technology (IT) boom
was a huge boost to Indian confidence-suddenly there were
Indian entrepreneurs who were young and willing to go out,
who fought to be world-class. They truly built brands. The
pharma industry soon followed. Today, there is a tremendous
amount of confidence in India, and we see nuggets of
excellence in a poor country that can grow. The question is,
how do you cause that growth? That was the question I was
eager to answer.
I have had a small part in it. I have been going out every
year for the last fifteen years, building Indian
multi-national corporations and working with CEOs to help
them become world-class. This meant experimentation and
developing a sense of confidence that India an be an
effective global player. It has been a huge change, with
much success.
You have said that current tools and products of finance
have become esoteric and that global financial institutions
in particular have struggled to stay current and effective.
Do you have a sense of what new tools should be introduced?
What are the outdated modes of thinking to which
corporations and institutions continue to cling?
You know, when you go to the bottom of the pyramid, you have
to understand first and foremost that people need
straightforward tools. They have to protect their balance
sheet first, and the balance sheet mindset assumes that
their home, land and all income- earners will be protected.
Second, you have to understand that wealth creation depends
on access to credit. That is true in the United States,
Europe, everywhere. Everybody in the United States assumes
that it is reasonably possible to get a credit card by the
age of seventeen, to get an auto loan by age twenty to
twenty-two, to find work and get a homeowner's loan by
thirty. Access to credit built the United States. The bottom
of the pyramid needs exactly the same.
If you look at the self-help groups and all the
grassroots-level communities that are so key to BOP markets,
it is $20, $50 and $100 that gets people out of poverty.
Consider a fruit seller in India. If he borrows 100 rupees
from a local money lender and has to pay 120 rupees back
every day, there is no way for him to accumulate capital. He
is lucky just to subsist. By giving him that 100 rupees at 2
percent or even 1 percent interest a day, already you are
helping him. If you instead give him a loan at 1 percent a
month, you are fundamentally changing his life. Out of the
30 or 40 rupees in profit that he makes selling fruit, he
can save small amounts over time and eventually build a
larger business.
We need to create micro-entrepreneurs, and we will do that
by making credit available at reasonable rates. The private
sector is critical for this. One thing we always
underestimate in this game is that all poor people have a
poverty penalty. They pay more for everything from water to
credit. And all are subject to local monopolies called money
lenders-though really, they are warlords-so our job is to
use modern systems, new forms of distribution, to reduce the
impact of the local monopolies and to get regional and
global competition to expand its market space.
You have said that India's emergence as a major global
player was driven by the IT industry and that the IT
industry is a co-creation driven industry. Do you see other
major emerging industries that will be fueled by
co-creation? Do you think that a developing nation like
India could enter the global financial mainstream by
specializing in that industry?
Health care and education, of course, will be huge in every
country. India is not an exception. It has a very young and
very large population, so education and health care will be
essential. Agro-industry will be huge, and virtually
anything that is agricultural-based will require co-creation
to thrive. You can already see how Brazil has evolved
through agro-industries; they have become one of the largest
exporters in the world of agricultural products. More
importantly, though, they have also taken huge steps toward
energy independence because of the transition to ethanol.
There are staples too, which are still
evolving-manufacturing will always be huge, and China has
illustrated and continues to illustrate this.
Speaking of China, that nation has a very hierarchy-focused
culture. Is co-creation a viable framework for a country ike
China, or are the cultural differences too great?
The ability to co-create depends on the willingness of two
parties to recognize each other as equals. That is
fundamental. If you have a very hierarchical view of the
other person or if you regard them as incapable or
subordinate, it goes back to the same issue of elitism with
all the problems that entails. Co-creation is harder, though
usually not impossible, in that case. That said, as people
become more affluent, they become more educated, and they
will assert their rights. Ultimately, co-creation cannot be
avoided- it is the future. Yet in the initial stages of
development, we have seen that people are willing to say,
"Since I don't know, I'm willing to listen and willing to
learn."
There are some who have suggested that the notion of a
"fortune at the bottom of the pyramid" might be
exploitative, either intentionally or unintentionally. They
say that a company that seeks out a BOP market, then finds
that it does not deliver as they had hoped and thus exits
the market, is simply using the poor to help themselves
without ethical regard for their well-being. Does that
concern you?
There are three components to address with that question:
First, can companies exploit? Of course they can, but they
don't and can't start with an exploitative view. Especially
now with the Internet and the growing access to information,
the checks and balances provided by NGOs and ordinary
citizens who limit exploitation. Any blogger can start a
global crisis for a large company. We must not underestimate
that. Thus, whether or not they can be exploited is a mostly
theoretical question. It can happen and has happened in
select instances, but it has never lasted for long. On the
other hand, while we spend so much time wondering about the
exploitative potential of large firms, poor people are still
being exploited by local moneylenders. We tend to focus on
these large companies, like Coca-Cola, Nike or Nestle,
because they make press. Millions of corrupt money-lenders
do not. So we are willing to accept a local tyranny while
comparatively minor problems with a global company get
over-played.
In doing so, we are fostering a counter-productive impact by
creating an environment where large companies are shy about
entering this arena. We leave the poor at the mercy of
moneylenders, and we must be cautious about that. To make it
very simple, consider a situation where Citibank proposes a
new program where they lend money at 15 percent to the poor.
Many NGOs would be up in arms arguing that Citibank is
exploitative and should lend at the same rate as they lend
to the rich, say at 10 percent. But from a poor person's
point of view, their only alternatives up to that point
would have ranged between 50 and 300 percent. Sometimes, we
have to remind people whose side they are really on. If you
are on the side of the poor people, 15 percent is much
better than what they already have as an option and better
than having to pay the poverty penalty to their local
money-lender. That is the first part.
Second, can some multi-nationals walk away from certain
markets? Yes, they can and do. If it is not profitable, or
opening up as they expected, as a private sector company,
they have the obligation to walk. They are not in the
business of subsidizing forever. In the short-term, you
account for it as an investment; in the long-term, you must
make sure it does not become a subsidy. If the market can't
pan out and it's not profitable, it will merely become a
subsidy. So titey must avoid this and already do so
routinely with conventional markets. They go in and out
based on profit margins; they discard unsuccessful products;
they sell failing divisions. This is standard. The real
question therefore becomes: If we socialize BOP markets to
expect certain minimum standards of performance, what are
the implications of a large company moving out? In my
experience, when a large multi-national moves out of an
established BOP market, a local company will come and fill
the gap. This happens all the time. Actually, the real
competitors for global companies are local companies that
can replicate their quality at half the cost. The key is to
get the market working and to cultivate scalable markets.
Whether it is a multi-national or local company doesn't
matter, as long as the market's needs are being met. One of
the most interesting companies in India, called Amul, is a
cooperative. That suits the market perfectly. What is next
for you and your work with BOP consumers?
The natural extension of what I do is to ask a bigger
question, which I am now very focused on: How do you
democratize commerce? How do you get every human being to
have access to the benefits of globalization? Usually,
economists ask: Is globalization good or bad for the poor?
This formulation polarizes the debate. Globalization is like
gravity-why deny it? We must instead defy it-in defying
gravity, we can build a plane that flies. If you treat
globalization as a natural Process in the world, our job is
to find the benefits and ensure that all people get access
to them. This means treating every person as a
micro-consumer, getting them world-class products and
services, offering choice and creating micro-producers who
are fairly compensated for their efforts. I am working on
creating micro- producers, micro-consumers and
micro-innovators who all get compensated appropriately. That
is the new frontier. Getting there will require multiple
steps. In my work on the bottom of the pyramid, the core
idea was to create inclusive capitalism-you can also call
this creative capital, whatever you like. The first point,
though, is to include the 5 billion people in the global
economy who have not been included. The second point about
co-creation concerns the creation of choice, individually
crafting each consumer's own experiences in the market and
in their own businesses.
I am very interested in opportunities that incorporate the
poor at the bottom of the pyramid into the global supply
chain, not just at the local level. For example, I am
writing a case study of an Indian company called Jaipur
Rugs. They receive wool from as far away as Australia, New
Zealand, China and Argentina. It is then blended with wool
from Rajasthan in India. 40,000 women in rural India create
classical and contemporary handmade carpets that are then
sold in the United States. This is the ultimate global
supply chain, where the poor are woven into the supply
chain. This is the democratization of commerce.
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