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Q.1 Michael Hammer argues for "the process enterprise". What is the important lessons "operational innovation" brings to the firm's performance?
Michael HammerÂ is the driving force behind business process revolution. He is the originator of both business reengineering and the process enterprise, concepts that have changed forever, how businesses around the world function. Thousands of companies have turned his ideas into practice and profit. Dr. Hammer is the author of four books, including the international best-seller Reengineering the Corporation, which Forbes ranked as one of the three most important business books of the past twenty years. An engineer by training, Dr. Hammer's research and teachings focus on how to transform business operations; his work is relentlessly pragmatic and immediately applicable. Dr. Hammer was for many years a professor of computer science at the Massachusetts Institute of Technology and is currently a Visiting Professor at MIT and a Fellow at Oxford University. He is founder of several high technology companies and was named by Time as one of America's twenty-five most influential individuals. He can be reached at mhammer (ibscdc.org).
James Champy, Michael Hammer, and others introduced the concept of Business Process Reengineering (BPR) in the early 1990's. A process enterprise according to Hammer & Stanton (1999) is a new process view of organizations has not yet been fully realized. Many companies have integrated their core processes, combining related activities and cutting out ones that don't add value, but only a few have fundamentally changed the way they manage their organizations. According to Hammer, a process is "everything that transpires from the beginning - the point at which a customer or constituent requires something - to the point that a customer is satisfied with the results" (Harris 1999). A process enterprise is a business that takes the revolutionary concept of BPR and transforms their organization. In the article, How Process Enterprises Really Work, Hammer and Steve Stanton reiterate the importance of building a business around its core processes. They take a look at companies who have successfully applied BPR and became process enterprises, noted some of the obstacles these companies faced and how the obstacles were overcome, and reaffirmed the techniques for becoming a successful process enterprise. The success stories that were given in the case all had at least two major themes: BPR was a means to an end for a very specific company initiative, and BPR was faced with much initial resistance by the organization's status quo (pamspam.com).
For example, Texas Instruments was facing obstacles with lengthy time-to-market and product development times that were being undercut by their competitors. They solved this problem by implementing BPR. BPR enabled them to streamline their product development by giving ownership of the development effort to a designated team, thereby getting rid of bottlenecks and enforcing accountability. However, the cross-functional teams were stymied by the existing infrastructure because the old functional departments refused to relinquish their power and give the teams the needed resources for success. Texas Instruments solved this problem by shifting the power from the functional departments to the cross-functional teams. Functional departments became learning centers and budgets were allotted by process instead of department. The end result for Texas Instruments was a 50% time reduction in bringing new products to the market, break-even points have been reduced by 80%, return on investment in product development has more than quadrupled and the unit has become the market leader in product categories where it previously had no share (Hammer & Stanton 1999).
IBM has a similar story, even though the details are different. IBM found itself competing for the same corporate customers globally, and felt that in order to better serve its customers it would have to standardize its operations worldwide. IBM's obstacles to implementing standardized BPR were the country and product managers who tended to tailor their processes to their region or product. To combat this, IBM reorganized its management structure. Each process was given to a Corporate Executive Committee and a Business Process Executive (BPE) to shift the power from the unit managers. This way, unit managers and BPE's were forced to collaborate when a conflict arose over standardizing a process or allowing it to be tailored for special circumstances. IBM's success came with a $9 billion cost saving, a 75% decrease in the time to market for new products, and increased overall customer satisfaction (Hammer & Stanton 1999).
The story for Owens Corning began with the initiative to implement an Enterprise Resource Planning (ERP) system. Since ERP systems "tie together previously isolated departments and the people working in them" (Hammer 1999) by offering an integrated system with a variety of functional modules and a common backend database, Hammer insisted that a proper ERP implementation could not be done without integrated processes. Owens Cornings' problem was that departmental and regional managers were rejecting the integrated software and trying to keep their applications as customized as possible. Owens Corning, like Texas Instruments and IBM, had to reorganize around processes in order to successfully implement the ERP system, which saved them millions of dollars in logistics and administrative costs along with a 50% increase in inventory turns (Hammer & Stanton 1999).
Duke Power, an energy company increasingly affected by deregulation, realized that in order to compete it would have to radically modify its business practices and improve customer service. They implemented BPR by balancing power between the four regional vice presidents and five new core process owners. Their struggle in defining the clear split in authority was solved by developing a "decision rights matrix" which outlined which process owner or regional vice president had the jurisdiction to make decisions, which had to be consulted about decisions, and which had to be notified of the outcome. An example of the success that they were able to achieve was the Deliver Products and Services process owner's ability to meet 98% of his construction commitments (Hammer &Stanton,1999).
Why need of BPR?
In the late 1980's and early 1990's many top executives feared that their companies would be overtaken by more efficient foreign competition or local startups. "It's becoming an absolute requirement for companies in almost every business to either rethink or die" (Harris 1999). BPR was originally conceived as a way for large, established companies to reorganize themselves around their customers' needs, and in doing so become more efficient and improve quality. The key to BPR is the "radical redesign of business processes for dramatic improvement" (Harris 1999). BPR eschews incremental change in favor of completely ripping out the old system and starting with a clean slate. As such, it's not easy to implement. It requires a lot of foresight and planning, but Hammer and Stanton are convinced that companies who successfully implement BPR will reap the rewards, which include lower costs, higher quality products and services, increased customer satisfaction and loyalty, and greater market share (Hammer & Stanton 1999). Unfortunately, as one might expect with such a radical procedure, BPR is very difficult to successfully implement. Stanton and Hammer provide some insights for how to implement BPR more smoothly and with less pain (pamspam.com).
Place respected, high-level executives in process owner roles - A process enterprise must have process owners willing and able to promote the benefits of the process throughout the organization. Process owners must design the process, train employees on the process, and provide all the resources that are necessary for the process to succeed. (Hammer & Stanton 1999). Hammer defines a process owner as having three primary tasks: designing, coaching, and advocating (Finley).
Put responsibility and authority of a processes success upon the process owner - If the process owner does not wield control over the process, the power will ultimately slip back into the hands of the functional departments (Hammer & Stanton 1999).
Connect the process enterprise initiative with other strategic organizational initiatives - As seen with Texas Instruments, IBM, Duke Power, and Owens Corning, the BPR process did not start on its own. BPR was driven by the companies' need to meet a certain goal. Tying BPR to a strategic objective provides a line of sight for management and employees, better enabling them to understand why the change needs to occur (Hammer & Stanton 1999).
Tie measurements and compensation to process goal initiatives - "Using Historical financial data to manage your company is like trying to drive while looking in the rearview mirror" (Randomhouse). If performance compensation is still tied to the functional departments, this will foster internal competition and make it harder for the departments to collaborate to serve the customer (Hammer & Stanton 1999).
Determine the right blend of process standardization and diversification - American Standard allowed each of its major business units to create their own process designs. In this case, IBM decided that it needed to have highly standardized processes in order to compete in a global market. The benefits of standardized processes come from reduced overhead and transaction costs along with the ability to present a consistent front to suppliers and customers. It also allows versatile movement of human resources within an organization since processes are standardized and no additional training is required. However, not all processes can be standardized. The main focus of BPR is on the customer's needs. Since different customers have different needs, not all processes can be standardized. Process standardization seeks to balance the desire for consistent processes and the need to meet a variety of customer needs (Hammer & Stanton 1999).
Focus on collaboration between functional areas and process teams - Hammer and Stanton propose that the functional departments still control the workforce and make sure the human resources have the necessary skills, but the process owners have the authority to set performance targets and establish budgets. The cooperation between the business units and process teams should have a tangible manifestation as well. Since cross-functional teams will be working together, it does not make sense to have them sitting with their respective departments. Hammer and Stanton propose that facilities should be set aside to foster cooperation between team members by their physical proximity. The companies mentioned in the article and many other traditional organizations have historically been structured around functional or regional departments that perform discrete tasks. These departments are one of the main barriers to a successful process enterprise. The problem is horizontal processes and vertical management. The departments are often unwilling to give up their internal power to help the process teams succeed. The power needs to be shifted from the functional or regional areas, such as in the case of Texas Instruments and Duke Power, so that there is collaboration between the process owners and the business units (Hammer & Stanton 1999).
Allow processes to be flexible to further evolution - BPR is not just a onetime deal. It should remain an active goal in an organization ready to adapt as business needs change (Hammer & Stanton 1999).
Two of the major criticisms of BPR are that it is a euphemism for downsizing and that implemented change on the scale that BPR demands is inherently too difficult. BPR expects functional managers and process owners to work together in a close, collaborative way that most high-level executives find uncomfortable (Context Magazine 2002). Even Hammer himself admits that "only 30 percent companies achieve these kinds of performance breakthroughs they had hoped for" (Finley). Indeed, Hammer who has been labeled the "Father of Reengineering" still vehemently defends BPR and the process enterprises 11 years after his groundbreaking innovation. However, his counterpart, Champy, repudiated BPR in 1994 with his book Reengineering Management because of its cold, scientific approach to transforming an organization. Instead, Champy focuses on the importance of management leadership within an organization. In the name of management science, Hammer failed "to address the human side of corporate change" (Hammer 1996). BPR, itself, has no major flaws as a model for organizing businesses, but it works better in theory than in practice. Since human behavior is so hard to change, this only increases the chances that a BPR project will fail. Hammer estimates that 80% of an organization will resist process centering at the beginning of a BPR project. However, his only solutions are to win the rest of the organization over through "evangelism" or cut them loose (Finley). This could be where downsizing became associated with BPR. Although Hammer argues that "reengineering eliminates work, not people or jobs," the fact that people are laid-off when jobs are obliterated cannot be denied (Rotman).
The scope of change required with BPR can be overwhelming, and this is probably the single biggest fault of BPR. It asks companies to do too much, too quickly. They must convert their employees to this new brand of thinking, re-train their employees to work in new ways, design and implement entirely new ways of performing internal functions, all while continuing to operate their core business. It is little wonder that many companies have been disappointed with the results they have seen and others have vastly underestimated the time, expense, and effort required to reengineer their processes. For BPR to be successful, so many things must fall into place that companies who are considering BPR must be realistic and be honest with themselves as to whether they have the resources to successfully pull it off. If they truly are being realistic, a large percentage of companies would have to admit that they may be better off incorporating incremental process changes rather than wholesale reengineering (pamspam.com).
What is the important lessons "operational innovation" brings to the firm's performance?
For better understanding the concept of "operational innovation" and its application brings for the firm,s performance a interview can be quote here. The Interview with Dr.Michael Hammer on change management was conducted by Dr. Nagendra V Chowdary, Consulting Editor, Effective Executive and Dean, IBSCDC, Hyderabad, India. This was published on IBSCDC reference No. INT0003 on June, 2007.
What is Operational Innovation? Operational innovation is coming up with entirely new ways of performing work; For example, a trucking company recently transformed its sales process, creating teams that handled customer requests instead of sending these requests from one department to another. This is operational innovation (and it reduced the time needed to respond to customer requests from 30 days to 2 days). Operational innovation is inventing new ways of working; product innovation means inventing new products or services. A company can do one without doing the other. Some companies do both. Please note that one area in which one can perform operational innovation is product development, the process by means of which one does product innovation (ibscdc.org).
The benefits of Operational Innovation are Lower costs, faster cycle times, higher quality, greater flexibility-all of which lead to greater customer satisfaction and improved financial performance (ibscdc.org).
"Operational Innovation is rare. It was estimated, no more than 10% of large enterprises have made a serious and successful efforts at it." Hammer have also pointed out, "Operational innovation is relatively reliable and low cost." Why do he thinks the effort rate is so low? Is it because they don't see upfront the possible benefits? Or is it that the leaders are not well equipped to look at operational innovation as another platform for competitive advantage? Hammer explains that "The major reason so few companies undertake operational innovation is that senior leaders are not familiar with operations and they do not recognize the strategic potential of innovation in the area of operations. As more companies establish leadership positions through operational innovation, He expects that more companies will become active in the area"(ibscdc.org).
He remarked that, "it (operational innovation) will never get off the ground without executive leadership. Yet senior managers rarely perceive operational innovation as an important endeavor, nor do they Interview 4 enthusiastically embrace it when others present it to them. He explained that hinge on some unpleasant characteristics of contemporary corporate leadership." What are these unpleasant characteristics of contemporary leadership? What kind of leadership does he therefore envisage for successful fructification of operational innovation efforts?
He has mentioned in the article that the unpleasant characteristic is that too many senior managers are distant from and even uninterested in operations and blind to its potential. The reason for this is that many of them have risen to senior ranks with minimal operational experience (ibscdc.org).
How should the need for operational innovation be identified? Who should spearhead operational change initiatives? Should it be the CEO or Departmental Heads or Divisional Heads or respective Functional Head? Any company needing to sustain or create an advantage in a tightly competitive industry should consider operational innovation. The effort needs to be led by a senior executive, though not necessarily the CEO. The CEO needs to encourage the effort, but we find it best that the actual efforts be led by line business executives and supported by specialists with expertise in the field (ibscdc.org).
What's the best way to foster operational innovation in companies? Should it be driven by top-down approach or bottom-up approach? Which of these two approaches would extract "passionate commitment" from employees across the organization? Bottom-up is unlikely to be effective, since operational innovation requires a broad perspective on end-to-end business processes, which front-line people are unlikely to have. Operational innovation requires both the authority and broad point of view that only senior executives possess (ibscdc.org).
Does corporate entrepreneurship play any role in fostering operational innovation? What should be the other institutional incentives to be organized for better operational innovation results? Corporate entrepreneurship is a good thing, but not the same as operational innovation. The former is more focused on creating new businesses, the latter on finding new ways to operate in existing businesses. Operational innovation does need incentives and supportive leadership, just like any other change effort (ibscdc.org).
What's the importance of performance goals / targets in operational innovation? They are absolutely required. Without them, no one feels a need to make deep change and reinvent how operations are performed. They need performance goals that cannot be achieved with the current process to induce them to come up with something new (ibscdc.org).
What's the importance of execution in achieving the desired results of operational innovation? What are the challenges in implementation? Even the finest and most innovative concept is of no value unless it is implemented. Implementing operational innovation, however, requires a new approach to implementation, one based on learning and iteration rather than precise planning. Operational innovation is at its heart a form of innovation, which is, by its nature, characterized by uncertainty (ibscdc.org).
How to overcome organizational inertia to make operational innovation a way of life? Rapid early success with organizational innovation is the first step to overcoming inertia; when people see that the approach works, they become less skeptical. It is important for the leadership team to publicize early results and make a public commitment to continuing and extending them. It is also powerful for the senior executives to make public commitments to quantified performance improvements that cannot be achieved with traditional modes of operation and so demand innovation (ibscdc.org).
What are your suggestions for accelerating operational innovation efforts? First, the senior executives must set aggressive time schedules in terms of when results are required. Second, those doing the work must adopt a new style of implementation, which foregoes detailed and lengthy planning in favor of iterative implementation, in which early results are quickly achieved and subsequent releases built on these (ibscdc.org).
Do you still see the relevance for operational innovation in the heightened commoditization across the industries? The more commoditization in an industry, the greater the need for operational innovation-it is one of the few ways for a company to establish some true differentiation (ibscdc.org).
Is there a relationship between the national culture of an organization (where its roots are; the headquarters is) and its organizational efforts? Yes there is. Different countries have different strengths and weaknesses when it comes to succeeding with operational innovation. For instance, some are more comfortable than others with making deep change; on the other hand, some of these may be better at the teamwork needed for operational innovation (ibscdc.org).
Why do you think some change agents are successful while many are not? For instance, Howard Stinger at Sony. Even those who are successful once (initially) are not consistently successful. Why is it so? For instance, Ed Zander at Motorola and Carlos Ghosn at Nissan Motors. I cannot comment on these specific examples, but in general, executives who are successful at leading major change are passionate about it, are willing to invest their personal prestige in it, maintain commitment rather than just treat it as a short-term project, and are willing to do whatever it takes-including dismissing members of the executive team-to make it succeed (ibscdc.org).
If you look at companies like Nike, Southwest Airlines, Bloomberg, etc., how difficult is to manage change (including the transition) when the founder-CEO is not around? In some cases, it is more difficult to make deep change when the founder CEO is still around, since it is often difficult for that individual to let go of the principles and techniques that led to the company's original success. Deep change is often best led by someone other than the one who created the system that is being changed (ibscdc.org).
How do you think companies can make "Change Management" a part of their "catastrophe culture" (as Samsung Electronics CEO Jong-Yong Yun has done) so that the fire is on at all the times, both good and bad? The most successful companies always believe that their success is only temporary and that they must always change or decline. This is a characteristic of Wal-Mart, Intel and Progressive Insurance. Creating a culture like this is the responsibility of the CEO, who must instill it through personal behavior, expectations of other managers, the reward and promotion systems, as well as through relentless communications (ibscdc.org).
No one has said it better than Hammer himself: "If some guru tries to sell you a magic bullet technique that will fix all your problems . . . let the buyer beware" (Randomhouse). Although Hammer wants companies to believe that process reengineering is the only way to survive in a competitive environment, he often fails to recognize that there are other management techniques such as Six Sigma and Total Quality Management that have been implemented and proven successful for many companies. A process enterprise does not always have to have revolutionary business process reengineering to dominate the market. In fact, the costs may be too high to do this. A recommendation to any company considering improving its processes is to first closely analyze its current processes, then determine if they should be incrementally or drastically improved, and then decide the right mix of management science and art to apply for success. Even if they should decide that a process can be drastically improved and that BPR could be used, companies should be cautious and consider whether the right factors are in place for successful implementation. If not, adopting an incremental approach could be far more profitable in the long run than undertaking a massive BPR approach and possibly running the company into the ground in the process (pamspam.com).
pamspam.com Pamela Karr and Paul Simpson ISM6022, Doc on Process Reengineering How Process Enterprises Really Work available at
Hammer, Michael and Stanton, Steven. How Process Enterprises Really Work. November 1999
Finley, Michael. It's Hammer Time! Available at http://www.mastersforum.com/archives/hammer/hammerf.htm
ibscdc.org Nagendra V Chowdary, 2007, Interview with Michael Hammer on Change Management IBSCDC reference No. INT0003 on June, 2007 available at http://www.ibscdc.org/executive-interviews/Dr_Michael_Hammer.htm
Harris, Blake. Reengineering and Beyond: The Path to Mutually Enlightened Self Interest. November 1999. http://www.govetech.net/magazine/visions/nov99vision/hammer/hammer.phtml
Randomhouse.com. A conversation with Michael Hammer. Available at http://www.randomhouse.com/crown/business/ex_archive/ex_hammer.html
Context Magazine. (re)made U.S.A. December 2001/January 2002. Available at http://www.contextmag.com/setFrameRedirect.asp?src=/archives/200112/Feature0RemadeintheUSA.asp
Hammer, Michael. Reengineered Recycled. How the Process Centered Organization Is Changing Our Work and Our Lives. August 1996. Available at http://www.businessweek.com/1996/34/b348940.htm
Rotman.utoronto.ca. Book Reviewed: Michael Hammer and Steven A. Stanton. The Reengineering Revolution. Available at
Q.2 - CK Prahalad argues for the importance of "the bottom of the pyramid". How does that challenges the orthodoxies of corporate performance?
CK Prahalad (CK or CKP as he is popularly called) represented the very best of Indian intellect that found a global home. Born into a large family of Sanskrit Brahmin scholars in the South Indian city of Coimbatore in August 1941, Coimbatore Krishnarao Prahalad obtained his B Sc degree in Physics from Loyola College, University of Madras in 1960. After graduation, he worked in Union Carbide as industrial engineer and later in India Pistons as training manager. Setting sights on management education, he earned his PG diploma in Business Administration from the prestigious Indian Institute of Management, Ahmedabad, as a student of the first batch in 1966. His stint at Union Carbide and the move into the management studies were perhaps the critical inflexion points of his life (cbrao2008.blogspot.com).
Prahalad, armed with the MBA from IIMA, proceeded to Harvard Business School, USA where he earned his Doctor of Business Administration in 1975. He returned to India to teach at his Alma Mater, IIMA during 1976-77. He thereafter joined University of Michigan, USA and made his mark as a foremost management teacher in the United States. He served as the Distinguished University Professor of Corporate Strategy at the Stephen M Ross School of Business in the University of Michigan. Dr Prahalad was the recipient of several honors and awards globally. Honorary doctorate degrees from global universities and high-ranking civilian awards from the Government of India such as Padma Bhushan were part of the recognitions (cbrao2008.blogspot.com).
Prahalad's books institutionalized new ways of strategic thinking through elaborate paradigms, well-illustrated with real time case studies. His notable works include "Competing for the Future", co-authored with Gary Hamel (1984), "Multinational Mission: Balancing Local Demands and Global Vision" (1987), "The Future of Competition: Co-Creating Unique Value with Customers", co-authored with Venkat Ramaswamy (2004), "The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits" (2004), and "The New Age of Innovation: Driving Co-Created Value through Global Networks" (2008), co-authored with MS Krishnan. Each of the books created a new strategy paradigm completely different from the previous ones and laid new trails of strategic thinking (cbrao2008.blogspot.com).
Amongst the many conceptual contributions of Prahalad, 'strategic intent", "core competency" and "bottom of the pyramid" have been the truly game-changing ones. Though these were initially proposed by Dr Prahalad as case based theoretical constructs and caused intellectual upheavals in management thought when they were first presented, all of these have now become viable practices.
It is, however, in the "Fortune at the Bottom of the Pyramid" that an entirely new human dimension of CK Prahalad emerged. By all accounts, no management guru (or any corporate honcho) until then considered poverty-stricken sections of the society as one deserving of any mention in strategy formulation. In an era where consulting organizations and corporate strategists encouraged companies to focus on advanced markets to drive revenues, Prahalad in his landmark book advocated creation of fortune by focusing on poor people in emerging markets. The tag line "enabling dignity and choice through markets" is evocative. Post-publication of this book, creation and delivery of low cost but high quality products for customized applications became a board room topic, finally. The theory with several actual case studies from India. While it had its share of skeptical critics it is now well established that Prahalad's BoP theory has become viable industrial practice. Tata's USD 2,000 dollar Nano small car, Nokia's and Samsung's USD 20 mobile phones and Yunus's Grameen Bank demonstrate how profits get generated by focusing on, rather than shirking away, from poverty (cbrao2008.blogspot.com).
This is a time for MNCs to look at globalization strategies through a new lens of inclusive capitalism. For companies with the resources and persistence to compete at the bottom of the world economic pyramid, the prospective rewards include growth, profits, and incalculable contributions to humankind. Countries that still don't have the modern infrastructure or products to meet basic human needs are an ideal testing ground for developing environmentally sustainable technologies and products for the entire world. Furthermore, MNC investment at "the bottom of the pyramid" means lifting billions of people out of poverty and desperation, averting the social decay, political chaos, terrorism, and environmental meltdown that is certain to continue if the gap between rich and poor countries continues to widen. Doing business with the world's 4 billion poorest people - twoâ€thirds of the world's population - will require radical innovations in technology and business models. It will require MNCs to reevaluate price- performance relationships for products and services. It will demand a new level of capital efficiency and new ways of measuring financial success. Companies will be forced to transform their understanding of scale, from a "bigger is better" ideal to an ideal of highly distributed smallâ€scale operations married to worldâ€scale capabilities. In short, the poorest populations raise a prodigious new managerial challenge for the world's wealthiest companies: selling to the poor and helping them improve their lives by producing and distributing products and services in culturally sensitive, environmentally sustainable, and economically profitable ways (C. K. Prahalad & Stuart L. Hart, 2002).
Four Consumer Tiers
The authors divide the whole world in 4 - tiers. At the very top of the world economic pyramid are 75 to 100 million affluent Tier 1 consumers from around the world. This is a cosmopolitan group composed of middleâ€ and upperâ€income people in developed countries and the few rich elites from the developing world. In the middle of the pyramid, in Tiers 2 and 3, are poor customers in developed nations and the rising middle classes in developing countries, the targets of MNCs' past emergingâ€market strategies. Now consider the 4 billion people in Tier 4, at the bottom of the pyramid. Their annual per capita income - based on purchasing power parity in U.S. dollars - is less than $1,500, the minimum considered necessary to sustain a decent life. For well over a billion people - roughly oneâ€sixth of humanity - per capita income is less than $1 per day. Even more significant, the income gap between rich and poor is growing. According to the United Nations, the richest 20 percent in the world accounted for about 70 percent of total income in 1960. In 2000, that figure reached 85 percent. Over the same period, the fraction of income accruing to the poorest 20 percent in the world fell from 2.3 percent to 1.1 percent. This extreme inequity of wealth distribution reinforces the view that the poor cannot participate in the global market economy, even though they constitute the majority of the population. In fact, given its vast size, Tier 4 represents a multitrillionâ€dollar market. According to World Bank projections, the population at the bottom of the pyramid could swell to more than 6 billion people over the next 40 years, because the bulk of the world's population growth occurs there. The perception that the bottom of the pyramid is not a viable market also fails to take into account the growing importance of the informal economy among the poorest of the poor, which by some estimates accounts for 40 to 60 percent of all economic activity in developing countries. Most Tier 4 people live in rural villages, or urban slums and shantytowns, and they usually do not hold legal title or deed to their assets (e.g., dwellings, farms, businesses). They have little or no formal education and are hard to reach via conventional distribution, credit, and communications. The quality and quantity of products and services available in Tier 4 is generally low. Therefore, much like an iceberg with only its tip in plain view, this massive segment of the global population - along with its massive market opportunities - has remained largely invisible to the corporate sector. Fortunately, the Tier 4 market is wide open for technological innovation. Among the many possibilities for innovation, MNCs can be leaders in leapfrogging to products that don't repeat the environmental mistakes of developed countries over the last 50 years. Today's MNCs evolved in an era of abundant natural resources and thus tended to make products and services that were resourceâ€intensive and excessively polluting. The United States' 270 million people - only about 4 percent of the world's population - consume more than 25 percent of the planet's energy resources. To reâ€create those types of consumption patterns in developing countries would be disastrous. We have seen how the disenfranchised in Tier 4 can disrupt the way of life and safety of the rich in Tier 1 - poverty breeds discontent and extremism. Although complete income equality is an ideological pipe dream, the use of commercial development to bring people out of poverty and give them the chance for a better life is critical to the stability and health of the global economy and the continued success of Western MNCs (C. K. Prahalad & Stuart L. Hart, 2002).
How does that challenges the orthodoxies of corporate performance?
Among the top 200 MNCs in the world, the overwhelming majority are based in developed countries. U.S. corporations dominate, with 82; Japanese firms, with 41, are second, according to a list compiled in December 2000 by the Washington, D.C.-based Institute for Policy Studies. So it is not surprising that MNCs' views of business are conditioned by their knowledge of and familiarity with Tier 1 consumers. Perception of market opportunity is a function of the way many managers are socialized to think and the analytical tools they use. Most MNCs automatically dismiss the bottom of the pyramid because they judge the market based on income or selections of products and services appropriate for developed countries (C. K. Prahalad & Stuart L. Hart, 2002).
For example a Hindustan Lever Ltd. (HLL), a subsidiary of Great Britain's Unilever PLC and widely considered the bestâ€managed company in India, has been a pioneer among MNCs exploring markets at the bottom of the pyramid. For more than 50 years, HLL has served India's small elite who could afford to buy MNC products. In the 1990s, a local firm, Nirma Ltd., began offering deterâ€gent products for poor consumers, mostly in rural areas. In fact, Nirma created a new business system that included a new product formulation, lowâ€cost manufacturing process, wide distribution network, special packaging for daily purchasing, and value pricing. HLL, in typical MNC fashion, initially dismissed Nirma's strategy. However, as Nirma grew rapidly, HLL could see its local competitor was winning in a market it had disregarded. Ultimately, HLL saw its vulnerability and its opportunity: In 1995, the company responded with its own offering for this market, drastically altering its traditional business model. HLL's new detergent, called Wheel, was formulated to substantially reduce the ratio of oil to water in the product, responding to the fact that the poor often wash their clothes in rivers and other public water systems. HLL decentralized the production, marketing, and distribution of the product to leverage the abundant labor pool in rural India, quickly creating sales channels through the thousands of small outlets where people at the bottom of the pyramid shop. HLL also changed the cost structure of its detergent business so it could introduce Wheel at a low price point. Today, Nirma and HLL are close competitors in the detergent market, with 38 percent market share each, according to IndiaInfoline.com, a business intelligence and market research service. Unilever's own analysis of Nirma and HLL's competition in the detergent business reveals even more about the profit potential of the marketplace at the bottom of the pyramid. Specifically, Tier 4 is not a market that allows for the traditional pursuit of high margins; instead, profits are driven by volume and capital efficiency. Margins are likely to be low (by current norms), but unit sales can be extremely high. Managers who focus on gross margins will miss the opportunity at the bottom of the pyramid; managers who innovate and focus on economic profit will be rewarded. Nirma has become one of the largest branded detergent makers in the world. Meanwhile, HLL, stimulated by its emergent rival and its changed business model, registered a 20 percent growth in revenues per year and a 25 percent growth in profits per year between 1995 and 2000. Over the same period, HLL's market capitalization grew to $12 billion - a growth rate of 40 perâ€cent per year. HLL's parent company, Unilever, also has benefited from its subsidiary's experience in India. Unilever transported HLL's business principles (not the product or the brand) to create a new detergent market among the poor in Brazil, where the Ala brand has been a big success. More important, Unilever has adopted the bottom of the pyramid as a corporate strategic priority. As the Unilever example makes clear that serving Tier 4 involves bringing together the best of technology and a global resource base to address local market conditions. Cheap and lowâ€quality products are not the goal. The potential of Tier 4 cannot be realized without an entrepreneurial orientation: The real strategic challenge for managers is to visualize an active market where only abject poverty exists today. It takes tremendous imagination and creativity to engineer a market infrastructure out of a completely unorganized sector. Serving Tier 4 markets is not the same as serving existing markets better or more efficiently. Managers first must develop a commercial infrastructure tailored to the needs and challenges of Tier 4. Creating such an infrastructure must be seen as an investment, much like the more familiar investments in plants, processes, products, and R&D. Further, contrary to more conventional investment strategies, no firm can do this alone. Multiple players must be involved, including local governmental authorities, nongovernmental organizations (NGOs), communities, financial institutions, and other companies. Four elements - creating buying power, shaping aspirations, improving access, and tailoring local solutions - are the keys to a thriving Tier 4 market. Each of these four elements demands innovation in technology, business models, and management processes. And business leaders must be willing to experiment, collaborate, empower locals, and create new sources of competitive advantage and wealth (C. K. Prahalad & Stuart L. Hart, 2002).
Consider another example the experience of the Grameen Bank Ltd. in Bangladesh, one of the first in the world to apply a micro lending model in commercial banking. Started just over 20 years ago by Muhammad Yunus, then a professor in the Economics Department at Chittagong University, Bangladesh, Grameen Bank's program is designed to addresses the problems of extending credit to lowestâ€income customers - lack of collateral, high credit risk, and contractual enforcement. Ninetyâ€five percent of its 2.3 million customers are women, who, as the traditional breadwinners and entrepreneurs in rural communities, are better credit risks than men. Candidates for loans must have their proposals thoroughly evaluated and supported by five nonfamily members of the community. The bank's sales and service people visit the villages frequently, getting to know the women who have loans and the projects in which they are supposed to invest. In this way, lending due diligence is accomplished without the mountain of paperwork and arcane language common in the West. With 1,170 branches, Grameen Bank today provides microcredit services in more than 40,000 villages, more than half the total number in Bangladesh. As of 1996, Grameen Bank had achieved a 95 percent repayment rate, higher than any other bank in the Indian subcontinent. Perhaps the most pertinent measure of Grameen Bank's success is the global explosion of institutional interest in micro lending it has stimulated around the world (C. K. Prahalad & Stuart L. Hart, 2002).
The paradigm of "fortune at the bottom of the pyramid', was India-centric theory with truly global implications. It argued that by developing low cost products and services that serve the poorest of the poor, corporations would actually earn profits with a social purpose. It hypothesized that by focusing on the demand at the bottom of the social pyramid companies would help eliminate poverty. The theory with several actual case studies from India. While it had its share of skeptical critics it is now well established that Prahalad's BoP theory has become viable industrial practice. Tata's USD 2,000 dollar Nano small car, Nokia's and Samsung's USD 20 mobile phones and Yunus's Grameen Bank demonstrate how profits get generated by focusing on, rather than shirking away, from poverty (cbrao2008.blogspot.com).
It is tragic that as Western capitalists we have implicitly assumed that the rich will be served by the corporate sector, while governments and NGOs will protect the poor and the environment. This implicit divide is stronger than most realize. Managers in MNCs, public policymakers, and NGO activists all suffer from this historical division of roles. A huge opportunity lies in breaking this code - linking the poor and the rich across the world in a seamless market organized around the concept of sustainable growth and development. Collectively, we have only begun to scratch the surface of what is the biggest potential market opportunity in the history of commerce. Those in the private sector who commit their companies to a more inclusive capitalism have the opportunity to prosper and share their prosperity with those who are less fortunate. In a very real sense, the fortune at the bottom of the pyramid represents the loftiest of our global goals (C. K. Prahalad & Stuart L. Hart, 2002).