C.K. Prahalad, author of The Fortune at the Bottom of the Pyramid; Eradicating Poverty through Profit (Wharton School Publishing, 2004), has long championed the notion that business — rather than government handouts — represents the most effective solution to poverty. In a keynote speech at the recent TiE Entrepreneurship Summit in New Delhi, he noted that India must pay more attention to entrepreneurship, which he described as “the essence of development.”

“We need to connect the poor through entrepreneurship, which enables wealth creation through transparent and legitimate means,” Prahalad said. He emphasized that businesses could create wealth for themselves, too, through poverty alleviation. “The poor deserve world class products and services.”

Devi Prasad Shetty, chairman of Narayana Hrudayalaya, a pediatric heart hospital in Bangalore, offered an example of Prahalad’s principles at work in health care. The hospital operates a low-cost health insurance program for farmers in the southern state of Karnataka. Each farmer contributes five rupees (13 cents) a month to the insurance program, while the government contributes another two-and-a-half rupees (7 cents) a month per farmer. The premiums from this pool of beneficiaries have permitted Narayana Hrudayalaya to operate upon 25,000 farmers and to offer free medical consultation to 85,000 more. “This year we have increased the monthly contribution by farmers to Rs 10 (25 cents) a month, but still, we hope to cover 13 million individuals using the world’s largest telemedicine network to deliver critical health services to rural areas,” Shetty said.

The network permits Narayana Hrudayalaya to provide cardiac services to villages in India’s hinterland that have few doctors and little medical coverage. “We have started placing ECG (electro cardiograph) machines in general practitioners’ clinics, where [cardiac] tests can be administered. The reports are sent to us over custom-built software,” Shetty said. Narayana Hrudayalaya gets the results over phone lines, allowing cardiologists at the hospital to diagnose the problem and prescribe treatment. As a result, Shetty said, the hospital was able to deliver “world class quality service to the doorstep of rural Indians.” 

Narayana Hrudayalaya saw an opportunity in the genetic proclivity of Indians to heart attacks — three times the European average — and devised an innovative solution. By adopting a so-called “portfolio approach,” the hospital was able to fund the delivery of health services that individual farmers could not afford. Shetty says the hospital is now leveraging its clinics to partner with retailers who want to set up village outlets. Retailers have the opportunity to sell their products taking advantage of the health facility’s position in the community. “The retailers will share profits with us, which will allow us to make our free clinics self reliant,” says Shetty.

Aspirational Pyramid

“The lifestyles of the poor are different than their income levels might suggest, as can be seen from the way poor people allocate their income to consumption,” Prahalad noted. Indeed, in urban slums, it is commonplace to find homes that are cramped and surrounded by squalor but have TV sets, refrigerators and pressure cookers. Often, at least one family member will possess the latest cell phone. The poor, even if they live in shanty towns, want to consume like wealthier people. This factor potentially can create surges in consumption.

According to Prahalad, resources and aspirations must be related to each other for entrepreneurship to flourish. “By creating a mismatch between aspirations (more) and resources (less) you create entrepreneurship. Entrepreneurs leverage resources and change the business model to get more, for fewer resources. So the task for us is, how to create aspirations that rest outside the current resource base,” says Prahalad. Innovative solutions by imaginative entrepreneurs would help solve poverty, he feels.

 “To discover a new approach to development [India needs to] move from best practice to next practice,” said Prahalad. When a large gap existed between the isolated Indian economy and world standards, benchmarking to best practices made sense. But in the current environment, where Indian companies aspire to be world leaders, benchmarking to best practices could result in mediocrity. “Strategy is about folding in the future, not extrapolating the past,” he added.

Prahalad advised aspiring entrepreneurs to have the courage to discover something new by asking who else is doing what they plan to do. “If no one is doing it, and you are smart, you can do it better,” says Prahalad. He pointed out that car companies around the world want to come to India to find out how to build a $2,500 car — such as the Tata Nano. “The $100 computer — designed in partnership with Intel for rural India — has more innovations than conventional laptops,” he added.

Entrepreneurs should use Price – Profit = Design as their guiding principle rather than the shortage economy paradigm of Cost + Profit = Price. “Challenge and change the price performance equations. If we can satisfy 500 million (poor) customers in India by producing world-class quality, then that can become the biggest export opportunity in the world,” Prahalad said. Innovating to create solutions the market needs at a price it can afford is important if Indian enterprise has to be globally competitive. “Electricity in India is twice as expensive as China and the railways cost three times as much as China,” said Shahzaad Dalal, vice chairman of IL&FS Investment Managers, illustrating the need to innovate to deal with the infirmities of the Indian ecosystem.

Ajay Singh, director of SpiceJet, a low-cost airline, argued that his company had employed Prahalad’s principle of providing a service for low-income consumers by refusing to listen to people who said low-cost aviation services were not viable in India. “Our experience shows that if you can bring down tariffs, people will find a way to buy services. So we figured that if we had a low enough fare, customers would find a way to reach us. We have kept things simple and we enjoy the highest passenger load factors,” said Singh.

Sandeep Murthy, partner at Sherpalo Ventures, which has funded Cleartrip.com — one of India’s largest online travel portals — agreed with Singh. He said if a service was useful enough, customers would flock to it. “We are already among the top three sellers of travel services in the country, despite not having a call center-led sales operation. We are now expanding to selling travel offline with a partner and believe this will allow us to become the largest seller of travel in India,” said Murthy.

Innovation in Business and Government

Prahalad urged budding entrepreneurs to have a clear vision of their goal but to take small steps toward it since both speed and stamina are required to succeed. The goal should be “broken up into smaller milestones that need to be pursued with the vigor of a Cheetah,” he said. Prahalad suggested that Indian academics should have the courage to create their own concepts. “Our problems have no precedent since they are huge in scale, so let’s invent our own concepts.”

Agreeing with Prahalad’s point about the need for speed, V. Vaidyanathan, executive director of ICICI Bank, noted that “small and medium enterprises that have a sense of urgency can outperform even their larger counterparts.” He also said that India’s per capita income — when seen over a 300-year period in real terms — has not grown. “But if you take the last two years, India’s consumer spending, which totaled Rs 17 trillion in 2005 has ballooned to Rs 34 trillion in 2007. When companies project 40% to 50% annual growth, eyebrows are no longer raised (at institutions whose funding is being sought),” Vaidyanathan said. Even more importantly from an entrepreneur’s perspective, venture capitalists (VCs) are now willing to value that kind of growth when acquiring a stake in a startup firm.

N. Gopalaswami, India’s chief election commissioner, spoke about entrepreneurship in government. “The biggest enterprise in India is maintaining democracy. Our elections, involving 700 million voters, are the single largest event management exercise in the world,” Gopalaswami said, adding that the Election Commission of India saved more than 8,000 metric tons of paper by using electronic voting machines to tabulate votes for all candidates. “These one million machines have a failure rate of just 0.5%, and now the new ones will be able to track minute-by-minute voting records and store them for at least five years,” Gopalaswami said.

Entrepreneurs at the Bottom of the Pyramid

In a panel discussion on bottom of the pyramid entrepreneurship, panelists talked about using cell phones for micro banking and how organizations need to be able to support entrepreneurs to get resources when their needs become larger.

Lakshmi V Venkatesan, founding trustee of Bharatiya Yuva Shakti Trust, pointed out that the kind of interest rates that small entrepreneurs can pay cannot be as high as those charged by micro finance institutions (MFIs) since small businesses have to compete with the cost of capital for larger firms. “Micro finance-like rates of interest would price such entrepreneurs out of the market,” she said.

Even MFIs are now segmenting their borrowers. “The top 90% of the people in the bottom of the pyramid can be serviced by conventional MFI terms. But the ultra poor need subsidies — so MFIs are now looking to give this segment their first loan as a grant, so that subsequent lending can be on a more sustainable basis,” said Geeta Goel, grant officer of the Michael & Susan Dell Foundation. Goel, who leads the foundation’s India micro-finance initiative, also discussed the need for MFIs to have livelihood trainers to work with their borrowers. She suggested that MFIs could focus on a few business areas where they could add value to potential borrowers who need both financial literacy and training.