Five years ago, C.K. Prahalad published a book titled, The Fortune at the Bottom of the Pyramid, in which he argues that multinational companies not only can make money selling to the world’s poorest, but also that undertaking such efforts is necessary as a way to close the growing gap between rich and poor countries. Key to his argument for targeting the world’s poorest is the sheer size of that market — an estimated four billion people. How has Prahalad’s book — a revised, fifth-anniversary edition of which has just been published — affected the behavior of companies and the well-being of consumers in the years since its publication? Knowledge at Wharton checked in with the author for an update, including examples of specific companies that are implementing Bottom of the Pyramid strategies.

Below is an edited transcript of the conversation.

Knowledge at Wharton: In the five years since The Fortune at the Bottom of the Pyramid was published, what impact have your ideas had on companies and on poor consumers?

C.K. Prahalad: The impact has been interesting and profound in many ways — much more than one could have expected. For example, several of the multi-lateral institutions — The World Bank, UNDF [United Nations Development Fund], IFC [International Finance Corporation] and USAid — have fundamentally accepted the idea that involvement of the private sector is critical for development…. I asked 10 CEOs of companies as diverse as Microsoft, ING, DSM, GSK and Thomson Reuters to essentially reflect on whether the book has had some impact on the way they think about the opportunities. Uniformly, everybody — whether it is Microsoft or GSK — essentially says not only that it has had some impact, but that it has changed the way they approach innovation and … new markets.

I also asked people to update the case studies that were in the original book. It was a pleasant surprise for me that almost all of them had grown, improved their offering and were doing quite well in this marketplace. I wrote a new introduction on what the lessons are that we have learned. So while the issue of poverty still remains — and is not going to be solved in the next 10 years — the active involvement of the private sector and its role in poverty alleviation … have been quite surprising. And we shouldn’t forget it is just five years old as an idea.

Knowledge at Wharton: We will come back to the major lessons in a minute. But could you share some of the most significant examples of companies that have employed your principles during the past five years?

Prahalad: Take, for example, the whole idea of Netbooks — a $200 computer that is selling like hotcakes in the United States — more than two million sold last year. The original idea was to have a suitable, reasonably sophisticated laptop for poor people in countries like India. So that idea not only is going to work in countries like India, it is also traveling back to countries like the United States and having a spectacular success. There are many, many stories like this of innovations coming from BOP (“Bottom of the Pyramid”) influencing what is happening here and suddenly influencing BOP market opportunities.

Knowledge at Wharton: Could you now talk about the major lessons companies have learned through serving poor consumers? 

Prahalad: I think when the book came out five years ago, there was a fair amount of skepticism — and rightly so. People could not just dismiss the idea; they knew that it was an interesting and a different one, and they could not walk away from the compelling videos and the stories in the book. Still, there was some skepticism about whether this was going to work. In a very short period of five years, many of the concerns have been put to rest. I can illustrate it with a simple example of one industry, which has broken many of the myths and cleared the way for profound rethinking about the opportunities at the bottom of the pyramid. What I have in mind is the wireless cellular phone industry. 

For the first time in human history, four billion people are connected. Now, of course, when you talk about four billion of the total six billion people, it is a large number. Maybe two and a half billion people are BOP consumers as described in the book. So the first thing that has happened is this dramatic shift in the use of cellular phones and the dramatic build-up of subscribers. It is taking place across the world — sub-Saharan Africa, South Africa, Latin America, India, Southeast Asia, and China. All the companies in every one of these areas — Celtel, Safaricom, MTN, Airtel, Reliance, Globe — all of them are making money. So the first lesson here is if you can find the right sweet spot in terms of business models, there is a really huge and very profitable opportunity. 

For example, India alone is creating more than 12 million subscribers per month — not per year but per month…. The second [concern] that people had was, can poor people and possibly illiterate people adopt new technologies? Do they need new technologies? Cell phones have again shown that the rate of adoption of this technology has been spectacular. People just understand how to use it and they are using it to good advantage. Third, in order to participate effectively, fundamentally new ecosystems are being created, including business model changes. For example — pay per use — prepaid cards — has become the norm in most parts of the world. We are moving away from average revenue per user, which has been the core metric of this industry for more than 50 years, to profitability per minute of cell phone time. 

We are also moving away from very intensive business call carriers to very low capital intensity to building alliances and partnerships. For example, Airtel in India has outsourced its IT networks to IBM and its capacity to Ericsson and Nokia, and it has built a large number of application developers. So, essentially, if you look at what has happened, Airtel has found a way of converting its fixed costs into variable costs and creating an ecosystem that dramatically reduces capital intensity. The most important of all these is the creation of very large pools of micro-entrepreneurs — small shops which download minutes to your phone, which allows you to charge your phone. Lots of entrepreneurs are being created.

And, finally, we find that BOP markets can be an extraordinary source of innovation. If I look at Safaricom — with the M-PESA, which stands for Mobile Cash — it is allowing poor Kenyans, who do not have access to banks, to transfer money from A to B by text messaging. So you go to an agent. You pay them money and receive e-mobile money or e-money, which you can text to your friend. And he can go with an encrypted message and pass that text and collect real cash. This is not a small business. Seven million consumers are involved. On average, every day, there are a million transactions of $20-$25 per transaction — a total of $20 million to $25 million every day. This is bypassing banks. In the same way, if I am a Filipino maid working in Singapore, I can send money to my grandmother at home through an SMS message. Fundamental new applications are also being developed so that BOP is not only a source of markets for micro-consumers. There are also lots of innovation opportunities. So just taking one industry, we are now able to see what a profound impact an understanding of … BOP markets can have.

Knowledge at Wharton: Where do you see this trend of using mobile technology creatively going in which mobile services can be harnessed to serve poor consumers in various ways?

Prahalad: I think mobile is going to be in public health and education — in managing pandemics like SARS and swine flu. It is going to be in entertainment — in video games and a wide variety of other things that use the mobile platform. Video gamers are now [asking], “Why can’t I download, not necessarily every complex game, but most of them, why can’t I create a seamless integration of my play at home in front of a PC and also on the go, where I can play with the mobile platform?” This is becoming a major opportunity for video gamers.

And so it is for education. There is absolutely no reason why we cannot mobilize everything from simple additions to multiplications and so on. [We could] teach children how to learn by themselves on their mobile phone and take tests remotely which are measured. Feedback is given to them, and if they don’t pass the test, you start all over again.

I see infinite possibilities, and I believe a lot of these innovations are going to come from BOP markets because there is a necessity there.

Knowledge at Wharton: What major obstacles do companies face when they try to implement BOP strategies?

Prahalad: I think there are three types of problems. The first is mental. If you start by saying, “Poor people don’t have money; therefore, they cannot be our consumers,” you already have a big impediment. Sometimes it is useful for us to go back to our own history and ask the question. The Singer sewing machine used to cost $100 and the poor in this country could not buy it, so they came out with a $5 a month payment plan. The rest is history. Singer became the first global company out of the United States. The same thing happened with the Model-T automobile. Making a car for $200 enabled farmers to move out of villages and then to travel to small towns and so on. So the first hurdle is mental. It is not how much income people have — it is how to create a capacity for them to consume. That means we have to change from a mentality of “my current costs plus profit equals the price” to a much more consumer driven “price minus profit must equal cost.” That means you start with affordability.

The second impediment is the assumption that we can take existing products and somehow sell them in these markets. [That] is unlikely to work because I think we need to fundamentally understand consumer needs. If you focus on that, many times you can improve upon existing products in the West. Let me give a simple example. GE has been in the game of producing EKG machines for a long time. They sell for about $10,000 in the United States. They are big and clunky — 60 pounds or so. And they sit in a corner in hospitals.

[GE] asked a simple question [several] years ago: How do we get an EKG machine that doctors can use in rural India? That means it must be battery-operated. It must be light so people can carry it. It must have a printer attached so the doctor or the paramedic can read it on the spot. And it better be connected so that if they are not able to figure out what is going on, somebody remotely in a large hospital can diagnose and give a message on what needs to be done. So they created a product which weighs three pounds. It is networked, has a printer and can travel quite easily since it is battery-operated. It sells for $800 rather than $10,000. It has better, improved functionality; it is an extremely good machine, and it is technically the equivalent of what we have in the U.S. except it has more functionality. So now the FDA has approved it so it will be sold in the U.S. It has already been sold in Europe and is being sold in China. So I find continuously that BOPs not only serve micro-consumers and markets — it creates micro-producers and, more importantly, it creates opportunities for innovation — whether it is Tata’s Nano or GE’s EKG machine or Netbooks. There is a huge opportunity, when you focus on these markets, for making fundamentally interesting innovations.

Knowledge at Wharton: You referred to the development of the GE EKG machine for rural markets. Is there a difference between rural and urban markets at the Bottom of the Pyramid? How does the strategy to reach consumers in each of these markets differ?

Prahalad: I think the Latin American development of poverty is much more urban poverty — there is some rural poverty — but it is primarily urban poverty. It is shantytowns in Sao Paolo, Rio and so on — or Mexico City. In India, you have both — urban poverty and shantytowns. But also 70% of India still lives in villages. So there is a tremendous amount of rural market opportunity that requires extremely complex distribution from logistics frameworks, which is somewhat different from just being in an urban environment where at least the logistics and distribution are reasonably simple. So there is some difference between how you access rural consumers compared to urban consumers at the BOP level.

Knowledge at Wharton: We were speaking earlier about the obstacles. Could you address some of the cultural and communication barriers that prevent companies from being able to serve consumers at the Bottom of the Pyramid? How can they tackle these barriers?

Prahalad: I think it is reasonably straightforward once senior management recognizes that there is an opportunity to innovate and there is a market to be served. The difficulties of approaching these markets are not intercultural, but the ability to identify and immerse in consumer experience in these markets. Let me give a simple example. If I am Unilever, Nestle or Procter & Gamble, I recognize that emerging markets are going to be significant for me 10 years from now. All three companies will have more than 50% of their revenues coming from emerging markets — China, India, Brazil, Mexico, Indonesia, Turkey, Russia and so on. 

I also recognize a significant portion of these populations will remain in the BOP realm and, therefore, I need to straddle the pyramid. I need to serve the top of the pyramid, but I also have to serve people at the bottom. Therefore, I have to create either a new format  … or new products. In other words, I have to innovate. And I have to keep in mind the 4 As of penetrating these emerging markets like the traditional 4 Ps of marketing (product, price, place and promotion). The 4 As are awareness, access, affordability and availability.

Once you come to that conclusion, then operationalizing it becomes a lot easier than the other question: Are there India-like markets? Can I use India as a source of innovation? Can I use South Africa as a source of innovation? You don’t have to participate in innovating for every market in the world. You identify critical markets and then you innovate there and let it flow to other markets with similar characteristics.

Knowledge at Wharton: Have any of your ideas about the Bottom of the Pyramid changed since you wrote the book? What has surprised you most?

Prahalad: I think three things have surprised me most. Even though in the book I said that BOP can be a source of innovation, [I was surprised by] how much of the innovation is happening in the BOP and the rate at which people are moving to innovate — whether it is Google or Microsoft or Intel or AMD. It is quite amazing how fast it has moved.

The second thing that I think is very interesting is, while I talked about building ecosystems and so on, it is clear today that no company — however big it is — can afford to go it alone for cost reasons but, much more importantly, for access reasons. You have to participate with local NGOs. You have to participate with micro-entrepreneurs, small- and medium-sized enterprises, and in many cases with the public sector. So the boundaries of the firms, which are primarily large global companies — [and the attitude of] “I’m going to do it myself” — are becoming less and less possible. You have to partner. It is continuously becoming part of an ecosystem and, in many cases, building the ecosystem. That was a second big surprise. 

And the third, which I think is very interesting … is: How you can dramatically build global scale without necessarily making the investment? How do you get 2.2 million farmers to bring milk to 10,000 collection centers so that they become the largest processor of raw milk in the world — almost 7 million kilograms of milk per day? That is possible because of highly decentralized origination and fairly centralized processing using logistics, cold refrigerated trucks or information technology to make this happen. It is the same thing with ITC — four or five million subsistence farmers who collect and aggregate all the produce and make it world class. Similarly with Jaipur Rugs, which is a new case introduced in the book: Jaipur Rugs gets all the wool from Australia, New Zealand, Argentina and China and blends it with wool from Rajasthan, produces carpets using weavers who are highly distributed — 40,000 of them in five states of India — and then sells all the rugs produced in the United States. So you can even create a global supply chain where raw materials are sourced from around the world and value-added activities are created in a highly decentralized fashion, with significant quality control, and then new products are sold in the United States. So these have been interesting surprises. Even though they were partly mentioned in the first version of the book, the rate at which these models are evolving — whether it is shipping flowers from Kenya or harvesting soy beans in India — how you can build virtual scale has been quite interesting.

Knowledge at Wharton: One last question. What are the emerging rules of engagement for serving consumers at the Bottom of the Pyramid?

Prahalad: The rules are fairly straightforward…. The consumer environment is critical. We need to continuously balance global standards of safety, quality and such without any compromise for the Bottom of the Pyramid with a capacity to be locally responsive and, more importantly, to work within the ecosystem and provide affordability. And what you learn must be rapid. You first learn, then invest and scale — not just invest and hope to learn. So the cycle is experiment at low cost, learn fast and scale rapidly so that you don’t make investments hoping to learn. And, finally, don’t push business model management practices and, most importantly, products and services that you are used to and accustomed to in the West onto these markets. In fact, the latest Harvard Business Review has a piece where GE is now recognizing that they have to create disruptive management models disrupting itself and its own management models if they want to succeed in countries like India. So the whole idea of building from within, learning rapidly and [having a] willingness to disrupt your own dominant logic is fundamental to succeed here.