This is the 21st in a series of posts discussing themes raised in The Fortune at the Bottom of the Pyramid by C K Prahalad. In chapter 3 the author discusses lessons which multinational corporations can learn through operating in bottom-of-the-pyramid markets. The lack of purchasing power of customers means that there is a very high emphasis on value for money or price performance, and very little latitude for cost margins.
Accordingly, there are strong incentives for process innovations to drive down the costs of design, manufacturing, distribution, and any other costs of doing business. Firms operating in those markets must have a clear focus on the efficiency of capital use, and the typical management systems and practices of multinational corporations are just too costly and capital-inefficient to allow for an adequate profit margin.
The author goes on to describe how Hindustan Lever Limited manages to reduce its capital intensity by outsourcing to numerous dedicated small and medium sized suppliers and by collecting revenues in real time as goods leave the warehouses of their suppliers (thereby reducing capital tied up in receivables). Aravind Eye Hospital reduces its capital intensity by using its equipment to conduct far more eye operations each day than do hospitals in Western countries.