Business Prophet

How strategy guru C.K. Prahalad is changing the way CEOs think


Take a cab ride through Bombay, and these are the scenes that will likely strike you first: raggedly dressed homeless families sprawled on blankets amid shacks. Traffic hopelessly clogged with every manner of soot-belching vehicle and wooden cart. Gaunt hawkers and beggars tapping on your window at red lights. For foreign visitors, such jarring images of poverty and desperation are hard to shake.

View those same streets through the eyes of C.K. Prahalad, however, and they become a beehive of entrepreneurialism and creativity. "I see the positives inside the muck," says Prahalad as he settles his stocky frame into the back of a hired Tata Indica sedan to conduct a quick tour of Bombay. As the car crawls through congested Mohamed Ali Road, he notes that virtually every individual is engaged in a business of some kind -- whether it is selling single cloves of garlic, squeezing sugar cane juice for pennies a glass, or hauling TVs.

On every block he points out the intriguing enterprises tucked into the nooks and crannies. With the world's cheapest telecom rates, "all you need here is a phone and a $20 card to start a business," he explains in his measured baritone. He notices a busy closet-sized shop charging a few pennies per page to send faxes. "That guy probably started with a single phone and then added a fax and printer. Now he has a self-contained communications center offering extremely low prices." Such entrepreneurs, he contends, pioneered cheap pay-per-use services long before they became a fad in the West. The car stops at a small dry-goods shop. Prahalad bounds out and asks the owner to let him behind the counter. Tiny 5 cents single-serve containers of shampoo, soap, toothpaste, and other household goods dangle from the walls and ceiling. He notes the brands: Head & Shoulders, Lifebuoy, Pears, Colgate, Lux. "Low quality won't sell," he says.

By the end of an hour it's hard to look at Bombay and its impoverished citizens in the same way. That's exactly what Prahalad, 64, intended. The University of Michigan professor's knack for being able to change people's perceptions of the world around them has made Prahalad an incredibly influential corporate strategist. He has built a lucrative consulting career helping such multinationals as Citibank, Philips, and Philip Morris break out of ingrained mind-sets and craft new business models. Prahalad and colleague Gary Hamel helped spark a management revolution in the 1990s with their idea of "core competence," which says that companies must identify and focus on their competitive strengths. Their 1994 book, Competing for the Future, is regarded as a classic. A decade later he co-wrote The Future of Competition, which argued that the traditional "company-centric" approach to product innovation is giving way to a world in which companies "co-create" products with consumers. That book gave Prahalad a reputation among designers. At the same time, he has been working to convince executives that today's needy masses, so often dismissed as subsisting largely outside of the global economy, are actually its future. Prahalad's 2004 work on that topic, The Fortune at the Bottom of the Pyramid, has been hailed as one of the most important business books in recent years and turned Prahalad into a celebrity in the field of international development.

Street-smart innovation

Now one of the management world's most creative thinkers has an even more radical idea: He believes that the entrepreneurial ingenuity at work amid such poverty, where success depends on squeezing the most out of minimal resources to furnish quality products at rock-bottom prices, has cosmic implications for executives and consumers everywhere. Some of the most interesting companies of the future won't emerge from Silicon Valley or other places of abundant means, he says. They will come from places many executives don't even think about because they have been considered too marginal. They won't have that excuse for much longer, though.

In the world according to C.K. -- short for Coimbatore Krishnarao -- poor nations are incubating new business models and innovative uses of technology that in the coming decade will begin to transform the competitive landscape of entire global industries, from financial and telecom services to health care and carmaking. Globalization, outsourcing, the Internet, and the spread of cheap wireless telecom are accelerating dramatic change. Few Western corporations fully harness these forces, Prahalad warns. And that puts them in danger of being usurped by a new breed of supercompetitive multinationals completely off their radar, just as American industrial icons such as Xerox (XRX ), General Motors (GM ), and RCA were blindsided in the '70s and '80s by nimbler Japanese upstarts including Canon (CAJ ), Toyota, (TM ) and Sony (SNE ).

For his next book, due in fall, 2006, Prahalad is assembling case studies of Indian companies that could spawn entirely new ways to think about conducting business. Fast-growing telecom operators such as Bharti, Reliance, and Tata, for example, are profitably selling cellular service for as little as 2 cents a minute "even though they must buy the same hardware as Western companies," he says. Now they're preparing to launch broadband TV, data, and voice for around $30 a month -- about a third of the cost of such packages in the U.S. Bangalore's Narayana Hrudayalaya hospital charges a flat fee of only $1,500 for heart bypass surgery that would cost 50 times that in the U.S. and operates on hundreds of infants each year for free. Yet it is highly profitable, has no debt, and claims a higher success rate than most U.S. hospitals. Narayana also profitably insures 2.5 million poor Indians against serious illness for 11 cents a month per person.

Low wages alone can't account for such price gaps with the West, Prahalad contends. The real secret is ingenious cost-cutting practices, such as extreme reliance on outsourcing, novel use of technology, and making the most of capital investment. "These are radical innovations," Prahalad says, many of which can be adapted to the U.S. Just look at the info tech industry: Long dominated by giants IBM (IBM ), EDS (EDS ), and Accenture (ACN ), it has already been transformed by Indian companies such as Infosys (INFY ) and Wipro (WIT ) that supply top-quality services at lower prices. That, says Prahalad, is just the beginning of the revolution.

How seriously should we take Prahalad? His theories naturally draw skeptics. For instance, bottom-of-the-pyramid efforts don't always help the bottom line, notes Microsoft Corp. (MSFT ) Chief Technology Officer Craig J. Mundie. Prahalad's work has reinforced Microsoft's view that it must develop software using different pricing, payment systems, and technologies in developing nations. "But even if you can execute a plan to sell to the poor, it's not clear you can make money," Mundie says. "Many companies in many industries have struggled to make a go of it, frankly." In response, Prahalad notes that many once argued a sub-$500 PC was impossible. Now they cost as little as $100.

Prahalad hasn't always had the Midas touch himself. A San Diego software firm he co-founded in 2000 struggled and was eventually sold. Of that experience, Prahalad said he at least gained some insight into his own management style. "I get extremely energized when there is an extremely complex problem to be solved," he says. "But management is a lot of blocking and tackling."

Evolving insights

Prahalad has been developing his worldview for decades. Born in India's southern Tamil Nadu province, he acquired his inquisitiveness from his father, a prominent judge who was a voracious scholar of philosophy and literature. At age 19, in between earning a bachelor's degree in physics and a management degree at the Indian Institute of Management, C.K. worked as a manager of a Union Carbide (DOW ) battery plant. Later, while at Harvard Business School, he and classmate Yves L. Doz won attention with their 1975 doctoral thesis on multinationals, one of the first studies to argue that corporations need new structures to project global strategies while adapting to local needs. He also began nurturing concepts he would build on later in his career: that entrepreneurs should not let limited resources constrain their ambitions or let deeply ingrained biases blind them to revolutionary change.

Prahalad's broad curiosity means his business insights tend to be fresh and ever-evolving. He consumes tomes on the rise and fall of nations, the spread of languages, and the history of such commodities as salt, tobacco, and cod. He is fascinated by historical maps and bird migratory patterns, which offer clues of the world's shifting ecology. Prahalad lives with Gayatri, his wife of 35 years, in a sprawling home in San Diego's posh Rancho Santa Fe district but spends about 40% of his time on the road. While traveling he does his own case studies of new business models and pumps everyone -- cab drivers, factory workers, university kitchen staff -- for insights. Ask him to tell a joke, though, and he's stumped. "I have to admit, I am not very fun at parties," he admits.

Prahalad built his following among CEOs as a blunt and demanding corporate adviser. Rather than operate with a retinue of junior staff, he likes to arrive alone with his Toshiba (TOSBF ) laptop, fully armed after doing his own analysis of the company's competitive strengths and weaknesses. He then proposes practical ways to correct management flaws. "The best way to describe C.K. is, he's an out-of-the-box guy who is pragmatic," says Hewlett-Packard Co. (HPQ ) CEO Mark V. Hurd, who ran NCR Corp. (NCR ) until March. Prahalad has been on NCR's board since 1997. "It's quite an art to get a board filled with past and current CEOs to think of the world in a different way."

As a consultant, Prahalad begins by trying to force managers to shake free of their "dominant logic." The stunt Prahalad pulled with the top brass of Royal Philips Electronics in 1991 is legendary. The Dutch electronics conglomerate, losing market share fast in consumer appliances, hired Prahalad for a weekend brainstorming session. He started the Saturday morning meeting by reading a small item he said he had seen in the Financial Times. Philips was heading into bankruptcy, the article speculated, and bankers wanted to know management's game plan. "Forget what we are supposed to talk about. There is a major crisis," Prahalad warned. "You had better figure out what you are going to do about it." He broke the stunned executives into two groups. They returned several hours later with ideas for radical restructuring involving up to 50,000 layoffs. Then Prahalad admitted he made the article up.

But he got their attention. Then-CEO Jan Timmer soon launched a restructuring program with Prahalad supervising a series of meetings with 100 managers from each business unit. "His style was to apply all of the pressure he could," recalls Jan Oosterveld, a retired top executive at Philips who now teaches entrepreneurship at Barcelona's IESE Business School. "His style can be mean but effective." Philips has since turned itself around through major asset sales, layoffs, better product design, and a keener focus on core technologies.

When Prahalad started working with Indian conglomerates in 1994, "he was so sharp in his criticisms that it was like a punch in the gut," says CEO K. Vaman Kamath of ICICI Bank. "We thought we were leaders. He taught us that Indian banking was a complacent mess and that we would soon be competing with no abilities at all." Now ICICI exemplifies the kind of company Prahalad sees as the wave of the future. Developing financial software in-house to slash costs, it deployed 2,000 ATMs in urban neighborhoods and villages around the country. Taking a cue from microcredit agencies, ICICI organized thousands of self-help groups that provide loans of as little as $100 to poor women for starting businesses. Today, ICICI ranks as India's dominant consumer bank, having boosted its customer base sevenfold, to 15 million, in six years, while pushing 75% of all transactions online. And ICICI's $150 million microcredit business is profitable and expanding fast. ICICI hopes to use its low cost base to expand in Canada and elsewhere.

Prahalad thinks U.S. financial institutions can learn from ICICI and microlenders in Latin America. "Some 45 million people in this country don't have or don't use bank accounts or ATMs because they are too expensive. So they use check-cashing services, bond brokers, and other alternatives," Prahalad explains. "If the financial industry can bring the poor into the organized sector, there is a tremendous opportunity."

Developing nations are at the forefront of cost reduction in other industries. Among the reasons Bharti can offer telecom service so cheaply, Prahalad says, is that it keeps capital costs down by outsourcing everything from its network infrastructure to IT systems and promotes use of prepaid cards that generate cash up front. By making service affordable to the masses, Bharti can lure millions more subscribers, gaining economies of scale, and entice them to rely on cell phones instead of PCs for Internet access. "Somebody will eventually clean up these business models and bring them to the U.S.," Prahalad predicts. "If high-tech and credit-card companies aren't following these trends, they will get hit."

Prahalad sees big changes ahead in manufacturing as well. GM, Ford (F ), and other auto makers increasingly outsource design and computer-simulated parts testing to Indian engineering-services firms. India also is rich in microelectronics design and high-quality precision auto-parts makers specializing in small-batch production. Before long, Prahalad predicts, Indian firms will be creating entire systems for Detroit -- such as dashboards and chassis -- that will cut development times and costs. "Many companies don't understand yet that outsourcing isn't about exporting jobs. It's about importing innovation," he says.

Healthier health care?

Prahalad thinks globalization also can help rein in America's soaring health-care costs. That's one reason he is studying Indian hospitals such as Narayana Hrudayalaya, founded by cardiac surgeon Dr. Devi Shetty. Some reasons for its low costs can't be easily replicated elsewhere. The land was owned by Shetty's family. The hospital's 25 foreign-trained surgeons earn half what they could in the U.S. Outsize malpractice awards are rare in India, so insurance costs are low. But the hospital also operates for free on anyone who cannot pay and on any infant younger than one month. For the rural poor, it runs 39 remote clinics and mobile-testing labs with satellite links that so far have treated 17,000 patients.

Some the of the biggest savings come from its business model. In the U.S., the chief surgeon manages the entire patient process, from testing and diagnosis to supervising the operating room, recuperation, and billing. Narayana works more like an assembly line: The surgeons perform only surgery.

That may seem like a recipe for shoddy care. But Shetty asserts it actually translates into fewer mistakes because specialists focus on what they do best. The 1.35% mortality rate for coronary bypasses and 2.7% rate for aortic valve replacements reported by Narayana are roughly half the average of U.S. hospitals, according to federal statistics, though those aren't the only measures of quality care. "The importance of volume isn't well understood in our industry," Shetty says. "A surgeon doing three or four operations a day does much better work than one doing three or four in a week." The factory approach also leads to economies of scale. The hospital uses all of its expensive CAT scanners and X-ray and magnetic-resonance machines to the max. "In the U.S., a lot of this infrastructure is used five days a week," says Shetty. "We use ours 14 hours a day, 7 days a week."

This raises intriguing questions. If Indian doctors can effectively diagnose and treat heart conditions in farmers in distant villages, why can't American consumers use videoconferencing to consult offshore specialists 24/7? Why can't an enterprising hospital chain bring Narayana's model to the U.S., or at least set up hospitals in Mexico or the Caribbean charging a fraction of U.S. prices? There are plenty of reasons this seems unlikely: Few Americans would tolerate the inability to collect big damages for mistakes, and it seems far-fetched that the U.S. medical Establishment would back sweeping liberalization to license offshore doctors to prescribe treatments. Or does such change seem impossible only because we are blinded by our "dominant logic"? Prahalad is confident that superior business models will eventually prevail. Just gaze into the kaleidoscope, give it a twist, and the implausible in the 21st century global economy becomes more realistic than you might ever imagine.

By Pete Engardio

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