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BOP Strategy

BOP Strategy

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Companies can make fortune at the bottom of the pyramid   rajesh nandakumar - id - 12778960 Companies can make fortune at the bottom of the pyramid rajesh nandakumar - id - 12778960 Document Transcript

  • 1Running head: FORTUNE AT THE BOTTOM OF THE PYRAMIDCompanies can Make Fortune at the Bottom of the PyramidRajesh N. KumarJames Cook University
  • 2FORTUNE AT THE BOTTOM OF THE PYRAMIDTable of ContentsExecutive Summary.........................................................................................................................3Background......................................................................................................................................4Introduction......................................................................................................................................4What is the BoP Strategy.................................................................................................................6What is the Driver for MNCs to Focus on BoP Market..................................................................9Is There a Buying Potential at the BoP............................................................................................9Behavior of Consumers in Asian Market.......................................................................................10Sector With Highest Potential of Business in BoP Market............................................................11Recommendation...........................................................................................................................12How to Approach the BoP Community - Innovation....................................................................14Implement Innovative Approach to tap BoP Market.....................................................................15References......................................................................................................................................16Appendix A....................................................................................................................................17Appendix B....................................................................................................................................18
  • 3FORTUNE AT THE BOTTOM OF THE PYRAMIDExecutive SummaryThis report explores published journals, blogs and books around The Bottom of the Pyramid(BoP) being the breakthrough in the Strategy for businesses across segment and analyse whatsteps would lead to success through the journey of business around the 4 billion populationexisting in the bottom of the pyramid layer. Methods of analysis include statistical and markettrend, and ratios of performance. Main area of focus is Asian market through the report as theyaccount to 3/4thof the population residing in the bottom of the Pyramid, given the uniqueness ofthis region around culture, market behavior, people mentality and social dynamics. Gaining thatknowledge would become important to have a break through into this market and ensure it’s asustainable business.The report would also try to analyze companies that had an early access into this market, andhow some still failed to make profitAnd we would conclude the report with statistics to prove how to gain access into BoP market,and ensure long term sustenance by making profit. We would also cover the key role of the 1/7thpopulation of the world, who do a survival with less than 2 $, and how they influence thebusiness model in this marketOur Recommendation would be as following:• Understanding the Cultural difference between East & West Market. And the role thatplays to make business at the BoP market• What is the right approach and principal of BoP as stated by some of the renownedauthors and research professors• What is the social dimension to doing business in BoP, and the difference that wouldbring in uplifting the average economy of Human beings• Change in Industry mind set and driving business into RuralLimitation of this report would be that it takes views from various author’s study, which wouldgive us a perspective and approach to enter the BoP market. However, may not provide laid out
  • 4FORTUNE AT THE BOTTOM OF THE PYRAMIDplan to gain profit in this business model. The reports view might be limited to the sources andreferences of the company within the discussion and may not cover or applicable for all type ofbusiness. And lastly, it is a general perspective which is limited to this report and not a directindication of any specific Company or Organizations performance, as the statistics are relevant tothe report on the date when it was published.Background:As per World Bank (16-09-2008), 1.4 billion people (one in four) in the developing worldwere living below US$ 1.25 a day in 2005. Overall the poverty rate had a steady downfallfrom Sixty to Forty percent across the South Asia region from 1981 to 2005. While inIndia the same trend was showing a uphill with Increase in the number of people povertyline going up from 420 million in 1981 to 455 million in 2005.The key assumption in the Developed countries is that the poor have no purchasingpower, not brand-conscious, and are not skilled enough to accept advanced technologyand therefore do not represent a viable market, (as cited in Author).Through this report we are going to be focused mainly around Asian market. Since, thebulk of the 4 billion people at the base of the pyramid, who account for 75% of theworld’s population, live in Asia. According to the World Resources Institute, Asia’s baseof the pyramid market is a whopping $3.47 trillion, far above than the rest of the Globetrending in billion’s as cited in Development Asia, 2, (2008).Introduction:London and Hart (2004) as they stated that the developed/matured markets are becomingmore saturated, and making it more difficult to sustain the market and are looking fornew avenues to enable profit to the shareholders. This led to multinational companiesturning towards emerging markets (EMs) in the developing world.The first step towards west moving towards east (Here American & European Companiesare referred to as West and India/South east Asian countries have reference to East)London et al. (2004) stated for MNCs the BoP population poses wonderful prospects andunique encounters. Followed by the unique argument by Prahalad and Hart (2002) stated
  • 5FORTUNE AT THE BOTTOM OF THE PYRAMIDdoing business with the 4 billion poorest people will require ‘Innovation in technologyand business models’.MNC’s planning to do business in the developing countries generally come across thecultural shock, and always fail to recognize the social behavior of the people in the Asianworld, as that plays an important role to do business in this market. They should alsorealize same size does not fit all, the approach and reach has to be customized to the needof this people in BoP and at core we need to approach this market as a booming potentialfor employment opportunity in the Asian country, where the 3/4thof the poorest peoplereside and we should also recognize that this is where you notice high population growth.This has to be seen as an opportunity, given that they would have a high ratio of youngerpopulation, which is important for the success of any Organization to grow and sustain inthe long run.It is also important to understand the purchasing potential that lies with the BoP market.Source: Richard Fletcher, The Impact of Culture on Marketing at the Bottom of the Pyramid – aRelationship Creation and Network Development ApproachThe perception which dwells the BoP market is the lack of spending potential, as the poorest ofthe poor live in country side or uptown market slums, and they usually do not hold any bankaccounts or assets. They have no formal education, and are hard to reach via conventionalmethods of Sales & Distribution as stated by Prahalad et al (2002)MNCs should recognize that the first step towards Globalization or to adopt a strategy to noticeincreased profit, with low cost, large business pipe line and long term sustainability is torecognize the potential with the emerging market, as they move towards the wave of
  • 6FORTUNE AT THE BOTTOM OF THE PYRAMIDurbanization, and the emerging cities with increased buying potential is an indicators of thefuture needs lie in the emerging markets. The consumers in emerging economies are moving upthe market spend as their earning increases, and statistics shows that spend has increased by 10%in countries like India & China year on year (asiaNBC).Please refer the illustration below adapted by Prahalad and Hart (2002) to depict some of themost common Assumption and associated Implications noticed by the MNC’sSource: http://www.csrwire.com/pdf/Prahalad-excerpt-001-022.pdf (Pg. 9/22)What is the BoP StrategyBefore we embark in the journey to understand the strategy, it’s key to know what led to thedevelopment of BoP Strategy. As per Prahalad, it was his view to solve the problem of povertyand to improve the economic scale. It was a Co-Creation solution towards economicdevelopment and Social transformation as illustrated in Appendix A1.
  • 7FORTUNE AT THE BOTTOM OF THE PYRAMIDThe 12 principles of Innovation as stated by Prahalad needs attention to penetrate into the BoPmarket. In simple terms it should be an Affortable Product, ease of access to consumers, andavailable across location. Chakrabarti also talks about the approach to rural in his study beingAvailability, Affordability, Acceptability & AwarenessThe MNC’s should always look at the future potential that the BoP market carries, as a study inSocial Entrepreneurship by Global Health University indicates that the BoP popullation couldspike up to 6 billion people in the next 40 years.It is important to take into account that the strategy does not focus only on creating cheaperproducts by manufacturing at low labor costs and increasing environmental and social concerns(asianbc).To gain experience in the BoP market and to set a position to tap into the market. It is critical toengage NGO, authorities and end-users from BoP market in different stages of solutions, and byaccepting other levels of revenue. Else, this would become a huge road block in breakingthrough the market (asianbc).It is also essential to recognize the market that is seen beyond the urban solution. As at core theBoP market evolves from the rural and it’s important for MNC to devise the strategy in a mannerthat it becomes a household brand names.In the study conducted by Chakrabarti on the potential of rural market, he indicated more andmore MNC’s are turning to tap into the rural markets. And the ones that have the head way areHindustan Lever, ITC, Coca-Cola, LC Electronics, Britannia, LIC, HDC Standard life, ICICI,Philips, Colgate, Palmolive and most of the Telecom companies.He also cites example of some of the brands such as Coke/Pepsi or Chic/Pantene orColgate/Close up or Ariel/Surf or Lays/Cheetos that have made the way into the rural ashousehold brands.The interesting fact that Chakrabarti shared in his study indicated that the rural India, with apopulation of 700 million, would over grow more than 4 times it’s potential compared to some ofthe markets such as South Korea and Canada. Also he stated that Hindustan Lever made soapcalled Lifebuoy, which was sold at 0.03$ for 50 gm and Coca cola had a great success by sellingcoke for 0.096$ for 200 ml coke with returnable glass bottle. Now Eighty percent of newdrinkers for coke come from the rural markets. The table below how diverse the market haspenetrated into the BoP strategy and the role that is played by ’Innovative pricing’ to make it’Affordable’.
  • 8FORTUNE AT THE BOTTOM OF THE PYRAMIDSource: http://www.csrwire.com/pdf/Prahalad-excerpt-001-022.pdf (Pg. 17/22)To name some of the Organisations, which entered the BoP strategy to fulfil the dream ofPrahalad to eradicate poverty and to enable exposure to the poor to products that they always feltthey can’t afford to experience. These are the social entrepreneurs, who led Organisation such asTata Nano car, the Aravind Eye Hospital cataract surgery, and Grameen Bank’s micro loans arefew Organisations to name some(asianbc).Given the exposure within Singapore, we could also name IKEA furniture as a Western exampleof a company that has made cost effective, high design and relatitively well-designed and highquality furniture available to larger market by well thought production and distributionstrategy(asianbc).Another such example in the low-income segment was the venturing of Danone, the FrenchDairy company who joined hands with the micro credit organization, Grameen Bank, to providespecially fortified yoghurt to families in Bangladesh at 5% of the usual price. And the way theymanaged to do so was by thinking of Innovative strategy for distribution. By using wide networkof small entrepreneurs – local women, who go from house to house.These are the companies, which have truely given thought to the strategy of Availability,Affortability, Accessability, & Awareness.What is the Driver for MNC’s to Focus on BoP MarketPrahalad and Hart (2002) who analysed the key drivers for MNCs to focus on BoP market statethat the increased access amongst the poor to Television and information through News papercreated more awareness amongst the BoP segment about various products and services in the
  • 9FORTUNE AT THE BOTTOM OF THE PYRAMIDmarket. Thus creating the want or aspiration to share the benfits. Followed by, homogenousenvironment enabling the MNCs to invest in the developing countries and additional supportextended by NGO’s.The market over the period is shrinking in the Tier 1, 2 & 3 layer and is driving the MNCs toexplore the untapped market at Tier 4 to enable ongoing increased dividends for the share holder.Innovative market and approach is the need of hour to have increase in revenue in any businesssectors.Rural market had over the period grown more demanding and the need has arised for MNCs tostart creating products and services for rural populations.Is There a Buying Potential at the BoP?To enable the buying power at the Tier 4 segment it’s crucial that we enable access to credit, andenhance the earning potential of the poor (Prahalad and Hart, 2002)Prahalad (2004) stated in his analysis that China is already $5.0 trillion economy, second afterthe United States in purchasing power parity (PPP). In his report he indicated that the developingcountries – China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa, and Thailandare home to 3 billion people, representing 70% of the developing coutries population. In PPPterms, this group’s GDP is 12.5 trillion, and it’s larger than the GDP of Japan, Germany, France,the United Kingdom, and Italy combined.Prahalad (2004) The poor tends to premium for every thing that they consume from rice to creditcompared to the rich society. For example. In the slum dwelled area of Dharavi, outsideMumbai, India, pay a penalty of 5 to 25 times more than a rich in the neighbouring area of B.Desai Road, Mumbai, India. This situation is driven mainly due to monopolies, lack of access toproper systems, poor distribution, and strong traditional situation that is built over the period.For example, the poor in Dharavi pay 600 to 1,000 percent interest for credit from local moneylenders. In a similar scenario, if a bank step’s in for micro lending they could easily afford to dothe same at 25 percent (Prahalad – 2004).
  • 10FORTUNE AT THE BOTTOM OF THE PYRAMIDThe Poor and High-Cost Economic EcosystemsSource: http://www.csrwire.com/pdf/Prahalad-excerpt-001-022.pdf (Prahalad - 2004, Pg. 12/22)Behavior of Consumers in Asian MarketAnthony (2012) said in his blog that quality is a relative concept. You certainly do see obviousdifferences in perception in certain categories. For example, Western market in cosmetic industrysell a lot of Tan creams, as that is considered to be a beauty enhancer for western women.However, same may not be true in Asian markets as the standard is glowing skin, sosupermarkets are packed with skin whiteners.Anthony (2012) very well stated that if you can figure to get a $ 1 from each Chinese [Indian,Brazilian or Nigerian] customer..? It is a brutally hard to crack the social barrier, so ignoringthem isn’t an option and it becomes inevitable to partner with local players to get lead on thesocial behavior and pattern of the emerging market consumers.It is ease to build loyalty amongst the BoP market, as they have limited risk appetite andreluctant to switch brands as selecting a non-popular product has higher implications for lowerincome consumer. According to D’Andrea (2003) reference used by Fletcher in his article ,indicates that the consumer products accounts for 30-35% of total spend in emerging markets,and 50-75% with the lowest layer of socio-economic groups.Fletcher had bought out these differences between cultures and their attitude towards past,present and the future, and it impacts on the degree of excitement to adopt newer technologiesand he also stated that different cultures exhibit different degrees of individualism andcollectivism and this influences intent to adopt something new or the ones well tested in themarket.
  • 11FORTUNE AT THE BOTTOM OF THE PYRAMIDSome researchers have been clearly carried out to highlight this difference in behavior betweenWest and Asia, and Fletcher had sited the behavior and response pattern from Bradley (2003).This has a key relevance when planning to cater to BoP markets.Source: Fletcher , p. 5 (http://www.unice.fr/crookall-cours/iup_cult/_docs/_Fletcher%20-%20Cultural%20Differences%20marketing%205687.pdf )Another model, which Fletcher had adopted in his report to indicate the buyers behavior patternis Maslow’s hierarchy of needs, which shows the order in which needs are satisfied by buyers.Research by Schutte and Ciarlante (1998) shows that Asia not only has difference in the waywhich needs are satisfied, they also differ on the actual needs compared to ‘west’. The figurebelow illustrates the unique difference between Asia and West, when it comes to be driver orinhibitors that drive the market strategyHierarchy of needs between different cultural groupsSource: Fletcher, p.5 (http://www.unice.fr/crookall-cours/iup_cult/_docs/_Fletcher%20-%20Cultural%20Differences%20marketing%205687.pdf )
  • 12FORTUNE AT THE BOTTOM OF THE PYRAMIDSector With Highest Potential of Business in BoP Market(Hammond et al, 2007) Asia with a 2.86 billion people with income of $3.46 trillion represents42% of purchasing power. The sector markets consumers range widely in size withinInformation and communication technology, or ICT ($51 billion as measured, but probably twicewith the rapid growth in this sector within BoP). Some are medium scale, such as health ($158billion), transportation ($179 billion), housing ($322 billion), and energy ($433 billion). Andsome are truly large, such as food ($2,895 billion) and the smallest of the sector is water with apotential of $20 billion.Source: Hammond et al (2007), http://pdf.wri.org/n4b_full_text_lowrez.pdfRecommendation:The recommended approach to tap into the BoP market would need key consideration to thefollowing as stated in report (The Next 4 Billion, Market Size and Business Strategy at the baseof the Pyramid, Hammond, Kramer, Katz, Tran and Walker, 2007).• Significant unmet needs: BOP society has no access to bank and modern financial aids.They live in unapproved settlements, and lack access to basic needs for a quality livingsuch as water, sanitation, electricity and basic health care support (Hammond et al –2007).• Dependence on informal or subsistence livelihoods is poverty traps: They lack the abilityto sell their labor, handicrafts, or crops and are restricted to local employment orexploited by mid brokers. Farmers and Fisherman are the ones most uniquely vulnerableto the natural resources destruction (Hammond et al – 2007).• Impacted by a BOP penalty: Many in the BOP pay a higher price for basic goods andservices than the richer consumers, and they often receive a lower quality in return(Hammond et al – 2007).
  • 13FORTUNE AT THE BOTTOM OF THE PYRAMIDUnderstanding the sectors, such as ICT, food and health care play a massive business potentialwithin the BoP market.As part of the business strategy, the following has to be focused to achieve market share. Alsorefer Appendix B1 from London and Hart (2004) for additional learning’s captured aroundstrategies that have worked well and the ones that didn’t do well in the BoP market:1. It is important to have a unique solution, product, services and Technologies that wouldsatisfy the BoP needs, such as point of use systems in water sector, healthier products infood, microfinance and low-cost remittance systems in finance sector, housing andenergy.2. Localizing value creation by having a targeted investment in building capability andtraining the local vendors & suppliers, and enabling franchisee or agent strategy. Thiswould build confidence on the product or service and would get local engagement andmotivation to drive the marketing and sales of the product. Telecom sector is the bestexample to the amount of localization by enabling local phone entrepreneurs andresellers.3. Enabling access to goods or services – Enabling financial independence by reducing thepurchase barriers, prepaid or other creative business models through financingapproaches or deployment of low-cost technologies. Examples occur in food, ICT, andconsumer business line (in packaging goods and services in small unit sizes, or“sachets”). And cutting across multiple sector is the micro-financing that range frommicroloans and mortgages4. Unconventional partnering with governments, NGOs, or groups of multiple stake holdersto bring the necessary complementing skills to the table.It is recommended to use one or more than one of these strategies serially or in a combination toattain sustained market share.Find below the indicative list of some of the companies that have performed well in the BoPmarket in various sectors and different regions. Recent days have new entrants into this marketsome to name are Microsoft (software), DSM (food supplements), Royal Philips (health care),Thomson Reuters (information), GlaxoSmithKline (pharmaceuticals), Intel (computing),Vodafone (telecom), ING (microfinance), and Monsanto (agriculture) as stated in Prahalad(2009).
  • 14FORTUNE AT THE BOTTOM OF THE PYRAMIDSource: Prahalad (2009), Introduction to the Fortune at the Bottom of the Pyramid, Revised andUpdated 5thAnniversary EditionHow to Approach the BoP Community - InnovationAs per Prahalad (2006) in his Innovation Sandbox, expresses the importance of innovationthrough every step of penetrating into BoP market:1. The Innovation must result in a product or service of world-class quality. (Prahalad,2006)
  • 15FORTUNE AT THE BOTTOM OF THE PYRAMID2. The innovation must achieve a significant price reduction – at least 90 percent off thecost of the comparable product or service in the West. (Prahalad, 2006)3. The innovation must be scalable: It must be able to be produced, marketed, and used inmany locales and circumstances (Prahalad, 2006)4. The innovation must be affordable at the bottom of the economic pyramid, reachingpeople with the lowest levels of income in any given society (Prahalad, 2006)Implement Innovative Approach to tap BoP Market(Prahalad, 2006) & (Prahalad, 2009) The Innovation Sand Box approach1. Scalability: Unless the solution can be scaled, it would not be effective. As the businessesat the BoP are highly volume-sensitive and scale is critical2. Pricing: It has to be priced in the most affordable manner for variant market segment.Prahalad talks about Price-Profit = Cost, and not Cost + Profit=Price3. Modern technologies: It is becoming imperative that dramatic cost reduction is notpossible without combination of technology & science4. High standard with Global recognition of quality, safe solution, organic sustainability andaestheticsSource: Prahalad (2009) Introduction to the Fortune at the Bottom of the Pyramid, Revised andUpdated 5thAnniversary Edition, http://www.ftpress.com/articles/article.aspx?p=1398628&seqNum=5
  • 16FORTUNE AT THE BOTTOM OF THE PYRAMIDReferenceAuthor, A. (No date published). Bottom of the Pyramid Innovation. AsiaNBC, a project of theUniverse Foundation, Asia Innovation Management Magazine. Retrieved fromhttp://www.asianbc.dk/page13784.aspxChakrabarti, S. (No date published). India’s Rural Market – “The Fortune at the Bottom of thePyramid”. Retrieved from http://www.abesit.in/pdfs/Success_Through_Excellence.pdfFletcher, R. (No date published). The Impact of Culture on Marketing at the Bottom of thePyramid – a Relationship Creation and Network Development Approach. Retrieved fromhttp://www.unice.fr/crookall-cours/iup_cult/_docs/_Fletcher%20-%20Cultural%20Differences%20marketing%205687.pdfHammond, A. L. , Kramer, W. J. , Katz, R. S. , Tran, J. T. , Walker, C. (2007). The Next 4Billion, Market size and Business Strategy at the base of the Pyrami. Research by WorldResources Institute, International Finance Corporation. Retrieved fromhttp://pdf.wri.org/n4b_full_text_lowrez.pdfJaiswal, A. K. (2007). Fortune at the Bottom of the Pyramid: An Alternate Perspective. Journalof MIT press, 2-28.London, T. and Hart, S. L. (2004). Reinventing Strategies for emerging markets: beyond theTransactional model. Journal of International Business Studies, 1-21Prahalad, C. K. and Hart, S. L. (2002). The Fortune at the Bottom of the Pyramid. JournalStrategy+business issue, 26, First QuarterPrahalad, C. K. (2006). The Innovation Sandbox. Journal of Strategy business issue, 44,Autumn. Retrieved fromhttp://www.strategy-business.com/media/file/sb44_06306.pdfPrahalad, C. K, (2009). Introduction to the Fortune at the Bottom of the Pyramid.The:Eradicating Poverty Through Profits. Revised and Updated 5thAnniversary Edition.Rimando, L.(2008). Fortune at the Bottom. Development Asia, No. 2.Retrieved fromhttp://development.asia/issue02/feature-02.aspWorld Bank (16-09-2008), Press release no. 20080916, Washington, DC, Author
  • 17FORTUNE AT THE BOTTOM OF THE PYRAMIDAppendix A1Source: Prahalad. C. K. (2004), Bottom of Pyramid Framework,http://www.csrwire.com/pdf/Prahalad-excerpt-001-022.pdfAppendix A-212 Principles of Innovation for Bottom of the Pyramid MarketsPrahalad provides the following building blocks for creating products and services for Bottom ofthe Pyramid markets:1. Focus on (quantum jumps in) price performance2. Hybrid solutions, blending old and new technology3. Scalable and transportable operations across countries, cultures and languages4. Reduced resource intensity: eco-friendly products5. Radical product redesign from the beginning: marginal changes to existing Westernproducts will not work.6. Build logistical and manufacturing infrastructure7. Deskill (services) work8. Educate (semiliterate) customers in product usage9. Products must work in hostile environments: noise, dust, unsanitary conditions, abuse,electric blackouts, water pollution10. Adaptable user interface to heterogeneous consumer bases11. Distribution methods should be designed to reach both highly dispersed rural markets andhighly dense urban markets12. Focus on broad architecture, enabling quick and easy incorporation of new features
  • 18FORTUNE AT THE BOTTOM OF THE PYRAMIDSource: http://www.12manage.com/methods_prahalad_bottom_of_the_pyramid.htmlAppendix B-1The below 2 Appendix B-1 and B-2 are represenation of the study conducted by London andHart (2004) in there research to analyse the Companies have listed out the strategies that haveworked well in BoP, and also listed out the companies that have seen success and failureSource: http://e4sw.org/papers/JIBS.pdf , London and Hart (2004)Appendix B-2Source: http://e4sw.org/papers/JIBS.pdf , London and Hart (2004)------------------------------------------- End of Document ---------------------------------------------------