Bottom of the Pyramid (BOP) Strategy

Bottom of the Pyramid (BOP) Strategy

Introduction

Bottom of the Pyramid (BOP) is a socio-economic strategy that brings in the concept of grouping the vast majority of the world’s population, who are in excess of four billion, and constitute the poorest individuals and represent the unserved and invisible market segment which have been blocked by challenging barriers from utilizing their full potential for the benefit of those around them including their families, the society, and themselves (Chikweche, 2013). According to world rating, anyone who falls within the category of the BOP is estimated to live on less than $2.50 per day  and do not have the liberty to enjoy the modernity and revolution of the current globalized and civilized services (London, 2008). These include consumption of the vast choices that the current globalized market offers, as well as the modern forms of organized financial offers. The wildest mistake that many businesses make is to overlook the overarching potential of this BOP, as broad estimates posit that this segment of the market has a purchasing power parity of well over $5 trillion as consumers (London, 2008). It is the thesis of this paper that in the face of globalization and market liberalization, transnational businesses have a rich base of consumers in the BOP segment, which when properly utilized through effective organizational management has the potential to bring huge economic benefits.

The Link between BOP and Globalized Business Management

The high level of poverty across the globe is hugely alarming, as it is recorded that approximately four billion people are living in abject poverty, surviving on less than $2.50 per day. Most of these people reside in developing countries, and many at times they have been vaguely dismissed as non-important to the economic status of the global climate (Sungbum, Lee, & Park, 2013). With the introduction of free trade and the setting in of globalization spurred by technological advancement, the world has been turned into a global village. Currently, the most vibrant way organizations do business is through instituting multi-national corporations that across different cultures and territories. From the time of C.K. Prahalad, it has been realized that targeting consumers at the lowest base of the pyramid actually has far-reaching potential for revitalizing the economy. Thus, Prahalad (2004), states that for businesses to gain from the modern status of globalized market, they must revolutionize their business strategies to encompass the both sides of the pyramid. This analogy presents a very practical and lucid way of fighting poverty in a profitable manner.

Many excellent opportunities have been availed through globalization for multi-nationals to invade and make the best out of developing countries. It is always a requirement that when a multi-national corporation is setting up a business in a certain country, then most of the taskforce would be derived from the hosting country. The employment of local people in these businesses is a business strategy that wise corporations have been using as a tool to fight poverty, and in return win the loyalty of the locals to their products (Wood, Pitta, & Franzak, 2008). Financial opportunities that empower the poor such as the micro-credit program invented by Mohammad Yunus is one of the most innovative ways through which the BOP have benefited from a globalized financial market (Chikweche & Fletcher, 2012). The main question that organizations have to ask themselves is how to effectively manage their businesses so that the BOP is adequately focused and targeted.

Advantages of BOP Strategy to Organizations

In the current market which is characterized by stiff competition, many companies are on the look-out for new ways to establish a sustainable competitive advantage. Multinational corporations have thus employed absolute strategies to make use of the BOP. As opposed to earlier notions, the BOP presents a vibrant base for economic growth and innovation, provided that companies have the ability to mold their operations through effective global management to suit the demands of the poor (Dolan, 2012). In order to actualize this dream, organizations have to understand the connection between globalization and business as discussed above, and employ strategies that would completely bring a change to the traditional models of business. This brings in the concepts of foundation of management and organizations; constraints and challenges for the global manager; and essentials of global management.

The benefits that organizations that adopt this strategy stand to gain are not limited. According to Prahalad (2004), if companies employ the 4As (awareness, access, affordability, and availability), then they could as well attain the sustainable competitive advantage that is so desirable in any economic setting. He posits that if organizations decide to serve consumers in a manner that meets the 4As, then there are tremendous advantages that await them. For instance, employing the BOP strategy involves understanding the niche of the market, and tailoring products that would best meet their standards. Since the BOP consists of the vast majority of consumers, an organization would have a wide coverage with a faster return on investments. In any case, the poor people of today are the ones who constitute the middle class of tomorrow (Sungbum, Lee, & Park, 2013).  Many companies that have used this strategy have revitalized economically, and have come to assume a global popularity that works well with their economies of scale. For instance, LG stands out as a prime guru in the utilization of the BOP strategy. It is the world’s leading supplier of televisions and other electronics. The organization focused on Prahalad’s 4As, and in Brazil for instance, it centered majorly on the last two economic classes D & E, and produced affordable, quality, available, and accessible products. It also devised manageable payment plans that could allow consumers purchase goods on installments. It further mingled with the locals in a more personal manner, putting up manufacturing plants in remote areas, promoting local activities, and employing natives to work in its plants (London, 2008). Bringing goods and services close to the poor has not only helped to alleviate poverty, but has also created a sustainable business brand for LG.

In addition, following the BOP approach enhances an organization’s innovativeness and effectiveness. This is partially because it is not a simple thing to produce goods that sell at a low price, but still bring profits and sustainability. In another aspect, the needs of the BOP are diverse, dissimilar, and rapidly changing. In a world driven by fashion and new designs, technological innovations are fast-paced, and goods and services quickly become obsolete. C. K Prahalad coined the term Innovation Sandbox to refer to the model of applying business strategies along with the 4As as well as target costing in order to meet the demands of affordability (Prahalad, 2004). This is the main component of the BOP market segment, and most consumers judge the quality of goods based on this parameter. An organization that focuses on collective affordability stands a chance to become more innovative, creative, and technologically astute. This is primarily because through the adoption of current technologies of production, organizations are able to minimize losses, maximize results, and reduce costs of production (Sungbum, Lee, & Park, 2013). The result of this scenario is that multinational corporations would be able to expand rapidly in an environment that is driven by great market demand and innovation.

Generally, the assumption that the poor have no money is misleading and unfounded. Well, while the analysis of an individual member of the bottom pyramid cannot give encouraging data for investors, the most important consideration that should be made is the cumulative purchasing power of this market segment (Dolan, 2012). While statistical data has repeatedly shown that the 4 billion people have a vast potential for business ventures, the area remains largely untapped. Once these misconceptions are eliminated, businesses stand a chance to invest in a highly liquid market, since prosperity is always meant for the poor. Individuals who are still rated low on the hierarchy of needs according Maslow have the inherent motivation to ascend up the ladder, so as to achieve self-actualization (Sungbum, Lee, & Park, 2013). It is this stimulation that enables them to have a high purchasing power, and offer a rich market for a company’s products. Basically, when corporations invest among the poor and produce goods that address their needs, it helps them build their brand and corporate image, which are both crucial for achieving a competitive advantage (Davidson, 2009).

Another important aspect of the BOP market is its level of reduced costs of production that is brought by supply of cheap labor. In top-line growth, the most crucial element is cost-saving opportunity, which can be exploited by businesses to reap more from less. With the rapid expansion of digital networks that operate in high-speed, many multinationals are relocating labor-intensive company operations such as marketing services, call centers, and back-office processing to areas that are still developing and are populated with the BOP members (Olsen & Boxenbaum, 2009). Apart from cutting on costs, outsourcing labor from BOP market segments is an innovative way of creating job opportunities, which exponentially increases the purchasing power of the locals. As it follows, the BOP markets offer not only reduced costs and capacity for innovation to the MNCs, but also offer a valid opportunity for top-line growth for those that have exhausted their primary targets.

Disadvantages of the BOP Strategy

It is precisely right to mention that in every economic opportunity, there must be beneficiaries and victims. The major determinant in this scenario is the ability of corporations to effectively manage globalized businesses, and adequately address concerns arising within their own organizations (Wood, Pitta, & Franzak, 2008). It therefore follows that having a comprehensive organizational culture dictated by strict customer focus is a necessary prerequisite for an attainable competitive advantage. However, many organizations lack this ability, and many assume that targeting the BOP is economically unsound since it does not bring good returns on investment. This claim is true if an organization does not efficiently identify, target, and address the needs of its market.

Organizations that employ the BOP strategy may fail if the local weaknesses are not adequately addressed. The foundation of an organization requires extensive market study that would serve to give relevant information regarding the needs of the targeted segment, as well the best strategies that would be favorable to the situation (Olsen & Boxenbaum, 2009). When these plans are not put in place, misperceptions such as ‘all goods sold in a BOP market are incredibly cheap, thus there is no room for expansion and innovation’ may start to develop within the minds of global managers (Chikweche, 2013). The reality is that consumers who are members of the bottom pyramid may actually pay higher prices for goods and services than the middle-class do, since their judgment of quality is primarily based on pricing (Wood, Pitta, & Franzak, 2008). This means that real opportunities exist for aggressive businesses in the BOP, but without adequate planning and research, many firms are likely to fail. The level of risks involved in this segment of the global market is what makes it challenging to tap.

Conclusion

From the arguments advanced herein, it suffices to conclude that corporations have more to gain from venturing into BOP markets than they have to lose. Fundamentally, markets at the bottom of the pyramid offer numerous opportunities for growth, innovativeness, cost-reduction, and creation of employment. Since these markets are still in their earliest stages of development, growth can be really rapid. However, there are dangers associated with globalization and targeting of new markets, which present entrepreneurial barriers to most business. Through effective global management, MNCs are able to create an aura of successful businesses that would not only earn them sustainable competitive advantage, but also contribute towards the noble course of poverty alleviation.

List of References

Chikweche, T 2013, ‘Marketing at the bottom of pyramid: market attractiveness and strategic requirements’, Marketing Intelligence & Planning, 31, 7, p. 764.

Chikweche, T 2013, ‘Revisiting the Business Environment at the Bottom of the Pyramid (BOP)—From Theoretical Considerations to Practical Realities’, Journal Of Global Marketing, 26, 5, pp. 239-257.

Chikweche, T, & Fletcher, R 2012, ‘Revisiting the marketing mix at the bottom of pyramid (BOP): from theoretical considerations to practical realities’, Journal Of Consumer Marketing, 29, 7, pp. 507-520.

Davidson, K 2009, ‘Ethical concerns at the bottom of the pyramid: Where CSR meets BOP’, Journal Of International Business Ethics, 2, 1, pp. 22-32.

Dolan, C 2012, ‘The new face of development: The ‘bottom of the pyramid’ entrepreneurs (Respond to this article at )’, Anthropology Today, 28, 4, pp. 3-7.

London, T. 2008. The base-of-the-pyramid perspective: A new approach to poverty alleviation. In G. T. Solomon (Ed.), Academy of Management Best Paper Proceedings.

Olsen, M, & Boxenbaum, E 2009, ‘Bottom-of-the-Pyramid: Organizational barriers to implementation’, California Management Review, 51, 4, pp. 100-125.

Prahalad, C K (2004) Fortune at the bottom of the pyramid: Eradicating poverty through profits. Upper Saddle River, NJ: Prentice Hall.

Sungbum, J, Lee, D, & Park, J 2013, ‘Determining business models in bottom-of-the-pyramid markets’, Industrial Management & Data Systems, 113, 7, p. 1064.

Wood, V, Pitta, D, & Franzak, F 2008, ‘Successful marketing by multinational firms to the bottom of the pyramid: connecting share of heart, global “umbrella brands”, and responsible marketing’, Journal Of Consumer Marketing, 25, 7, pp. 419-429.

  

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