Doing Business at the Bottom of the Pyramid

International Business Strategy 1 – Jelena Đukić

2 Jelena Đukić

Introduction ____

Over the past few years, business leaders and strategists around the world have increased the

focus on the challenges of intense competition and slowing growth in high income markets. In

order to remain competitive, multinational companies (MNCs) must adjust. Winston

Churchill once said: “To improve is to change; to be perfect is to change often.” This process

has led many of MNCs to reconsider the potential of emerging and low income markets.

The concept of the Bottom of the Pyramid (BOP) consists of the market made up by 4 billion

poorest people in the world that live on less than $2 a day. A lot of MNCs have already tried

to enter emerging markets in BRICS countries that account for almost a quarter of the world’s

GDP (Castellanos, Uglow & Kodama, 2013). However, the idea behind BOP suggests that the

best way to meet the needs of the poor is through a profit driven market-based approach (Hart,

Prahalad, 2002). Most companies have usually not considered people at the base of the

economic pyramid due to the low individual income, but rather served customers from the

“global tier”. However, the true opportunity for both the poor and MNCs actually lies at the

bottom of the pyramid, also named the Tier 4 (Prahalad, Hart, 2002).

Before getting into more details, it is crucial to

understand which market is targeted in such a

case. On the image on the right it can be seen

that the top arrow represents the wealthiest

countries and the bottom one the countries that

are on the “Bottom of the Pyramid”.

It is observant that in general, when going abroad, companies take with them their well

worked out business strategies. However, even though this may work out when going to some

high-income markets, when entering into an emerging market, their business models need to

be modified. The BOP presents a whole new managerial challenge and in the further text, the

advantages and disadvantages of doing so will be debated.

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Advantages ______________

There are more than 4 billion people living in Tier 4 originating from every continent, with

the most affected regions being Africa, Latin America, Asia, Eastern Europe and the

Caribbean (Prahalad, Hart, 2002). All together they make up 72% of world’s population and

with the population growth rate increasing in developing countries, the number of people in

the BOP could reach 6 billion in the next decades (Ashish Karamchandani, Mike Kubzansky,

Nishant Lalwani, HBR, 2011). In previous years, MNCs mostly focused on serving the

“global tier” customers first. Zilber and da Silva state that the MNCs were only paying

attention to the easily spotted “iceberg”, yet the massive Tier 4 was largely kept under water.

However, the real and numerous opportunities actually lay at the Bottom of the Pyramid.

Some examples of these opportunities are: vast size, rapid growth, cost-savings, less

competitive environment and opportunities for innovation.

1. Vast size

As previously mentioned, the BOP constitutes the lower segment of the economic

pyramid and it represents the purchasing power of all the consumers living on less

than $2 a day or the equivalent of $3,000 per year. Moreover, even within the global

BOP there are levels making it a pyramid itself.

On the pyramid on the left the size of each layer

represents the number of people in the different income

segments. The aggregated income of the total BOP

population makes up a $5,000 billion market.

All these layers include around 4 billion consumers with a purchasing power of $5

trillion. Even so, companies should not expect high profit margins; however the unit

sales could be extremely high due to a large number of potential customers. Therefore,

it can be concluded that profits are not driven by high margins, but rather by the

volume, which is in this case – the consumers.

2. Rapid growth

As the developing markets included in the BOP are in their young stage of economic

development, it is highly likely they may be hiding a huge growth potential which

presumably could evolve very rapidly. Several African countries are experiencing

growth rates of 5% and countries in Asia, Latin America and Eastern Europe are

growing at an even faster pace. Another factor is the high birth rates that will increase

the number of people in the BOP. In addition, the more people, the more customers,

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the higher profits (discussed below into more detail). Western cultures’ birth rates are

declining, which also makes developing countries more desirable for MNCs.

(Prahalad, Hammond, 2002)

3. Costs-savings

In general, companies take their well worked out business strategies with them when

going abroad. However, even though that may have worked with higher income

countries, when entering the BOP, MNCs are facing obstacles when combing

sustainability, good quality, low costs with being profitable all at the same time

(Prahalad, Hart, 2002). Therefore, before emerging into the new markets MNCs must

generate a completely new strategy - a great challenge, yet a great advantage for the

future, since the brand new strategy will make the companies operate in a much more

efficient way. When entering the BOP, Tier 4 customers’ needs must be taken into

consideration; something that worked quite well in the past, may not work today, and

thus change is inevitable. (Prahald, Hammond, 2002). According to Prahald and

Hammond, change in the cost structure is imminent, as well, therefore stating to have

high profits will not be an option anymore, but rather saying how efficient the capital

is (Return on Capital Employed ROCE). Another factor beneficial to being cost

efficient is that experience showed that cost structures tend to be lower in developing

countries and producing locally can also lower the production costs considerably.

4. Less competitive environment

Over past few decades, many MNCs tried to enter the BOP, however some of them

failed to be successful due to the incapability to adapt their business strategies.

Nonetheless, some companies succeeded to enter the developing countries and

established themselves in the emerging markets. On the other hand, the intense

competition has saturated the top of the pyramid, which was previously the main target

of MNCs, thus they no longer represent the true competition due to decreasing growth

and profits. Even though there are many opportunities and advantages for MNCs they

have to bear in mind that they have to remain versatile and follow the steps of the

previous companies and overlook the local companies’ strategies - “When in Rome,

do as the Romans do.” (Khanna, Palepu, 2006)

5. Opportunities for innovation

With underdeveloped infrastructure and technology, emerging markets are craving for

innovation. Being unable to provide all the products that consumers from the BOP

require in order to satisfy their basic human needs, this sector is great for innovation.

All the innovative products and solutions MNCs had, yet could not present to

developed countries due to high knowledge and unwillingness to participate can now

be introduced to the BOP. With new and innovative products, many problems

emerging markets had may disappear. After testing the products and conducting

consumer reactions, MNCs can actually present these innovative products to

developed countries that will result in satisfaction and be beneficial for both sides.

(Khanna, Palepu, 2007)

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Disadvantages _________

In the text above, all advantages and opportunities of entering the BOP were mentioned.

However, there are few challenges MNCs should prepare for in order to be successful in the

emerging markets, and in this case, when entering the Tier 4.

1. Poverty

The reason why the consumers at the bottom of the pyramid are so interesting to

MNCs cannot be neglected. Even though being extremely numerous attracts the

companies, the fact they are lacking the financial resources is most probably the

greatest challenge when entering these types of markets. When looking at the figures,

it is apparent that people from the BOP have a lot of money to spend, however that

specific “a lot” is mostly spent on food and basic products. With the remaining money

consumers purchase “luxury” goods provided by MNCs. MNCs need to understand

that they are serving the market that lives slightly above the $1 a day which is

somewhat above the poverty line (Karnani, 2007) and not to set their prices too high

(Karamchandani, Kubzansky & Lalwani, 2011). Failing to do so appeared to be a fatal

move for many companies that wanted to conquer these markets.

2. Geographic, economic and cultural difference

Geographic, economic and cultural differences make a huge impact when creating a

new strategy and setting up a business in the emerging country, even though it perhaps

does not sound as important as it would be to create a well established costing

strategy. Let’s take an example of a Dutch company wanting to enter Peru. First of all,

there is an immense geographical distance that can disturb the business in several

ways, such as climate, distribution channels, etc. Forces that influence economy in

Western Europe may be completely different in Eastern Europe or Africa or in this

Case, Latin America, thus it is important to be familiar with the know-hows in the

business. Cultures differ from region to region, hence the pre-knowledge about the

culture that the company will be facing in the future is an asset that is convenient to

possess. All of these are most definitely just fractals of the business strategy when

entering the BOP, yet the crucial factors to be taken into consideration.

3. Limited brand/product awareness

In BOP markets some brands/products are widely available and recognizable whereas

others are completely unknown, or it may be that consumers are unaware that they

even need a certain product. That is where MNCs jump in and educate their potential

consumers.

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Conclusion ____

When entering the BOP there are many challenges to be conquered, yet many advantages and

opportunities that work in favor for the MNCs. As previously mentioned, a one size strategy

is not applicable due to different needs of various populations, in addition to geographical,

economical and cultural factors. Gaining previous and local knowledge is crucial and

beneficial for MNCs and eases the process of adaptation.

BOP markets are the markets of the tomorrow and MNCs must overcome all vicissitude

situations, in order to capture the markets that will be of extreme value in the prospective

future. Even if that means adapting the business strategy completely, ultimately every

hardship must be overcome.

In order for MNCs to be successful, consumers must be actively involved in the market, since

they are another big aspect of the process. That way, consumers rise up from poverty and

switch to a better and more prosperous life.

Entering the BOP is most definitely not for every company, thus every MNC has to reason

well and wage out whether entering the BOP is the right choice for them. Moreover, when

carefully deciding, the willingness to modify the cost structure as well as the management of

the company has to be taken into account. If most or all factors are favorable, MNCs should

go for it. The risks are high, but the rewards are even higher.

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References _________

International Finance Corporation (IFC), World Bank Group (2014), “The Next 4 Billion:

Market Size and Business Strategy at the Base of the Pyramid”

Ashish Karamchandani, Mike Kubzansky, Nishant Lalwani (March 2011), “Is the Bottom of

the Pyramid Really for You?”

Paul Polak, Mal Warwick (April 2014), “Why Entrepreneurs Will Beat Multinationals to the

Bottom of the Pyramid”

Prahalad, C., & Hammond, A. (September, 2002) “Serving the World's Poor, Profitability”

Confederation of Danish Industries (June 2007), “Working with the Bottom of the Pyramid”

Khanna, T., & Palepu, K. (October, 2006). “Emerging Giants”