Business at the Base of the Pyramid - Essay Example

? Business at the Base of the Pyramid Institutition The fact that there exists numerous business opportunities at the base of the pyramid is not new knowledge. However, the risks associated with such a business approach are daunting. This arises from the fact that, in most cases, these companies are unsure of the most efficient and appropriate business model to employ (Schrader, Freimann and Seuring 2012, p. 285). This is in context to the aspect of engaging these prospective clients and caters for both their needs and preferences (Prahaland 2002, p. 3). Given these hurdles, companies that desire to operate at the base of the pyramid must endeavor to develop solutions that have the best potential to overcome such hurdles (London 2007, p. 4). Survival for companies, at the base of the pyramid, directly hinges on the level of innovation that is put into the products (Prahaland 2002, p. 5). Achieving new levels of capital efficiency is a pre-requisite to profitable operation at the base of the pyramid (The European Alliance 2008, p. 11). The emphasis of business structure remodeling should be to produce innovative product using innovative means. This in turn necessitates the need to adopt innovative manufacturing processes. The guiding principle that should be adopted is the production of commodities that aid the community in meeting its development objectives (The European Alliance 2008, p. 10). The simple fact is that positioning a product to enhance the lives of the poor has a variety of advantages, chief of which is the financial advantages that will accrues from this approach (London 2007, P.9). The approach that should be adopted by the firms, which focus on the bottom of the pyramid, should entail employing an innovative manufacturing process, which will reduce the overall cost of production. This is in line with the fact that operating at the bottom of the pyramid entails lowering of prices and repackaging products into financially friendly units. This is best exemplified by the approach adopted by HLL India (Prahaland 2002, p. 6). The firm launched a new product called Wheel which essentially reduced the ration of oil to water in their detergent. When this was coupled with the low cost pricing strategy that they had set up, the result was a booming product which appealed to the poor consumer. This then ushers in the point of distribution. In order to target, effectively, the bottom of the pyramid, there must be systems that have been put in place, to ensure that the distribution mechanisms are able to access, effectively, the poor people (Prahaland 2002, p. 5). The lack of equitable wealth distribution restricts the poor to the sidelines of the global economy. This is regardless of the verity that they comprise a significant portion of the population. The status and nature of the poor makes it extremely difficult to reach via the conventional models that have reigned supreme using traditional business models (International Finance Corporation 2007, p. 3). The appropriate structure should be to position sales points to the small outlets, which are frequently used by the poor. These small outlets are characteristics of the dwellings of the poor. As such, should constitute as sales points for the business models of the bottom of the pyramid. Efficient distribution systems have greater potential of providing to large and untapped market. The largest being sourced from the rural poor. As such, with models that encompass structuring distribution points in the rural areas are better placed to tap these large and exponentially growing markets (Schrader, Freimann and Seuring 2012, p. 289). This is best done by structuring the business model to bring the product closer to the customer (The European Alliance 2008, p. 13). This in turn ushers in the need to check on the infrastructure. As such, this necessitates the need to incorporate NGOs and the government into a mutually benefitting partnership (The European Alliance 2008, p. 10). Aside from this, another vital aspect, to take into consideration is the mode of packaging. It is imperative to take note of the mechanisms of buying adapted by the poor. Their income restraints do not allow them to buy supplies in bulk. As such, they buy on a daily basis in smaller qualities when compared to the middle and upper class. The adopted structures of packing should be modified to accommodate such qualities. However, such approaches necessitate the need to employ innovative strategies. The poor of the society are faced with the lack or at times incomplete market. This being said, the business that targets this population should first address this obstacle if they want to experience an increase in sales volume (The European Alliance 2008, p. 9). The key approach, of the bottom of the pyramid business strategies, is to increase sales in these low wealth distribution areas (The European Alliance 2008, p. 10). The key aspect to take heed of being the win-win initiative the strategy that has been employed should be of a manner that enables the community and the company to benefit, mutually. As such, the most common approach should be to reduce the profit margins with the aim of increasing the market potential of the product. This is given that a small profit margin when mapped into a large sales volume eventuates in large profits. This depends on the market reach of the product (International Finance Corporation 2007, p. 3). This then reiterates the point of ensuring a wide market potential of the product by structuring a wide distribution network. The rationale for this strategy is that small profit from unbounded sources beats large profits from bounded sources (Prahaland 2002, p. 7). As such, this strategy necessitates the need to remodel the traditional business strategies and formulate new modes of capital efficiency. Compare And Contrast The SKS Microfinance Model With The Grameen Bank Model Microfinance can best be defined as lending to the poorest of the society without collateral in the aim of alleviating them from poverty. The microfinance industry is synonymous with the Grameen Bank and SKS. These two institutions represent the epitome of success in the microfinance industry. As such, this paper seeks to compare and contrast their business models. For starters, the Grameen Bank is wholly owned by its borrowers (Bornstein 1996, p. 2). Their modes are such that the earnings are reverted into the firm for catering for operational costs and other expansion purposes. The surplus is then given to the borrowers (Rahman 1999, p. 7). This is in the form of dividends. This is starkly different from the SKS model. It boasts ordinary shareholders and other several large-scale investors (Drake 2010, p. 2). This is in art due to the IPO it had some time back. This renders them un-unique since this model is somewhat similar to other business models existing in the West. Irrespective of the major difference in ownership of the two institutions, their business model adopts the same approach, albeit differing in some areas. The two institutions are assisting women to save and making it easier for them to borrow. This is in light of the fact that contemporary business models do not inculcate the feature of unique women’s need in their business strategy. This is one of the features that has aided the success of these institutions. An aspect that makes these business institutions different is the motive of their business approach. The Grameen Bank opts to act socially and assist the poor women in the society without any regard to the aspect of profit (Bornstein1996, p. 3). However, for the SKS, the two, profit and social responsibility, should not be treated as mutually exclusive (Drake 2010, p. 11). As such, it endeavors to assist the poor and simultaneously generate profit. This is a rare trait in the corporate world. This is because a majority of corporations would rather generate exponential profits, to the detriment of social entrepreneurship. As such, the result of this unique business approach is forming a microfinance institution that has been ranked as the fastest growing. The SKS approach has been to focus on women and their subsequent women groups (Drake 2010, p. 4). This is hinged on the rationale that women have an intrinsic quality of financial responsibility. The rapid growth being experienced by SKS is because of adopting business models akin to those of Coca-Cola and McDonalds. The business model of financing adopted by SKS is to borrow from commercial banks and direct it to the poor in the society (Mohan and Potnis 2010, p. 220). In turn, the interest that has been accrued will cover the cost of the transaction. This interest is sourced from a high interest rate of twenty five percent (25%). The profit is then soured from the fact that SKS borrows at a rate of ten percent (Drake 2010, p. 16). This is different from the interest rate charged by the Grameen Bank which charges its customers only twenty percent (Rahman 1999, p. 16). Five percent less to that charged by SKS. The Grameen Bank model assists the poor of the community much like aid donations. However, they refuse to be associated with this term. They endeavor to give small loans, microloans, especially to those who are not eligible for other forms of finance lending that are provided by traditional finance institutions. The Bank discourages foreign investment thus becoming more inclined to inclined to poverty alleviation and limited profit generation (RAHMAN 1999, p. 3). The problem now becomes developing mechanisms for sustainability. The Grameen model stipulates that no one is unqualified for lending. The Bank famously states that even beggars qualify for their services (BORNSTEIN1996, p. 7). They minimize the rate of default by stipulating weekly repayment. This is, however, under group lending, which is the most common form of lending. As such, the member of the group is tasked with ensuring that each member contributes to the weekly allocation so as not to default. This has the effect of raising their operational costs as compared to when their repayment plan had been on a monthly (RAHMAN 1999, p. 13). The interaction between these two institutions and their customers is also different. Grameen takes money as equity and as savings (Hassan 2006, p. 44). As such, it acts as a lender and also a reserve for its clients. This is akin to the operations of any conventional Bank. Conversely, SKS takes money only as equity (Drake 2010, p. 17). It adapts to the role of a lender. As such, it generates s profits via interest on the loans. The Grameen Bank, aside from giving loans to their customers, gives investment advice, as well (Hassan 2006, p. 46). As such, when receiving loans, the customer gives advice that is tailored for that, particular, case scenario. In addition, they encourage their clients to form groups of peers in order to ensure accountability (Rahman 1999, p. 21). Conversely, SKS is a lending institution that does not offer after loan services (Drake 2010, p. 23). As such, they do not cater for the special needs of their clients. In addition, they do not campaign for the formation of groups. Though both institutions endeavor to assist the poor of the community, another contradiction is that SKS focuses its business model on women. This is due to their innate responsibility traits. However, the Grameen Bank does not act solely on this principle. The Bank also lends to men , but the greater majority of its customers happens to be women. This at one point climaxed at 94 percent (Hassan 2006, p. 51). The motive for SKS for lending to women is that they are far more probable of not defaulting (Mohan and Potnis 2010, p. 224). However, Grameen Bank focused on women since, when their incomes increased the automatic beneficiaries are the children. This is unlike men whose behavior is unpredictable. The difference in the two business models is principally rooted in their revenue and profit approach. The Grameen Bank is a community based initiative with all their products and services are designed to raise the community living standards (Hassan 2006, p. 54). Most of its branches operate on a self funding basis. The deposits, of the local customers, acts as a source of operational funding. The fact that they offer deposit services to the poor propels their motive of aiding the poor build a financial base. Simply, put the profits of the Grameen Bank are redistributed to the owners of the Bank who are the poorest of the community (Rahman 1999, p.36). There is no doubt than both of these institutions represented the epitome of the microfinance industry. However, they have adopted uniquely different approaches. SKS opts to engage in social Entrepreneurship (Mohan and Potnis 2010, p. 231). Grameen Bank opts to engage, wholly, in poverty alleviation. SKS generates profits for its investors while Grameen Bank does not focus on profits but gives this profit back to its owners, the poor of society. Key to note is that, both of these institutions operate at the bottom of the pyramid. . References Bornstein, D. 1996. The price of a dream: the story of the Grameen Bank and the idea that is helping the poor to change their lives. New York, Simon & Schuster. Drake L. 2010. SKS Microfinance. LAD consulting. Hassan S.2006. Micro Credit And Grameen Bank: A New Approach Towards Development. Journal Of Asian Affairs. (42-62). International Finance Corporation, 2007. The Next 4 Billion. Market Size and Business Strategy at the Base of The Pyramid. London T. 2007. A Base-of-the-Pyramid Perspective on Poverty Alleviation. THE WILLIAMS DAVIDSON INSTITUTE. Mohan, L., & Potnis, D. 2010. Catalytic Innovation in Microfinance for Inclusive Growth: Insights from SKS Microfinance. Journal of Asia-Pacific Business. 11, 218-239. Schrader C., Freimann J. and Seuring S. 2012. Business Strategy at the Base of the Pyramid. 21. (281-298). Prahaland C. K. 2002. The Fortune at the Bottom of the Pyramid. First quarter. Strategy and business. Rahman, A. 1999. Women and microcredit in rural Bangladesh: anthropological study of the rhetoric and realities of Grameen Bank lending. Boulder, Colo, Westview Press. The European Alliance. 2008. Creating Wealth and Value at the Base of the Pyramid. Pyramid. Business Strategy and the Environment. Read More