Bottom of Pyramid Strategy - Coursework Example

? CONTEMPORARY ISSUES IN BUSINESS of the of the of the School 20 November Introduction In the world today, so many people are very poor and most often, efforts to reduce poverty have failed. This has been due to many factors such as an unhealthy political environment, corruption among others. The economists have come in to try and develop strategies that are going to help in solving the problem of poverty. Among other strategies that have been developed, the economists have come up with the Bottom of Pyramid strategy, which is commonly known as BOP (Schenk, Bielik and Horska, 2013). Countries with citizens who still have problems in meeting basic needs like food, clothing, and housing are an ideal testing ground for the comprehension of Bottom of Pyramid. The most challenging issue to this strategy is defining those people who are said to be at the base of the pyramid, as there are those who earn less than two dollars a day, and there are those who earn slightly higher than two dollars a day, but are still languishing in poverty. Many companies especially the multinational corporations invest on Bottom of Pyramid, so as to lift the lives of billions of people out of poverty and desperations that seem to continue, if the gap between the rich and the poor continues to widen. For example, the Unilever Company is one of the companies that have adopted the Bottom of Pyramid as a corporate strategy. Many CEOs have come to look at this strategy with a new lens (Prahalad, 2010). There is some evidence that can be used to prove that the innovations in the Bottom of the Pyramid can and have resulted to profitable business. Business leaders, who have adopted the Bottom of Pyramid strategy, have started to re-examine and see the role of business in the society. This strategy has provided a platform for global innovations, which have a lot of implications in the world of business today. Therefore, though the Bottom of Pyramid has its own shortcomings, it is a very important strategy that most organizations can adopt (Prahalad, 2010). What is “Bottom of Pyramid?” There have been many discussions on the concept of ‘Bottom of Pyramid’ in business today and no precise definition has been put forward to define the concept. However, this concept was originally introduced “to draw attention to the 1-5 billion poor, who are unserved or underserved by the large organized private sector including multinational firms” (Prahalad, 2010, p. 6). The main aim of the Bottom of Pyramid is to ensure that the rich, who are the ones occupying the top of the pyramid would be sensitized to help those who are less fortunate, and who are the majority occupying the base of the pyramid. Kazmi defines it as a strategy that "refers to exploiting the opportunities that are believed to be available in serving the poorer sections of the society and also serving social objectives” (2008, p. 207). Cited in Donohue, 2009. The above diagram is a representation of the rich occupying the top of the pyramid being the very few, and the poor occupying the base being the majority. In other words, it is a representation of how income in the world is distributed (Donohue, 2009). Thus, the Bottom of Pyramid refers to that population that leaves below the poverty line. How does the B.O.P Strategy Work? The term Bottom of Pyramid is said to be a relative term; it focuses on the strategies that companies can start to serve the populations, rather than un-serving and underserving them. When people say it is a relative term, it means that, a person living at the Bottom Pyramid in China is different from someone living at the Bottom Pyramid in Somalia, though both are seen as living at the BOP, but in different contexts (Prahalad, 2010). This strategy also focuses on serving with approaches that are more profitable and relevant for application towards the bottom of the pyramid population. The debate on this issue will definitely continue before a very precise definition has been approved, so as to clearly know which group of people are said to be living at the Bottom of the Pyramid. Advantages of an Organization Adopting the Bottom of Pyramid Strategy Market creation: Most of the organizations like the multinational corporations are looking for avenues for profitable growth and innovations. The four billion poor people that have occupied the bottom of the economic pyramid will provide this opportunity. When they convert these poor people into active consumers, it will foster innovations. According to Khanna et al., “businesses can gain three important advantages by serving the poor-a new source of revenue, greater efficiency, and access to innovation” (2008, n.p.). For example, Hindustan Lever Limited (HLL), which is a subsidiary of Unilever has been providing to the needs of the elite (the top of the pyramid) in India with detergents (Prahalad and Hart, 1999). A local firm known as Nirma came in to challenge HLL by creating a new business system, starting from manufacturing to packing and pricing (Prahalad and Hart, 1999). Initially, Nirma was dismissed by HLL as being a low end producer, but it rapidly grew. Nirma’s success was because it was pursuing its detergent business from the Bottom of Pyramid (Prahalad and Hart, 1999). Profitable Growth and Tier # 2 and # 3 markets Nirma HLL (Wheel) HLL (High end) Total sales ($ Million) 150 100 180 GrossMargin % 18 18 25 ROCE % 121 93 22 Cited in Prahalad and Hart, 1999. The diagram above represents the performance of Nirma compared to HLL. As a result of using the Bottom of Pyramid strategy, Nirma is the largest branded detergent maker in the world, whereas the HLL has slowly started to change its business models and as a result they have started registering growth in their revenue (Prahalad and Hart, 1999). Bottom of Pyramid is an innovation driver: As this strategy mostly concentrates on the many people in various countries, who are poor, it is a strategy that has been used to promote innovations. When the poor people are able to access information, they are able to be innovative so as to improve their standards of living. Also, most organizations are usually caught with over capacity; that is, the over capacity in the up markets. However, when it comes to the Bottom of the Pyramid, it is largely unoccupied and thus this will be a nice strategy for innovation and success (Prahalad and Hart, 1999). It is advisable for an organization with an aspiration of being successful to start at the Base of the Pyramid. Huge workforce base: The Bottom of Pyramid strategy concentrates on the four billion population, which is characterised by poor people, who are desperate. The reason why these people are poor is because they are underemployed or their jobs have low-paying salaries, and therefore they cannot support themselves and their families. Therefore, when organizations bring business opportunities at the bottom, the business will thrive as the workforce is readily available (Prahalad and Hart, 1999). Disadvantages of an organization adopting the Bottom of Pyramid Strategy Bottom of Pyramid strategy leads to losses: The strategy of Bottom of Pyramid calls for companies and organizations to do business with people who are at the base of the pyramid. They offer products at extremely low prices and at the end of the day, they hope for generation of profits that are reasonable, as they tend to sell large amounts of these products. However, recent experiences have proven that this strategy can lead to organizations and companies losing a lot of money. For example, DuPont through its subsidiary Solae, which manufactures Soy protein globally, had the intention of opening new market for its Soy protein, which would fight malnutrition (Simanis). Their main targets were mothers in the rural areas and also those who were located in the urban slums. At the end of the sales, they realised that the sales were stronger, but the profit margins were significantly low to an extent that they closed because the company was unable to see any profit (Simanis, 2012). This is a clear indication that the Bottom of Pyramid strategy can lead to losses in organizations. Additionally, there have been other examples that have continued to discourage companies and organizations from using the Bottom of Pyramid strategy, as the strategy has been seen to cause many losses for the businesses. The shoe project of Nike Company is a good example of another failed project which had used the Bottom of Pyramid strategy. Nike had attempted to supply shoes in china at very low prices to the low income earners in china. The result was failed sales and goals that the company had; this shows that not all BOP is good (Simanis, 2012). Something that should be noted is that a BOP can be successful in the beginning, but it later fails to meet targets. The Bottom of Pyramid strategy seems to challenge the global managers because when the poorest people in the world dominate the world market, then it will force the price performance relationships to be re-examined, and this will affect most of the businesses. The prices will be re-adjusted so as to fit the incomes of these poor people and as mentioned earlier, this will greatly affect business because it will end up in losses. London, Hart and Kacou point out that “unlike businesses operating solely in the formal economy, BoP venture leaders cannot rely on establishing competitive advantage based on investments made within and secured by the firms protective boundaries or by a country’s legal system” (2011, n.p.). Four billion people have a great impact on an organization or company, compared to the elite who occupy the top of the pyramid. This has proven to be a challenge to the managers everywhere around the globe (Karnani, 2009). Bottom of Pyramid strategy also offers great opportunities to organization as they present diverse work force, but the problem with it is that the poor people’s workforce have proven not to be effective. Most of them tend to be labour force employees rather than entrepreneurs. An entrepreneur is a person who has a vision and creativity, and who is able to convert a business idea to a successful innovation (Karnani, 2009). There are those poor people who have the capability of being entrepreneurs, but a vast majority of them have proven to have poor skills, poor vision, and lack the creativity to make an organization or a company run. This means that most of them work so that they can sustain their families rather than working smart. The picture that has been used portraying the poor as being resilient and creative entrepreneurs is not accurate (Karnani, 2009). Conclusion In conclusion, Bottom of Pyramid Strategy is a business strategy that has been used by most companies and has resulted to their success. In other words it can be said that it is built round three pillars, which are accessibility, availability, and affordability. It is a strategy that operates in a way that it approaches a business strategy from the bottom, where the population is very high. A company or a business invests on the poor people who are at the base of the pyramid, so as to promote them to be in a position to help themselves and their families. As seen earlier, the effectiveness of this strategy cannot be realised without the active engagement of people at the local level who are the majority. For example, in India, there was short supply of milk some years ago; however, today, India is known as the largest producer of milk in the world. The reason of this success is because there was investment on the local people, who are the occupants of the Bottom of the Pyramid. Though their milk was not so much, they would bring it twice or even thrice a day and it would be refrigerated. This in turn helped in the growth of the milk industry in India, and today, it is well recognized in the world (Prahalad and Hart, 1999). It is now starting to be clear that sustainable development of a country and its business is rooted in investing on the local people that are located at the Bottom of the Pyramid. However, it is not all roses to those companies or organizations that have used the Bottom of Pyramid approach. There are evidences that have proven that the Bottom of Pyramid approach has led to losses to some businesses. This is because some businesses have invested in helping these poor people and neglecting the fact that a business should make profits. Their losses come in because they tend to offer very low prices to these poor people, and this negatively affects their profits and goals. Reference List Donohue, P., 2009. What is the BoP? [online] Available at: < http://www.brinq.com/resources/bop> [Accessed 20 November 2013]. Karnani, A., 2009. The Bottom of the Pyramid Strategy for Reducing Poverty: A Failed Promise. [pdf] Available at: [Accessed 20 November 2013]. Kazmi, A., 2008. Strategic Mgmt & Bus Policy 3E. New Delhi: Tata McGraw-Hill Publishing Company Limited. Khanna, T. et al, 2008. Harvard Business Review on Emerging Markets. Massachusetts: Harvard Business School Publishing. London, T., Hart, Stuart L. and Kacou, E., 2011. Business Strategies for the Bottom of the Pyramid (Collection). New Jersey: FT Press. Prahalad, C. K. and Hart, S. L., 1999. Strategies for the Bottom of the Pyramid: Creating Sustainable Development. [pdf] Available at: [Accessed 20 November 2013]. Prahalad, C. K. and Hart, S. L., 2002. The Fortune at the Bottom of the Pyramid. [pdf] Available at: < http://www.cs.berkeley.edu/~brewer/ict4b/Fortune-BoP.pdf> [Accessed 20 November 2013]. Prahalad, C. K., 2010. The Fortune at the Bottom of the Pyramid, Revised and Updated 5th Anniversary Edition. New Jersey: Pearson Education, Inc. Schenk, R., Bielik, P. and Horska, E., 2013. From Micro-Financing and Base of the Pyramid Concept to Private Social Business by Crowd investing/Crowd financing as a Modern Phenomenon and Chance for Economy. Munich: GRIN Publishing. Simanis, E., 2012. Reality Check at the Bottom of the Pyramid. [online] Available at: [Accessed 20 November 2013]. Read More