Corporate Social Responsibility and Bottom of the Pyramid - Coursework Example

Corporate Social Responsibility and the Bottom of the Pyramid

Why companies should operate at the Bottom of the Pyramid

Overview

In the previous decade, the notion of reaching the Bottom of the Pyramid has gained popularity globally. The Bottom most of the Pyramid segment has the biggest number of deprived people in the socioeconomic group. The idea of strategically harnessing this socioeconomic group has proved to be motivational. This is evident as large multinational corporations, NGOs, and social entrepreneurs seek and gain finances as they try to include the group that was formerly neglected (Gashgari, 2016). Davidson (2009) asserted that in most instances, the beneficiaries of the corporate social responsibilities are local communities, and they fall in the 4- tier segment in the pyramid. This article proposes on the need for companies to operate at the Lowermost of the Pyramid as it covers the majority and the main beneficiaries of the Corporate Social Responsibility in the community.

Critical review of the topic

Companies globally are engaging in developing markets although many focus on the high-income group in those countries (World Economic Forum, 2009). The low economic group has many productive potentials, and the market is unpenetrated nonetheless it is faced with particular challenges. However, companies that can overcome these difficulties can gain much and improve the livelihood of the poor. Success comes with creativity, product design and adoption of new means of distribution and sourcing. This report argues that companies should operate at the bottom of the pyramid and it therefore critically looks at the opportunities available on the 4-tier segment of the pyramid.

Defining Corporate Social Responsibility

Corporate Social Responsibility is a concept common in management where organizations in their operations and relations with shareholders involve issues that are affecting the society both socially and environmentally (Moore, 2014).

Differentiating philanthropy from corporate social responsibility

It is necessary to distinguish Corporate Social Responsibility from philanthropy that also plays a role in minimizing poverty in the community. Philanthropy has a direct impact on enhancing a company’s reputation while strengthening its brand whereas the concept of Corporate Social Responsibility goes an extra mile (Martin, 2016). Gupta and Jaiswal (2013) argue that the only way people can serve those who are destitute is through Corporate Social Responsibility initiatives.

Endorsing an ideology of giving back to the society requires the use of strategies that meet the needs and the capacity of the enterprise and do not have an adverse effect on its economic profitability (Tarafdar et al., 2012). Some of the strategies used are the Triple Bottom Line approach. Organizations use this method as a framework to measure and report their corporate performance against their social, economic and environmental performance without compromising their competitiveness (UNIDO, 2016). Sustainability of an enterprise depends on its financial security and at the same time the ability to minimize or eliminate its environmental impacts to meet the expectations of the society.

Bottom of the Pyramid

Bottom of the Pyramid is a concept where companies develop new market to low socio-economic group with an aim of resolving massive problems in the society and earn profit (Prahalad, 2004). The main component of the Bottom of the Pyramid justification lies in the conviction that one can make a profit by doing good and by giving back to the society (Prahalad, 2016). As Gupta and Jaiswal (2013) argue, the best way of serving the destitute segment is through establishing programs that enable giving back to the same society.

Integrating corporate social responsibility at the bottom of the pyramid

To enhance the community entrepreneurial role, companies should creatively incorporate the aspect of corporate social responsibility when conducting business in low socioeconomic society (Zahra and Wright, 2015). Sustainable business growth is achievable through use of efficient strategies at the lower segment of the pyramid and adopting excellent corporate community responsibility strategies. Organizations should align these two strategies with business strategy and long-term market positioning. Formation of an effective corporate social responsibility program is a system process that commences with assessing the company’s internal and external environment. External assessment refers to the analysis of the macro environment and the stakeholders. An internal evaluation, on the other hand, relates to the analysis of the footprint and the value chain (Jeffrey et al., 2013, p.5)

Achieving a win-win scenario

When companies invest in the bottom of the pyramid, they offer many social benefits to the community. This is because spending in the bottom of the pyramid has high chances of reducing poverty in the community. Poverty reduction occurs by accelerating growth in the society through the creation of jobs and lowering prices thus increasing the capacity for individuals to consume goods (UNDP, 2010). As Gradl and Knobloch (2010) reveals, inclusive business allows companies to support the improvement of the livelihoods of the community through the generation of income creation of job opportunities and development of skills.

Firms interested in exploring opportunities at the bottom of the pyramid should aim at offering new products and establish business models that can provide low priced goods and services since the sustainability of bottom of the pyramid lies in the inherent win-win situation. When companies offer goods and services to the community, they make a profit and also help the underprivileged by cutting their costs and thus better their livelihoods (Wankel & Malleck, 2012).). The market approach is the reason why investing in the bottom of the pyramid is viable and sustainable. The result is for this is a bottom line win-win situation for the firms and the bottom of the pyramid consumers

Review of literature

The article looks at why companies should operate in the 4-tier segment of the pyramid. It also reviews the relevant literature on the lowest segment of the Pyramid and the Corporate Social Responsibility initiative on a performance viewpoint.

Potential at the 4th tier segment

Firms such as Vodafone, Unilever and Cemex have shown that low-income markets offer huge business openings, which private firms can utilize to earn profits and at the same contribute to poverty reduction (Schuster and Holtbrügge, 2014). However, some factors restrain companies from serving the individuals living in poverty. These factors are a shortage of cash, poor infrastructure, corruption, illiteracy, violence lack of good legal frameworks and lack of distribution channels (Kolt and Lenfant, 2013). Consequently, billions of individuals have been eliminated from the market economy and are stuck in poverty. According to World Bank (2016), there has been an improvement in poverty reduction over the past decades.

Size of the bottom of the pyramid market

Despite high efforts to ensure poverty reduction, there is still a large number of individuals living in extreme poverty. The most recent estimate reveals that 10.7% of the global populace lived on below a dollar daily (World Bank, 2016). As International Finance Corporation (2011) besides World Resources Institute report highlights, the number of citizens living in low socioeconomic condition is very high and totals to about four billion citizens who represent a $5trillion market (WRI, 2016). While there has been a reduction in poverty levels, the reduction is not even. The sub-Saharan Africa still, have unacceptable high poverty levels. These areas have the greatest sum of impoverished individuals globally totaling to about 389 million. In Africa, the bottom of the pyramid market is worth $429 billion. According to the World Bank report, the markets that represents the tier four of the pyramid are sub-Saharan Africa, SouthAsia, and East Asia (World Bank, 2016).

Embracing business at the lowest segment of the pyramid

Most of the literature show the success stories of multinational corporations serving less affluent customers are dominant in the fast-growing economies such as India, Mexico, and Brazil. However, the bottom of the pyramid seems risky to the destitute group, and alternatives approaches are helpful for companies to have the ability to serve this segment (Davidson, 2009). In the recent years, the bottom of the pyramid proposal has been the preoccupation of corporate academics and senior executives in companies. This has seen many multinational corporations undertake the bottom of the pyramid initiatives. Some of these enterprises are the Unilever and Johnson. CEOs of world’s top companies have recently been discussing the topic of the bottom of the pyramid in World Economic Forums, and some schools in the USA have opened up the bottom of the pyramid centers (Jomo & Chowdhury, 2011). As Ansari, et al. (2012) noted many scholars argued that the multinational corporations should to look at the bottom of the pyramid segment beyond its economic returns and take the initiative of improving the society together with the civil society and the public.

Business opportunities at the bottom

According to Hart (2011), Bottom of the Pyramid has extensive entrepreneurial and productive capabilities. Tier 4 also represents a high purchasing force with substantial unmet needs for goods and services. Harnessing the productivity of this large group means that there can be a positive impact in reducing poverty in the community. It is important to note that the bottom of the pyramid allocates its budget on services depending on its spending preferences. This also represents the vast opportunities available in 4-tier segment (Karnani, 2009). Consumer needs in the lowest segment vary considerably from those in high markets. Low income is categorized by low and regular income that is related to the low purchasing power and the minute chances of saving cash for significant investments. It is evident that most of the individuals at the bottom of pyramid segment are in the survival trap that forces them to make tough choices (Prahalad, 2008). Following the work of Prahalad (2008), awareness of the goldmine in the bottom of the pyramid markets has increased. However, opportunities in the bottom of the pyramid are still unclear to the most of the business executives. It is therefore of great importance to refresh on the importance of bottom of the pyramid markets in the global economy. The survival trap mostly affects people who live in low socioeconomic segment and Prahalad has named them as the untapped group and possibly the hugely profitable market segment (Prahalad, 2008).

Importance of developing markets in low socio economic regions

Market expansion in low socioeconomic segment can create a significant number of unique brands and also nurture new entrepreneurs. It also helps in raising entrepreneurs from the grass root level to small micro-enterprises and later enable them contribute to the market-based ecosystem. Moreover, the bottom of the pyramid will call for collaborative relationships between local governments and the civil society (Schuster and Holtbrügge, 2014). A study by Singh, et al. (2014) suggests that there are several ways of enhancing market development in the 4th tier of the pyramid using the aspect of business social responsibility. These methods include reducing risks in tier four segment of the market. Singh, et al. report also suggests the need for organizations to involve the members of low socioeconomic status in the supply chain of the company to increase the business’s sustainability. Finally, the report suggests that government intervention to increase scale up is important in enhancing market development at the lowest segment of the pyramid (Singh, et al., 2014).

Implications of corporate social responsibility and bottom of the pyramid

According to Olsen and Boxenbaum (2009), a fascinating repercussion of the bottom of the pyramid is the impact it can cause organization's primary business model. Serving individuals in the low social, economic group calls for innovations (Praceus, 2014). Very few studies discuss on product innovation in tier four of the pyramid.

Available literature supports the fact that if a change favors the low socioeconomic status people, then it contributes to giving back to the society (Mukherjee, 2014). To test this assumption, Ramani and Mukherjee (2014) conducted a study that revealed that organizations could make a difference by making innovations that better the lives of the poor and showed that marketing of social welfare leads good returns in the corporate social responsibility. These innovations range from a change in business models, changes in the design of products and services and changes in technology (Praceus, 2014).To execute bottom of the pyramid projects accordingly, it is prudent to merge them into the main area of business operations where decision-making and execution of new markets and products take place. It, therefore, requires extensive changes in the organization and a lot of involvement by key departments responsible for new market creation (Davidson, 2012).

Enhancing corporate social responsibility through bottom of the pyramid practices

Organizations that are market oriented aim at understanding customers’ needs and preferences and in turn meet those needs. Since customers have become socially sentient, these firms must perform Corporate Social Responsibility initiatives (Senthikumar, et al., 2011). There is a recent study on the effect of market positioning on corporate societal responsibility on microcredit institutions in SriLanka. The findings revealed customers, competitors and inter-functional coordination are components that have a weighty and affirmative influence on corporate social responsibility involvement (Jebarajakirthya et al., 2016).

Achieving a win-win situation

The win-win situation arises when multinational corporations do business with the low socioeconomic status group. This aspect is important and intriguing as it can help in eradicating poverty globally by uplifting the poor. Prahalad (2008) argues that despite their low per capita income, the massive number of these citizens has the potential market that can add up to trillions of dollars in the disposable income. Prahalad goes ahead and argues that engagement of the poor in the commerce will finally transform the population earning distribution pyramid into a diamond pattern as a large number of individuals make positive step in the income distribution ladder and become middle-income earners (Kuruvilla and Noronha, 2016).

Critical analysis of the topic

In the analysis of the BOP markets, Roy (2010) found out that thinking about the 4-tier segment is something inevitable for any business that is thinking of expansion. This is because of its large market size and the fact that the market is untapped. As pointed out by Prahalad (2014), there is a mutual belief that the poor do not have high purchasing power and thus they are not part of the appealing market. However, this notion does not take into account the volume of the market. This means that firms that capitalize on producing and distributing cheaper goods to the consumers at the base of the pyramid can reap many benefits.

As Kolt and Lenfant, (2013) mentioned above, there are certain factors that restrict companies from penetrating markets at the BOP such as high operations cost. However, Harvard Business Review report by Simanis (2012) shows that there are platforms that a company can use to boost its profit margins to cater for the high operation costs. These platforms include localizing base products, which involves doing the final processing of a product near the target market to reduce on labor cost since locally the rates for the wages are a bit low. Other platforms pointed out in this report include offering services that engage customers and offer them skills and knowledge required to increase the functionality of a product (Simanis, 2012). Finally, establishing customer peer groups is also a platform that can help in increasing the profit margin (Simanis, 2012). Peer groups create awareness in the community on the benefits of a good or a service, and they assist each other in developing mindsets and new behaviors. This can play part in increasing the benefits goods and turn increase the size of sales transactions.

There are incredible benefits for businesses if they decide on serving the low socioeconomic groups in the society. Operations at the bottom of the pyramid have fewer competitors and consumers are underserved. More so, they are significant benefits for the unfortunate group such as reduction in poverty levels, empowerment and increased productivity (Willie & Barham, 2009). There are various advantages of operating at the bottom of the pyramids for firms as highlighted below

Broad market size

As emphasized above the lowest segment of the pyramid market comprises of about four billion consumers who have a total purchasing power of five trillion dollars (WRI, 2016). In the same market, there are varieties of products that are not available because of neglect by large firms. Though the companies may experience low-profit margins, the sales volume can be very high due to the high customer turnover. Therefore, the gains are achievable by sales volume rather than high-profit margins.

High market growth rates

Currently, the tier four of the pyramid market is a case example of a massive market. A report by the International Finance Cooperation (2007) showed that the estimate is $5 trillion. The market also has opportunities for new entrants in future. Some African markets, for instance, are facing low growth rates while others such as Asia are facing high growth rates (Prahalad, 2011). This means that there is potential for penetrating these bottom of the pyramid markets.

Low market competition

According to Dansk Industry report (2007), most Danish firms are focusing on consumers in top segments of the economic pyramid. Unfortunately, these markets have a high number of competitors, and thus profits are lower, and their potential for rapid growth is decreasing. On the contrary, the bottom of the pyramid markets is underserved and thus provide massive business opportunities for the companies to penetrate (Tinits, et al., 2016).

Cost saving benefits

Since the cost of structures is lower in growing markets, the bottom of the pyramid market offers cost saving benefit to the companies. Similarly, local production and employing local suppliers and distributors can lower the cost of production significantly (Simanis, 2012).

Innovation opportunities

To meet the demand and the needs of the bottom of the pyramid buyers call for new solutions. Goods designed for low-income earners needs different designing regarding quantities and low prices (Klein, Chevrollier, and Collée, 2012). This means that the company has the chance of being innovative to meet those requirements. Innovation comes with the development of new technologies that are essential for business development and growth. Dikmener, (2016) also urged companies on learning on how to reverse innovation by producing goods from countries like China and then redistribute them worldwide.

Summary

Due to the rising social demand and expectations, companies are at the forefront of addressing concerns related to lowest tier of the pyramid by developing initiates that give back to the society (United Nations Development Program, 2014). However, the philanthropic strategy may not be sustainable and may raise the question to stakeholders. This calls for an integrated approach that can play the role of profit-making while addressing significant bottom of the pyramid issues. Organizations should establish a bottom of the pyramid approach that fits their capacity, competencies and the needs of the stakeholders. It is, therefore, wise for companies to perform and internal and external assessment before developing strategies to apply at the lowest level of the pyramid. Companies must integrate then embed a tier-4 approach into corporate plan of the organizations functions to serve the organization and its beneficiaries.

When developing an efficient and integrative bottom of the pyramid strategy, organizations must assess their footprint and internal and external environment that consists of the stakeholders’ macro environment. The company must also bear in mind its current environment and their corporate capabilities. This is because these factors can favor or complicate its adoption of the lowest of the pyramid strategies. An effective 4-tier strategy must consider business and the interests of the stakeholders. A sustainable program must be integrated into business functions, and it must be viable for the company. Similarly, it must offer tangible benefits that improve the life of those at the bottom of the pyramid.