Bop Strategy: Advantages and Disadvantages the Expression

BoP Strategy: Advantages and Disadvantages

The expression 'Bottom of the Pyramid' (BoP) is commonly used to refer to the poor; those people who live on no more than two dollars per day (Rivera-Santos & Rufin, 2012). A pyramid can be used to capture the world's wealth distribution and income-generation capacity, as shown;

Tier

Tier 1 Purchasing power parity (U.S. $) Populations in millions

>$20,000 75-100

Prahalad, 2010, p.28)

The topmost tier is made up of the wealthiest individuals, who commonly encounter numerous income-generating opportunities. However, this text is more concerned with the 4 billion people at the base of the pyramid. The BoP strategy of management targets the very poor regions. It deals with the development of business models that create more income-generating opportunities in these regions (Kacou, 2010). Essentially, BoP is often overlooked; a factor that has led to the underestimation of its real potential. This has been caused by misperceptions and prejudice, which makes developers unappreciative of the fact that "the very poor represent resilient entrepreneurs and value-conscious consumers" (Prahalad, 2010 p.27).

The BoP strategy seeks to get the poor actively involved in business operations, thereby enhancing sustainability, as well as profitability (London & Hall, 2010). This can take many forms. Multi-national corporations (MNCs) can, for instance, provide low-cost high-quality products, education, infrastructure, etc. To the BoP (London & Hall, 2010). The poor can only benefit from globalization if they are actively engaged, and given "access to products and services that represent global quality standards" (Prahalad, 2010, p.29). Misperceptions and prejudice have significantly contributed to the underestimation of the BoP's real potential. It would be prudent to examine a number of these poverty misperceptions.

MNCs Logic in Relation to BoP / Poverty

Misperception

Implication

People in BoP are low income earners and cannot buy MNC products

There is no need to provide services to the BoP; the market there cannot generate revenues that match the costs of production.

The poor consider MNC products luxuries, and would rather spend their limited incomes on necessities.

MNCs attach little importance to functionality. For instance, "the poor might need sanitation, but can't afford detergents in formats we offer" (Prahalad, 2010, p.32). Therefore, BoP simply does not offer adequate market for our products.

The poor lack skills and knowhow to handle technology, and do not appreciate technological advancement.

The poor do not need solutions for technological advancement. They can neither afford nor use them. There is no innovation that can come from the BoP.

The market in BoP is uncertain, and cannot be considered crucial for MNCs vitality and sustainable growth.

Service delivery in BoP is costly, and the uncertain revenues cannot be relied upon in long-term planning. If anything, "BoP markets are at best an attractive distraction" (Prahalad, 2010, p.32).

The BoP has inadequate intellectual capacity. If a company is to be started in the BoP, managers from the developed areas would have to be brought in.

It is not profitable to "assign our best people to work on market development in BoP markets" (Prahalad, 2010, p. 32).

(Source: Prahalad, 2010, p.32)

Such biases cannot be easily eradicated. However, developers need to appreciate the diversity between the BoP and the ToP (the top of the pyramid). In order to achieve this, governments, businesses, "civil society, and development partners must come together to create the conditions to transform the operating reality in BoP markets" (Kacou, 2010, p.158). Moreover, empirical facts, as outlined in the next section have shown that it may be more advantageous to invest in the BoP, as opposed to the developed markets.

The Characteristics of BoP Markets

Managers need to understand the distinct features of the BoP, if they are to embrace the BoP strategy.

The BoP is a Vibrant Market

The poor may not have as high incomes as the rich in developed markets but "by virtue of their numbers, the poor represent a significant latent purchasing power that must be unlocked" (Prahalad, 2010, p.35). The bulk of the BoP market is found in the developing world, which also provides massive opportunities for innovation and growth. China, for instance, has a population of 1.2 billion and a GDP per capita of U.S. $1,000, representing an economy of $1.2 trillion. This figure, converted into the equivalent PPP (purchasing power parity), yields an economy of $5 trillion - one of the largest; only second to the U.S. In terms of PPP. India's economy yields $3 trillion when the same measure is used. Turkey, China, Brazil, India, Mexico, South Africa, Russia, Thailand, and Indonesia collectively represent approximately 70% of the world's BoP. They collectively yield a massive $12.5 trillion in GDP, in PPP terms. This represents massive potential. The only problem is the inefficiencies that are brought about by corruption and the resulting poor distribution of wealth. However, "these problems can be cured if the organized private sector decides to serve the BoP" (Prahalad, 2010, p.36).

The BoP Appreciates Advancement in Technology

Consumers at the BoP would willingly embrace advanced technology, especially if it would lead to an improvement of their living standards; moreover, they lose nothing by doing so (Segal-Hart & Faulkner, 2010). The poor would actually be more willing to embrace advanced technology, than their rich counterparts; after all "moving to wireless from nothing is easier than moving to wireless from a strong tradition of efficient and ubiquitous landlines" (Prahalad, 2010, p.40).

Developing the BoP Market

The potential of the BoP can only be fully realized if stakeholders disregard the common poverty misperceptions and adopt strategies aimed at developing the market. The BoP strategy is one of those. However, for it to be effective, business developers need to create BoP consumption capacity and formulate strategies for product development (London & Hart, 2010).

i) Creation of BoP Consumption Capacity

Traditionally, this has entailed providing goods and services to the poor at no charge (philanthropy). However, this approach does not provide long-term sustainable poverty solutions. More scalable approaches to increasing the BoP consumption capacity would include; single-serve packaging and favorable purchase programs.

Single-serve packaging involves making small but affordable packages. Unlike the rich, the poor's streams of income are relatively unstable and highly uncertain. Theirs is a hand-to-mouth kind of existence and they often buy just what is needed for a single day (Rivera-Santos & Rufin 2012). Single-serve packaging would, therefore, be highly efficient in the BoP. As a matter of fact, this would be one way of appreciating and using diversity to the benefit of all stakeholders.

Secondly, business developers could invent purchase programs that are responsive to the poor consumers' low and unstable streams of income. A good example, in this regard, is the Casas Bahia BoP lending program in Brazil. The program incorporates counseling into its lending system and "provides access to high-quality appliances to consumers who could not otherwise afford them" (Prahalad, 2010, p.42). Businesses could, therefore, incorporate lending into their purchase programs in this way. If effectively conducted, such a program could significantly enhance the BoP consumption capacity.

A BoP management strategy would be effective in increasing consumption capacity if it takes into account the "Four As" principle discussed below.

"The Four As"

Awareness: This principle guides management to ensure that the BoP consumer is aware of the existence of a certain product in the market and its use (The Bottom of Pyramid Strategy, 2010).

Affordability: Whichever approach is chosen, the products supplied should be affordable to the BoP consumer. However, quality should not be compromised.

Accessibility: Strategy formulation should ensure that the products are easily accessible by the target group; they should be considerate of the target group's location, and patterns of work. For instance, consumers in the BoP may have to work the whole day, and may only make purchases at the end of the day, i.e. when they receive their pay. In such a case, businesses that close as early as 4:00 PM may be irrelevant (Prahalad, 2010). All these factors need to be considered if an effective BoP strategy is to be implemented.

Availability: This is more of a market creation incentive. It appreciates the fact that low-income earners tend to rely on current rather than future consumption and may be unwilling to postpone their purchases (The Bottom of Pyramid Strategy, 2010).

ii) Product Development

Business developers have to come up with affordable, quality products that suit the BoP market. This is the only way to get the BoP more involved in the global markets. In this way, a sense of responsibility, and trust, would develop between the BoP and the business world. Although "trust is difficult to build after 50 years of suspicion and prejudice, based on little evidence and strong stereotyping," it would be beneficial to, at least, try (Prahalad, 2010, p.46). The poor have many needs, and the BoP has huge potential. However, in order to fully realize this, developers and managers have to be more innovative (Stead & Stead, 2004).

Advantages of the BoP Strategy

i) To the BoP Consumer

The consumer at the BoP benefits from an effective BoP strategy in two major ways. First, the provision of low-cost, yet high quality products improves the consumer's welfare. Additionally, the availability of a variety of products creates opportunities for the BoP consumer to not only make choices, but also be part of the global market (Stead & Stead, 2004).

Secondly, the BoP strategy enables developers to look beyond the common assumptions and misperceptions of poverty. In this way, the poor get to benefit from services that they would, otherwise, be barred from accessing. Such services include credit facilities, employment opportunities, etc.

ii) To the Businesses

The benefits of innovation:

In order for business developers to effectively tap the potential at the BoP, they have to be innovative, both in designing their products, and in availing the same to the target consumer. This cannot be realized through "watered down versions of traditional technology solutions from the developed markets" (Prahalad, 201, p.45). Existing technology has to be combined with the most advanced versions for the strategy to be effective. This would naturally translate to increased productivity and high-quality results, which are crucial for the long-term business profitability, and growth.

Increased Scale and Scope Economies

Adoption of the BoP strategy implies serving an additional market, which is significantly different from the current one. This translates to serving a broader population, with more diverse needs (London, Hart & Kacou, 2011). There is need, therefore, to increase the scale of production (to serve the increased market), and the scope (to take care of diverse needs). This way, business developers are able to realize both scale and scope economies of production. Moreover, this contributes to poverty alleviation as it provides increased opportunities for employment.

iii) To the Greater Economy

Sustainable and Equitable Development

Poverty is one of the greatest challenges facing any federal government. This is evident from the UN adoption of the MDG for poverty eradication (London, Hart & Kacou, 2011). The eradication of poverty requires collective efforts from all stakeholders. The business sector has significant influence -- a well-implemented BoP management strategy would go a long way in reducing the levels of poverty and ensuring equitable distribution of wealth. The provision of employment opportunities, the availing of affordable high quality products, etc., to the BoP consumer, is all crucial in ensuring an equitable and sustainable world.

Sustainable Customer-Manager Relationships

The principles of BoP strategy -- awareness, accessibility, availability, affordability -- seek to ensure the satisfaction of the BoP consumer's needs (London, Hart, & Kacou, 2011). This way, BoP consumers feel that their needs are being taken care of and that they are not being unfairly treated on the basis of misperceptions. This would see the development of improved and sustainable relations between business managers and the BoP consumers, who have long been underserved (London, Hart & Kacou, 2011). Sustainable relations are crucial, especially because the world is fast becoming a global village.