Strengthen the ’bottom of the pyramid’

Wednesday, December 19, 2007

By Anand Kumar Jaiswal

The bottom of the pyramid (BOP) has become one of the dominant ideas of discussion among practising managers, academicians and policymakers. Prof. C. K. Prahalad and other proponents of BOP argue that, instead of disregarding low-income consumers as inaccessible and unprofitable, multinational corporations (MNCs) should view them as an unexploited business opportunity. Moreover, through this, MNCs can help improve the living conditions of the world?s poorest population.

The first question which needs to be answered is whether there really is a ?fortune? at the bottom and how big is the BOP market. The oft-discussed BOP success stories are mainly from developing countries with relatively higher economic growth rate and/or high per capita income such as India, Brazil and Mexico.

The concept?s applicability in the poorest nations is questionable. About 2.4 billion people live in low-income countries; among them 751.8 million people live in least developed countries (LDCs).

The World Bank uses $1 and $2 per day as reference poverty lines. In 2001, 1.1 billion people were living on less than $1 a day. If we enlarge the base, 2.7 billion people lived on less than $2 a day. These 2.7-billion people living in acute poverty and struggling to meet even basic needs can by no means be viewed as a profitable market for large corporations.

HUL case study

Proponents of BOP point out Hindustan Unilever Limited?s (HUL?s) success with low-priced candy aimed at the BOP markets. However, in 2005, HUL actually pulled out of the confectionery business as it did not generate satisfactory financial results. Similarly, HUL?s innovation of transporting ice-creams in un-refrigerated vehicles and Annapurna iodised salt were quoted as examples of BOP success.

It is a different matter that, owing to continuous losses in ice-cream business, HUL later decided to focus only on economically better-off customers in select cities (Karnani, 2007). National salt brands, including Annapurna, are out of reach of most poor consumers. In 2002, national brands had a 45 per cent share of the iodised branded salt market while local brands held the remaining 55 per cent share.

Small isn?t beautiful

The proponents suggest several ways to MNCs to tap low-income markets. Use of sachets and low-unit packs is one such. However, empirical evidence does not support this contention. An AC Nielsen study has shown that for products such as biscuit, jam, washing powder, sanitary napkin and milk powder, the smallest available packs are not the largest contributor to total volumes of product sold in rural areas (Dobhal and Das Munshi, 2005).

Shampoo is one exception where sachets have the highest share of total volumes sold. Another study by LG Healthcare in India questions the usefulness of sachets for marketers. The result has shown that, although sachets have helped in increased penetration, they have also caused a decrease in overall consumption. Also selling large volume packs enable companies to reduce the processing and transactions costs, not the other way round.

Factors overlooked

BOP work also overlooks the role of several factors, which are often invisible and which facilitate organisations to serve BOP markets on a sustainable and profitable basis. These factors can be in different forms such as support from other organisations, availability of workforce at a lower than market wage rate or availability of low cost or free advertising and communication support (Dixit and Sharan, 2007).

In the case of Aravind Eye Hospital (AEH), local business units, Lions Club, Rotary Club and Vivekananda Kendra organise eye camps and bear the associated costs, which were estimated to be over Rs 200 per patient more than a decade ago. Employees at organisations such as AEH and Amul are dedicated to the cause, hard working, productive and work for a pay which is far lower than that in most private organisations.

The proponents of BOP assert that poverty can be eradicated through BOP initiatives by 2020. Eliminating poverty in just 15 years may be nothing but wishful thinking. It is unclear how selling products such as candies, shampoos, soaps, detergents or refrigerators to the poor will eradicate poverty in just 15 years. The important issue is that BOP consumers cannot really buy more than they currently do because of little disposable income they have.

Raise income levels

To reduce poverty, the income level needs to be raised and for that the poor should be seen as producers and providers. Income of the poor can be increased by providing an efficient system to bring to the market their agriculture produce, handicraft and other products they manufacture. Models such as that of Amul and Shri Mahila Griha Udyog Lijjat Papad, which facilitate decentralised production by thousands of milk farmers and low-income women, contribute immensely to income generation by the poor. We cannot also totally disapprove viewing the poor as consumers as some argue (Karnani, 2007).

Selective consumption by the poor, which entails enabling or restricting the consumption based on the characteristics of goods to be consumed and the net effect on their well-being should be facilitated.

The private sector should avoid undesirable inclusion (marketing products that are not likely to enhance their wellbeing or products that are likely to be abused by them) and exclusion (not offering products that are likely to enhance their wellbeing) of the poor in target market selection decisions. The poor are more vulnerable to undesirable inclusion.

Disparities in income and differences in lifestyle add to a greater perceived relative deprivation. Intensive advertising and promotion of products may result in misplaced priorities in resource allocation .

These consumers may spend or overspend on non-essential goods while cutting down their expenditure on education, nutrition and health.

For instance, under the influence of an attractive advertising campaign, a rural woman may be induced to buy fairness cream or hair colorant. The problem with the consumerist-focused BOP movement is that it does not differentiate between priority and non-priority areas. Contrary to the impression one gets from BOP work, multinationals? entry in BOP markets may actually create serious problems also. Examples such as Coca-Cola?s alleged involvement in groundwater depletion in Kerala or Nike?s sweatshops in developing countries show that multinationals? BOP engagement can also be severely problematic.

A rather cautious approach on large corporations? participation in low-income markets is needed. Managers working in MNCs should carefully formulate their BOP strategies so that they do not add any further woes to the already marginalised and vulnerable population.

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Source: The Hindu Business Line (link opens in a new window)