Framework for Case Studies

1. What is the case about? (theme + summary/synopsis)- Summary : The successful of BOPMs not necessarily defined by national

border but by the pockets of poverty across countries if companies are innovative enough to create or tailor their products to the economic realities and life needs of poor, they will won the business

- Definition : Bottom of the pyramid new concept of developing countries and markets huge market for population at lower income at rural areas because 4 billion people, income < $2/day or $1,200 per annum ¾ of world’s population

- Thus, marketing to the bottom of the pyramid may have real potential and be worthy of exploration.

Exhibit 1: The World Economic Pyramid

2. (a) What is the main issue? (major attention)

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- Typical market analysis is limited to urban area, thereby ignoring rural villages.

- Major markets become more competitive and in some cases saturated – with the resulting ever-thinning profit margins-- C.K. Prahalad’s basic point is that these consumers have been relatively

ignored by international marketer because of misconceptions about their lack of resources (both money and technology) and the lack of appropriateness of product and services usually developed for more affluent consumers. (fr Book, p. 260 -261)

Exhibit 2: Bottom of the Pyramid framework (C.K.Prahalad)

(b) What other minor issues? (from Article 3)

- Market to poor is less attractive; “marketing to the affluent / rich” is better.- Products of the rich are not suitable for the poor- Market forces are usually not inclusive- Transaction must be reduced through better organisation

(c) Are there any other issues? (Inference / assumption) – (from Article 1)

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- Non-profit microfinance institution – E.g. Gramen Bank To accuse for-profit providers of charging their poor customer so much

- Profit microfinance firms accused for lending recklessly to people too poor to repay the loans.

- Borrowers are using their loans to pay off other loans that charge higher interest rates social-cultural problems

3. What are the justifications, if any? (rationale) – (from Article 5)

Fortune at the BOP: Large multinational companies can make a fortune by selling to poor people at the bottom of the pyramid.

Mirage of a Fortune: The alleged large and lucrative market at the bottom of the pyramid is a mirage, and companies are much better off targeting the growing middle class in emerging economies.

Fortune at the BOP Mirage of a FortuneBOP market size is $13 to $15 trillion BOP market size is only $0.36 trillion.There is much ‘untapped’ purchasing power at the BOP The poor have low savings rates, and little ‘untapped’

purchasing power.Profit margins in BOP markets are high BOP markets are not so profitable because customers

are price sensitive, and the cost of serving them is high, given the small size of transactions and poor infrastructure.

The poor often buy ‘luxury’ items The poor spend 80 per cent of their meager income on food, clothing, and fuel alone, leaving little room for luxuries.

Companies should reduce prices dramatically without reducing quality

A significant improvement in technology could reduce prices dramatically without reducing quality, such as in computers, telecommunications and electronics. But in most other product categories, the only way to reduces prices significantly is to reduce quality. The challenge is to do this in a way that the cost-quality trade-off is acceptable to the poor.

Single serve packages increase affordability Single serve packages do increase convenience and help the poor to manage cash flow. But the only way to increase real affordability is to reduce the price per use.

Large MNCs should take the lead role in the BOP initiative to sell to the poor

Markets for selling to the poor usually do not involve significant scale economies, and small to medium sized local firms are better suited to exploiting these opportunities.

4. How is this case related to International Marketing?

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International marketing is defined as the performance of business activities, including pricing, promotion, product and distribution decisions, across national borders.

Exhibit 3:

Promotion Requires advance technology - ITC farmer’s able to connect directly to information sources to check offer price for produce train farmer to used >10,000 villages & > 1 million farmers are covered by system ITC able to pay more to farmers and reduce its costs because it has dramatically reduced the inefficiencies in logistic.

Price Requires creative financing – Advance Micro Devices market personal computer at low price $185 Personal Internet communicator – a basic computer for developing countries but Taiwan company offers a similar devices @ $100

Cemex third-largest in world recognized an opportunity for profit by enabling lower-income Mexicans to build their own homes customers paid Cemex $11.50 a week and received building and received building materials

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every 10 weeks until the room was finished (70weeks) although poor, 9.6% of 150,000 Patrimonia hoy participants had paid their bills in full.

ICICI Bank – start making small loans to the poor at rates fun from 10% to 30% but lower than some Indian loan sharks 10% daily rate each women contributes to a joint savings account with the other members (self-help groups) bank lend $ to the group group lend to individual ICIC has developed 10,000 of groups and 200,00 women ICICI’s $ has helped 1 million households to get loans at average $120 to $140.

Place Requires effective distribution –Unilever – lending micro-credit loads funds to poor women in India realized it could not sell to the bottom of the pyramid unless it found low-costs ways to distribute its product its created a network of hundred if thousands of “Shakti Amma” who sell Lever’s products in their villages through an Indian version of Tupperware parties 1,300 poor women are selling Unilever’s products in 50,000 villages in 12 states in India & 15% of the company’s rural sales in those states. Overall, rural market contributed 30% of the company’s revenue.

Products Requires affordable packaging – Sam’s Club, Costco, K-Mart poor consumer do not have cash to stockpile convenience they do not mind frequent trips to the village store product have to made available locally & in affordable units e.g 60% of the value of all shampoo sold in India is in single-serve packets.

Nestle – targeting China 29 new ice-cream brands multipack products ranging $0.72 to $2.30 products are distributed through a group of small independent saleswomen company aim to expand & 24% company sales are from rural market.

Products Creates health benefits – Hindustan Lever Company concentrated effort to take message into 10,000 of villages where the rural poor reside “Lifebuoy teams visit each village several times” using a “Glo Germ” kit to show children has reached “around 80 million rural folks” small bar become the brand’s top seller.

5. What is your conclusion (optional)?

Positive - marketing to the bottom of the pyramid may have real potential and be worthy of exploration.

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References

01. http://www.economist.com/node/14298996

02. http://www.beyondgreypinstripes.org/pdf/BOP.pdf

03. http://www.poverty.ch/newstudy/beyond-bottom-pyramid.html

04. http://www.un.org/esa/desa/papers/2009/wp80_2009.pdf

Exhibit 1 : http://www.google.com.my/imglanding?q=bottom%20of%20the%20pyramid&imgurl=http://www.baseofthepyramid.nl/BoP.jpg&imgrefurl=http://www.baseofthepyramid.nl/index_en.html&usg=__b5GmoZi-kC5mkW1Uph8m83Tu4zI=&h=300&w=300&sz=55&hl=en&zoom=1&itbs=1&tbnid=bnBaP4-Z9XhPrM:&tbnh=116&tbnw=116&prev=/images%3Fq%3Dbottom%2Bof%2Bthe%2Bpyramid%26hl%3Den%26sa%3DX%26tbs%3Disch:1%26prmd%3Divnsb&ei=CBxyTbrPAcqtrAex6JTVCg&sa=X&tbs=isch:1&prmd=ivnsb&start=0#tbnid=bnBaP4-Z9XhPrM&start=2

Exhibit 2 :http://www.google.com.my/imglanding?q=bottom%20of%20the%20pyramid&imgurl=http://www.12manage.com/images/picture_prahalad_bottom_pyramid.gif&imgrefurl=http://www.12manage.com/methods_prahalad_bottom_of_the_pyramid.html&usg=__6HmtuX6-3C3wcPTxE2lApr9em5s=&h=302&w=447&sz=5&hl=en&zoom=1&itbs=1&tbnid=nAokooq2_XHObM:&tbnh=86&tbnw=127&prev=/images%3Fq%3Dbottom%2Bof%2Bthe%2Bpyramid%26start%3D20%26hl%3Den%26sa%3DN%26ndsp%3D20%26tbs%3Disch:1%26prmd%3Divnsb&ei=fx1yTcsJkPOtB4jY0dIK&start=17&sa=N&ndsp=20&tbs=isch:1&prmd=ivnsb#tbnid=nAokooq2_XHObM&start=21

Exhibit 3:http://www.google.com.my/imglanding?q=bottom%20of%20the%20pyramid&imgurl=http://farm3.static.flickr.com/2133/2898493534_a08fab8387.jpg&imgrefurl=http://alootechie.com/content/reaching-half-a-billion-indians&usg=__blRWdoZxe416juOEuSmJEenNOv4=&h=423&w=383&sz=59&hl

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=en&zoom=1&itbs=1&tbnid=NLXORXyRTrbJ1M:&tbnh=126&tbnw=114&prev=/images%3Fq%3Dbottom%2Bof%2Bthe%2Bpyramid%26start%3D20%26hl%3Den%26sa%3DN%26ndsp%3D20%26tbs%3Disch:1%26prmd%3Divnsb&ei=fx1yTcsJkPOtB4jY0dIK&start=30&sa=N&ndsp=20&tbs=isch:1&prmd=ivnsb#tbnid=NLXORXyRTrbJ1M&start=34

http://www.undp.org/legalempowerment/docs/ODS%20note%20BOP%207Jun06%20(Bus%20Contrib%20to%20MDGs).doc

Discussion Note on the Data/Statistics Part of the Report on Business Contributions to the MDGs*

7 June 2006

This note outlines some of the issues that could be discussed and elaborated further in connection with the data and statistics component of the Report on Business Contributions to the MDGs. Section 1 describes a possible organizing framework for examining the bottom of the pyramid (BOP). Section 2 highlights some of the possible

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issues in estimating the BOP; and section 3 notes down some of the issues for discussion if there is a special focus on the role of developing countries’ indigenous firms.

I. Possible framework for thinking about the bottom of the pyramid (BOP)

The poor are both consumers and producers of private sector products and services. Thus, in approaching the topic of the BOP, it might be useful to consider a framework that takes account of both the demand- and supply-side dimensions.

Taking the demand side, the poor are consumers, and the BOP could be considered a largely unmet demand opportunity. Demand is unmet at many levels including the outright absence of some goods and services, as shown, for example, in many instances whereby there might be low or no access to financial, insurance, and other services that are important to empowering the poor. Demand is also unmet (or poorly met) in many cases because of the higher cost that the poor have to pay for similar goods and services consumed by the relatively wealthier segments of the population; or because of the low quality or poorly-fitting goods and services that are offered to the poor.

On the supply-side, the poor are also potential entrepreneurs and undertake economic transactions as part of what is often a very large informal sector, which is typically a key provider of goods and services to the BOP. In many cases, it is very costly to operate in the formal sector, and thus the potential benefits from formality (such as access to finance for expansion or the legal system) are out of reach.1

Thinking of the BOP along these lines could help highlight the demand- and supply-side aspects of the possible policy issues at hand. It could also help highlight the potential synergies that could be (or need to be) exploited in addressing both the demand- and supply-side aspects simultaneously. Drawing on the analysis contained in DFID (2005) for example, annex box 1 contains an illustration of how interventions in both the demand and supply side must work in tandem in order to achieve sustainable results.

II. Possible issues in estimating the bottom of the pyramid (BOP)

One part of the report could be to elaborate on several aspects related to the size of the bottom of the pyramid. According to one broad estimate, 4 billion people in the world earning less than $1500 a year make up the bottom of the pyramid (UNDP 2004, p.8).

1 Informality not only deprives entrepreneurs in the bottom of the pyramid from many benefits, it also creates costs for the economy over-all. For example, according to McKinsey and Co. informality in Brazil restrains productivity and discourages business investment, in turn reducing the potential for economic growth. Lack of predictability makes long-run investments difficult and expensive, as reflected in very high local interest rates, for example. They note that Brazil’s economy could grow an additional 1.5 percentage points per year if a comprehensive program to fight informality is launched (Capp, Elstrodt and Bones 2005, p.1; see also Elstrodt, Fergie and Laboissiere 2006).

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This could perhaps be refined further by breaking it down according to regions (and to the extent possible, countries).

Determining the number of people that constitute the BOP is just a first step. Other indicators would be required to characterize the BOP more fully. These might include, for example, those on the proportion of the BOP that have access to key products and services that could empower, increase the welfare and reduce the poverty of this section of the population. Some examples of these products and services are: access to financial and insurance services, access to water, access to electricity, access to telecommunications, access to information, access to health services, etc. At the country level, it might also be useful to draw up a “map” of the major sectors (on the demand side) and actors (on the supply side) in order to help describe in more detail the amount of activity, and thus provide an indicator of unmet demand and potential markets at the bottom of the pyramid. Annex figure 1 illustrates the beginnings of what such a “BOP heat map” might look like. Ideally, such a map could be constructed for each country in order to demonstrate the potential opportunities in each sector of interest (e.g. those that are thought to contribute most to achieving the MDGs) and for each actor group (e.g. NGOs, MNCs, SMEs, public sector) in the bottom of the pyramid. Of course, not all actors will (or can) necessarily play a major role in each sector. The value-added of this mapping exercise is that it could perhaps inform policymakers where best to devote scarce resources2 and where to try and leverage increased private sector presence.

Another possible characterization of the demand side – in addition to the sector/issue based outlined in the paragraph above – could involve the type of market opportunity at stake. These could consist of, for example, products and services that are available, but not customized to the purchasing power and preferences of people at the BOP. Related with this, they might also include goods and services that are available at much higher costs than in industrial countries – such as access to water, in some settings. Or they could include missing products and services, that is, needs for which there is a need for some research and product/service development.

In moving forward on the work in this area, it might be useful to consider further the following aspects:

Refining estimates of the size of BOP based on purchasing power . Further country-specific estimates of the number of people at the BOP based on refining purchasing power considerations could also be useful in order to arrive at a disaggregation of the 4 billion BOP figure noted earlier. Here one might be able to draw on the work of UNDP-HDRO and the UN Statistics Office.

Drawing on estimates of the informal sector : Estimates of the informal sector could serve as building blocks in developing more specific estimates for other characteristics of the BOP. While the two may not exactly be the same, there is probably some overlap, and the extent and nature of this overlap could perhaps be

2 For example, in responding to market failures and trying to mitigate the effects of possible negative externalities, and encourage the production of positive externalities.

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explored further. There are a number of key studies and initiatives that one could draw on, including, for example, work by the World Bank on local economic development (see Friedman, Johnson, Kaufmann and Zoido-Lobaton 2000; Schneider 2002) and work of the International Labor Organization (see Hausmanns 2004).3

Drawing on regional BOP estimates : Survey-based work by the IADB and World Resources Institute (WRI) on the size of the BOP in Latin America could also serve as a building block in extrapolating the possible size of the BOP in other regions, correcting for possible factors that could account for regional differences. It might be possible to develop a model to identify the key factors that might help explain the size of the BOP (e.g. income per capita, gini coefficient, etc.) and then use this to extrapolate the possible size of the BOP in other regions, given their own specific characteristics (i.e. for those same factors).

III. Possible focus on the indigenous private sector

A possible focus on Southern companies (small or large; national or multinational) could be considered, possibly including small and medium enterprises (SMEs), especially when these are new ventures. Southern companies (and perhaps Southern SMEs in particular) may have a comparative advantage over Northern MNCs in the BOP market for a variety of reasons:4

Local knowledge : Local businesses often have a better knowledge of local market needs than large corporations due to their understanding of the local language and culture. This local knowledge gives them a key advantage in the conceptualization, design, and commercialization of products for the BOP.

Ability to innovate : Entrepreneurship is a cornerstone for most small and medium enterprises firms, which typically translates into fertile ground for innovation.

Local manufacturing : By manufacturing products locally, products can be more readily adapted to the local circumstances and needs. Due to the ability to adapt and change quickly based on local (developing country) conditions, Southern companies could be well placed to undertake the design and production of viable products that will be successful at the BOP.

Distribution and logistics : Traditional distribution channels generally do not function at the BOP, but rather multiple smaller distributors are often needed instead of large, centralized distribution centers.

Southern companies, however, are still relatively small players in many developing countries, notably those in Africa (UNDP 2006, p.13). In analyzing their 3 See the World Bank LED website at: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTURBANDEVELOPMENT/EXTLED/0,,contentMDK:20808825~menuPK:402644~pagePK:148956~piPK:216618~theSitePK:341139,00.html.4 See also IADB (2006, p.2-3) for further discussion on this point.

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possibly enhanced role in the BOP, as well as elaborating on the possible barriers that they face to achieve higher growth, there are a number of key studies and initiatives that the report could draw on, including work, notably on SMEs, by the World Bank (see for example, Beck, Demirguc-Kunt and Levine 2005; Ayyagari, Beck and Demirguc-Kunt 2003) and ongoing initiatives such as Pearl 25, the Multilateral Investment Fund (MIF) at the IADB,6 the Global Entrepreneurship Monitor (GEM)7 and the initiative to “Make Market Systems Work Better for the Poor” of DFID (2005).

5 Private Enterprise Accelerated Resource Linkages Phase II (Pearl2) is a project that supports the development of Small and Medium Enterprises (SMEs) supported by the Canadian International Development Agency in conjunction with the Philippine Department of Trade and Industry (DTI) and Philippine National Economic Development Authority. See http://www.pearl2.net/pages/GSD_DOCS.ASP.6 The Multilateral Investment Fund (MIF), established in 1993, is a mechanism of the Inter-American Bank Group in promoting inclusive economic growth in Latin America and the Caribbean. Equipped with $1.2 billion, and a mandate to support innovative private sector development, MIF’s goal is to develop broadly based growth and improve economic prospects for those less equipped to benefit from market reforms. See http://www.iadb.org/mif/v2/Basepyramid.html.7 GEM is the world’s largest and longest-standing study of entrepreneurial activity. In 2004, GEM conducted research in 34 countries around the world. The results of GEM data analysis is used as a key benchmarking indicator by regional, national and supranational authorities around the world. Those new to the research program will find global comparisons, national reports, and special topic reports based on the annual data collection cycle. Over 200 scholars and researchers are currently participating in the GEM project. See http://www.gemconsortium.org/default.asp.

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References

Ayyagari, Meghana, Thorsten Beck and Asli Demirguc-Kunt. 2003. “Small and Medium Enterprises across the Globe: A New Database.” Working Paper 3127. Washingtom, D.C.: World Bank. [http://www.worldbank.org/research/bios/tbeck/abd.pdf].

Beck, Thorsten, Asli Demirguc-Kunt and Ross Levine. 2005. “SMEs, Growth and Poverty: Cross-Country Evidence.” Journal of Economic Growth 10(3):199-229.

Capp. Joe, Heinz-Peter Elstrodt and William B. Jones Jr. 2005. “Reining in Brazil’s Informal Economy.” The McKinsey Quarterly 2006, Number 2.

DFID. 2005. “Making Market Systems Work Better for the Poor.” [http://www.dfid.gov.uk/news/files/trade_news/adb-workshop-conceptualapproaches.pdf].

Elstrodt, Heinz-Peter, Jorge A. Fergie and Martha A. Laboissiere. 2006. “How Brazil Can Grow?” The McKinsey Quarterly 2006, Number 2.

Friedman, Eric, Simon Johnson, Daniel Kaufmann and Pablo Zoido-Lobaton. 2000. “Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries.” Journal of Public Economics 76(2):459-93.

Hausmanns, Ralf. 2004. “Measuring the Informal Economy.” Working Paper 53. Geneva: ILO. [http://www.ilo.org/public/english/bureau/stat/download/papers/wp53.pdf].

Inter-American Development Bank (IADB). 2006. “Promotion of Opportunities in the Economic Base of the Pyramid.” Washington, D.C.: IADB. [http://www.iadb.org/mif/v2/files/BoP_eng.pdf].

Minniti, Maria, William D. Bygrave, Erkko Autio. 2006. Global Entrepreneurship Monitor: 2005 Executive Report. Babson College and London Business School: Boston and London. [http://www.gemconsortium.org/download/1149385780500/GEM_2005_Report.pdf].

Schneider, Friedrich. 2002. “Size and Measurement of the Informal Economy in 110 Countries Around the World.” Working Paper. Washington, D.C.:World Bank. [http://rru.worldbank.org/Documents/PapersLinks/informal_economy.pdf].

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Annex Box 1. A Demand and Supply Framework for BOP Analysis

The Figure above depicts a process of market expansion, with the objective of achieving a sustainable shift from point X to point Y. Initially, at X the market is small and insensitive to the cost of services. An intervention increases effective demand from D1 to D2. Such an intervention may be in the form of a community-based grant scheme, or other transactional subsidy, but equally might be achieved via an improved information or institutional environment or for example the building of a new feeder road. Service supply responds initially by expanding to point W. Further progress to point Y, depends upon a shift in the supply conditions being achieved such that supply shifts outwards to S2. This may also result from direct enterprise support, or equally from improved management skills, or reduced perceived risk as a result of parallel regulatory change. Importantly for the change to be ‘permanent’ the increase in demand must be sustained after the intervention has ceased. Otherwise the market will contract back towards Z and then to X as suppliers exit.

This model helps to illustrate the importance of(i) the need for ‘joined-up’ attention to both demand and supply sides of amarket,(ii) understanding the dynamics of specific markets with specific metrics,(iii) designing means to lock in changes in the long term.

Source: DFID (2005, p.35-6).

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Annex Figure 1. BOP Heat Map

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SMEsNGOsMNCsGovernment

Etc.

Telecom.

Health

Financial services

Education

SMEsNGOsMNCsGovernment

Etc.

Telecom.

Health

Financial services

Education

Sectors

Actors

Note: Size of the circles reflect the degree of activity based on some measure of presence by each of the actors in each of the sectors identified. A more crowded space represents a more dynamic BOP for a country. A less crowded space indicates the potential for expansion in activity.