The following paper gives a review of the article serving the world poor profitability. A brief introduction to the article is provided. Further, the key areas of the article are summarized, including a discussion on the untapped potential, the business case and the Strategies for serving the bottom of the pyramid markets. Moreover, the usefulness of the article and recommendations on how to apply the authors' discussions with practical life experience is also highlighted.
As the global economy improves from its current stagnation, deflation still continues to threaten the difference between the rich and the poor. Civil war, economic chaos, and unstable governments continue to plague developing regions keeping away multinational companies from investing in these emerging markets. On the positive side, entrepreneurial activities and private investments drive the economies of developing regions. They create employment and wealth-attracting millions of consumers to the global marketplace. The resulting decline in poverty leads to various social benefits; stabilize the developing regions and ultimately reducing cross-border and civil conflicts (Prahalad & Hammond 2002). Most multinational companies only expand to areas with greater innovation and intense competition.
The primary factor that will determine the position of the global market in the future is the willingness of MNC's to invest in the worlds poorest markets. Through the initiation of development and commerce at the bottom of the economic pyramid, multinational businesses can improve lives of people. These companies only need to have self-interest because there are numerous benefits in entering into developing markets. Few companies have invested in the worlds poorest regions and have generated revenues, experienced higher operating efficiencies and realizing new sources of innovation (Prahalad 2008). As the twenty-first century unfolds, building businesses from the bottom of the pyramid provides these companies with better competitive advantages.
Development and prosperity can be realized in the poorest regions through the sustained and direct involvement of big companies. Furthermore, these big companies cannot entirely solve the economic crisis in the poor areas themselves. But it will also require financial aid from well-developed nations and also with improvements in the way of governance of these regions themselves. By multinational helping these developing regions, they equally gain their prosperity.
The population of the poor in comparison to the rich is distressingly high. More than 65% of the people in the world earn less than $2,000 in a year. Despite this large market, it has remained untapped by the MNCs. These companies have assumed that people with low income have less to spend on services and goods and they only spend on necessary things such as food and shelter. Other assumptions are that illiteracy, corruption, bureaucratic red tape, currency fluctuations and inadequate infrastructure limit business profitability in these regions.
These assumptions are outdated in the currently developing world because there have been companies that have thrived in this regions. Despite the commerce barriers, there are more positive trends. They have majored in the upper middle-class market segments of these markets. There are increased political reforms, development of wireless communications, and entrepreneurial spirits have reduced the barriers and providing access to poorest slums (Waddock & Rasche 2012).
Despite the low-income levels, the average purchasing power of the poor communities is quite high. Assuming that the poor only concentrate on satisfying their basic needs is incorrect. They also purchase luxury items. For example in Mumbai, 85% of the households have TVs, 75% pressure cooker. They dont have running water, they live with that and buy what can improve their quality of lives instead of saving for a rainy day. Another misperception is that goods and services provided in these regions are cheaper thus no room for competitors to enter the market and turn a profit. But in reality they pay more than even the middle-class consumers. Therefore, there are vast opportunities for corporations with economies of scale to capture the market share. This can be attained by providing quality goods at lower prices while maintaining appealing margins.
It is also cheaper to market and deliver services and goods to the worlds poor. It is because they live in densely populated cities. Companies operating in these areas will have access to millions of customers who when combined have billions of dollars to spend. Suburbs of these cities have distinct ecosystems with small businesses, retail shops, money lenders, schools and clinics. And they are thriving. The scale of business operations ranges from single business operations to larger well-recognized companies with brand name products.
Residents from rural areas are poor, and it is harder to reach compared to the urban poor, they also account for the significant untapped opportunity for companies. For example, most Indians live in the rural areas but still accounts for over 60% of the countrys GDP. The only challenges to doing businesses in rural areas are distribution access and a lack of buying power. However, with the introduction of new information technology and wireless forms of communication have eased marketing and distribution to these communities. For example, Kenyan teenagers are trained on the web designing Indian women are trained on how to use PCs to interpret information and satellite images. Therefore, it is clear that poor communities are ready to embrace new technologies that improve their quality of life or improve their economic opportunities. Lastly, theres a misconception about the issue of overexploitation of the poor people by multinational companies. The economies serving the poor are full of exploitative intermediaries and inefficiencies. MNCs provide primary products to improve the livelihood of everyone. Therefore, it is clear that markets at the lowest of the economic pyramid are primarily new sources for multinationals because these markets are steadily growing.
The Business Case
Opportunities at the bottom of the pyramid have been slightly noticed by NGOs and entrepreneurial start-ups. They have benefited from the poor communities. They have acquired a new source of revenue growth, access to innovation and greater efficiency.
Top-line growth: bottom of the pyramid markets provides an opportunity for the MNCs to increase their revenue growth. The demand for low-priced, high-quality commodities is enormous. Besides, provision of products, they will also expand their business and brand in the vast new market.
Small businesses services are also common in these markets. For example in Bolivia offer communication and business information services to small producers of Eco agricultural products. Some services cannot be produced at low costs to be profitable. Mobile telecommunications cannot provide their services cheaply in the developing countries. Therefore to counter these people are using alternative technologies. For example use of smart cards that can store all customers information and allow dispensation of cash without a network connection thus essential in remote areas (Czinkota, Ronkainen & Kotabe 2009).
Another solution is to aggregate demand and making the community the community customer. For example, Dhar district in India has a shared access model providing the internet and telecommunication access to entrepreneurs, governmental and educational services. Such a network is essential as a channel for marketing and distribution products at low costs. It also increases sales and client loyalty.
Reduced costs: top-line growth results to cost saving opportunities. A popular way of reducing cost was outsourcing operations. However, currently there has been an expansion of high-speed networks that has made companies to even realize greater savings by placing labor intensive service roles as call centers, back office transaction processing and marketing services in developing areas. Besides reducing costs, outsourcing of jobs to the bottom of the pyramid markets can enhance improved growth since the creation of employment ultimately increases the purchasing powers of consumers.
MNCs besides tapping into cheaper labor pools; they can also use other creative ways to configure their finances, products and supply chain to enhance their degree of profitability. The new discoveries can then be incorporated into the existing operations in the developed markets (Carrigan, Marinova & Szmigin 2005). Companies focusing the BOP market find it that the shared access model widens their customer base as well as increasing asset productivity. Poor people use these technologies instead of using computers or other electronics. Thus, providers of these services gain considerably more revenue of investing in the underlying assets. Shared access creates the chance of achieving greater returns from the infrastructure investments.
In terms of finances, managers must strategize their business metrics, especially on high gross margins. It is important to consider the capital efficiency by trying to get the highest return on capital employed. It is possible by reducing capital investment through extensive outsourcing production, streamlining supply chains, paying attention to distributors performance and managing receivables. To have a little capital needs means having a focused distribution and large volumes at low margins which eventually leads to high ROCE thus creating economic value for the shareholders. The model is both attractive in developed and developing countries.
Streamlining supply involves replacing assets with information. The program helps to eliminate multiple bagging, transportation and handling steps from the farm to the processor that did not add value to the chain.
Innovation: bottom of the pyramid markets are a hotbed of technological and commercial experiments. Connectivity is a significant issue for the BOP customers. Companies that can lower connection costs will have a stronger market position in these countries. New wireless innovations are likely to spur business model technologies and lower costs even more. These changes will transform the economics of the accessing internet.
E-commerce systems are important in BOP markets because they eliminate the need for intermediaries. E-commerce is changing the limitations of BOP markets to competitive and strategic advantages.
Usefulness of the Article
The article is of great significance to the existing and new companies. It provides an intensive insight into the untapped market potential at the bottom of the pyramid. Furthermore, strategies for serving the bottom of the pyramid are provided enhancing their knowledge of how they can integrate their operations and expand to this untapped market. Moreover, the benefits of venturing into this market are further explored including reduced overall cost of operations and increased and enhanced innovation.
Recommendation for Application
To succeed in a BOP market companies must have effective strategies. The executives must change their attitudes and practices to succeed.
The most pressing need to succeed in a BOP market is education. Managers should spend some years in BOP markets to open their eyes to the promise and understand the realities of doing business there. The goal should be to engage with the local people. This will help the managers expand their understanding of the BOP markets.
Companies should also create internal investment funds and venture groups aimed at nurturing entrepreneurial effort...
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