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The Daily Sabbatical/INSEAD | Apr 1, 2013 | 5603 views

Finding Growth at the Base of the Pyramid

As competition in emerging economies intensifies, multinationals are searching for new growth opportunities. Could the poorest of the poor hold the key?

T

he emerging economies’ expanding middle class has been a saviour for multinationals during the global economic crisis. But with growth here already showing signs of slowing, researchers are increasing their focus into an even more innovative market - billions of very low-income people living in slums and rural villages, the so-called Base of the Pyramid (BOP).

“We’re talking about four billion people living on less than US$100 a year,” says INSEAD Professor of Entrepreneurship and Family Enterprise Stephen Mezias. “It seems clear to me if these people don’t get a stake in the global economy then this is going to be a huge problem for everyone.”

But entry into this market has proved more difficult than expected. Challenges abound, many large companies have had their fingers burnt and, with a general trend towards cutting costs and consolidating operations, experimental moves into markets that are deemed “difficult” is waning.

In his research paper Business Paradigms for the Base of the Pyramid: Effective Structuring of Institutional Interfaces, Mezias looks at how social and political differences can impede effective market exchange and how companies can better transfer knowledge and information across boundaries to enhance their chance of success.

Just because they need it doesn’t mean they want it

Moving into BOP markets is most definitely NOT business as usual, says Mezias.

“Successful ventures are built on dialogue and joint action and not data and delivery time.”

To be successful, companies will have to innovative their business models, review their product offerings and look at effective ways of communicating with their new, unfamiliar customers.

In their extensive study into market-based solutions to global poverty Karamchandani, Kubzansky and Frandano from Monitor Group found a definite gap between the Western perception of what people at the base of the pyramid needed and what they actually desired.

It was a problem not even Procter and Gamble (P&G), the company that revolutionised the world of branding and marketing with floating Ivory soap, has been unable to overcome.

P&G’s PUR water purification powder, was designed as a for-profit product for some of the world’s poorest. Unfortunately, says Mezias there was a miscommunication problem between the makers and their market. “It was a case of the consumer products company saying ‘Of course you want clean water to drink’ and the consumer saying ‘Why should I pay for water when I get water for free,’” Mezias notes.

“Literally sometimes what the multinational enterprise (MNE) knows – even the product entry team – and what people in the community know are simply not aligned enough to allow the kind of market exchange that is going to make the business successful.”

The PUR water purification powder is now a non-profit product and part of the company’s CSR initiative. While the product continues to be distributed, the company has abandoned hope of seeing any profits.

This is typical of the way Americans have attempted to penetrate the BOP market, says Mezias. They start it as a business venture and find themselves missing unrealistic milestones and unable to meet profit expectations.

European companies have tended to take the opposite route, making CSR investments into BOP markets with an eye towards creating new markets or new products for existing markets – or both. It’s a model, says Mezias, which seems to have a greater chance of success.

An example of this is Schneider Electric, the French energy management specialists who initiated a pilot project connecting Vietnamese communities in the Quang Binh province with access to a renewable energy grid, allowing the easy recharge of lanterns and mobile telephones.

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Comments (1)
Durudarshan H. Dadlani Apr 3, 2013
The average billionaire is now worth a little bit less than in previous years. The bottom-of-the-pyramid live on less than $100 a year, and comprise 4 of the 6 billion global population. So long as the billionaires' money keeps sloshing and keeps the mechanism fluid, all will benefit. Even if the billionaires were to be worth a little bit less still, they'll still be pretty well off, but they will have helped the rest of humanity carry on with the merry dance of life.
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