Contemporary Issues in Business Management- Bottom of the Pyramid
Introduction
One of the earliest use of the term “Bottom of the pyramid” in recent history was in 1932 by then United States president Franklin, D. Roosevelt and this was in his address called the ‘Forgotten man’ broadcast across the nation. If the term is to be observed in a literal sense, it will bring about the mental image of the lower part of a pyramid which happens to be wider. In a three dimensional sense, this refers to the portion of the structure that has the greatest volume per unit height.
In an economic sense, this term therefore refers to the largest population in the population which is made up of individuals who have a daily income of less than 2 to 2.5 US Dollars. This group is also called the Base of the Pyramid or BoP (Agnihorti, 2013). The most common usage of this term can be found in the documentation of discussions about the development of business structures that are geared towards making the most of this group. Globally it is estimated that over four billion people are in this category and this makes up roughly 65% of the world’s population estimated at 7billion as at 2012 estimates (Sumner, 2010). Given such as large population, it has been theorized by many economists that this segment of the population is the most ideal market for the provision of goods and services at an affordable rate for both manufacturer and customer. The application of daily income however cannot be strictly applied when it comes to defining who falls into the Bottom of the Pyramid and who doesn’t. Economies vary from country to country and what may be considered as poverty in one country such as the United States will fit into the category of affluence in an impoverished country such as Somalia (Sumner, 2010).
The large numbers give the business community an opportunity to adequately take advantage of the associated economies of scale and reap profits given the low prices will still bring about profits for their operations (Pitta et al, 2008). The Bottom of the Pyramid segment is not just something that has been looked at from the commercial benefits’ aspect (Schumpter, 2011). There is also a welfare element in it given the fact that large numbers of patients have helped governments overcome some of the cost issues that pose obstacles to the provision of quality healthcare for the masses as witnessed in Mexico where the SalaUno healthcare enterprise has been conducting cataract surgeries for hundreds of thousands of patients at a fraction of what it would cost. This paper will therefore analyze the Bottom of the Pyramid from a theoretical perspective, tying it to different issues associated with contemporary business management (Forbes, 2013).
The Global Manager and the Bottom of the Pyramid (Lecture 3)
When it comes to the determination of challenges that face today’s global business manager, the Bottom of the Pyramid will fall under the category of external factors since it is primarily based on the customers. This means that any action that needs to be taken by the business will have to involve tremendous effort by the organization to realign and streamline its operations in such a manner that will make it profitable to cater for this promising market segment (Prahalad and Hammond, 2004; Prahalad, 2009). If this is the point of emphasis for a given business then the ‘Omnipotent View of Management’ comes into play. If it were an internal matter the firm would merely need to put in place measures that would modify the behavior of employees whose population is minute in comparison to customers who make up this population.
Another way in which this poses a challenge to the global manager is the fact that he or she needs to act against second nature by pursuing the less affluent members of society whereas it has always been the norm for business to take advantage of opportunities that are identified in relatively affluent segments. When it comes to the execution of decisions about how to go about the production for and marketing of the company’s goods and services, it becomes an internal challenges matter since the employees and their responsiveness will have to match up to market needs. In this light the manager will be fighting to maintain the satisfy the omnipotent view which will be seen in his or her ability to help the business sail through tough forces from outside. If the business is however unable to adequately take advantage of this population, it the ‘Symbolic view of management’ will have prevailed as the market conditions may end up being perceived as being too strong.
The matter of the Bottom of the Pyramid in the realm of Business Management with respect to the organization’s business environment will fall under the external economic environment, international environment as well as the Macro Economic Environment (Bartlett et al, 2008). The reason why matters related to the BoP will fall under the macro environment is because based on the PESTEL analysis, two elements closely linked with the Bottom of the Pyramid are present. These are the Socio-cultural and also the Economic.
The Socio cultural element is manifested by the fact that this population is made up of individuals who most likely live in the same communities and therefore have a similar way of life. Economic also comes into consideration because matters of supply and demand manifested in these markets have to be analyzed and taken into accounts. The Global Economic Recession as witnessed in 2008 is a good example of why the Bottom of the Pyramid is partly an economic issue (Schumpter, 2011). The economic meltdown led to a credit crunch that saw hundreds of thousands of people lose jobs, assets and their homes thus pushing them into the Bottom of the Pyramid.
Business Environmental Factors that affect those in Management are the associated uncertainty as well as the market complexity. The uncertainty that is presented by the bottom of the pyramid is the fact that analysts find it very hard to come up with solid figures to determine the actual population of this group in economies that are largely comprised of informal sources of income that are scarcely populated. At the same time the market is bound to be complicated to cater to since it is not exactly homogenous. Demand may vary from place to place and in an international market this may be pegged on culture as well as shifting value systems. Aldi, a German supermarket chain based in the USA has observed that it can package its shopping experience to match to those of luxury chains while selling discounted products. Wal-Mart and McDonalds too have been capitalizing on America’s bottom of the pyramid though the provision of consumer commodities at lower prices that suit their pockets (Landrum, 2007).
The combination of high uncertainty and a high rate of change will compel the business to adapt to the environment and this will often call for restructuring of the operations which involves transfers of managers and expansion initiatives. In line with adapting to the new business environment, the Bottom of the Pyramid will also oblige the business to change the way it engages with its different publics or stakeholders (Prahalad, 2012). According to the Medlow’s Matrix, a group of stakeholders who exhibit both high interest and high power will demand that the business closely engages them with the aim of influencing their behavior (Wood et al, 2008). Of the four types of corporate culture, Adaptability remains the most ideal when it comes to catering for the Bottom of the Pyramid since the business needs to be fast in responding to market needs based on the prevailing signals. Again on the case of Aldi, it can be noted that it uses smaller stores as opposed to super stores which are favored by other discount outlets.
Global Management and the Bottom of the Pyramid (Lecture 4)
One of the surest signs that the international business community is looking towards the direction of the Bottom of the Pyramid is the manner in which globalization has taken root in the global economy (Jenkins, 2005). From the above it has been stated that the Bottom of the Pyramid is made up of almost four billion people worldwide. Since this group of people is not concentrated in a single location, it has become imperative for multinational players to push for the elimination of trade barriers that have posed a hindrance to global businesses accessing these markets. Regional trading blocs are the main approach to this end. Examples include NAFTA and ASEAN which stand for North American Free Trade Agreement and the Association of South East Asian Nations respectively.
These organizations make member countries trading allies through abolition of taxes and other obstacles to international business. Businesses are opting for this business model since it allows them to take advantage of pull factors in external markets often comprised largely of the Bottom of the Pyramid segment. Push factors such as better expertise and advanced production capacity often from the more developed nations makes it ideal for them to supply and or manufacture their products in less affluent countries that may have the desired demand and market numbers for their products (Kuriyan et al, 2008). While this approach favors the international organization moving into new markets, local industries are often left on the receiving end as their inability to adequately compete drives them out of the market.
Other than the PESTEL analysis as a means of analyzing the external environment for a business dealing with businesses in the Bottom of the Pyramid, another meaningful way of looking at this environment is the CAGE analysis which takes into consideration the matter of distance. It was advanced by Ghamewat in 2001 and it outlines strategies for analyzing the differences in Geography, culture and Economy so that the best approach to the bridging of these gaps can be taken up. This is because in an effort to take advantage of the opportunities in a foreign market that has a high concentration of consumers in the bottom of the economic pyramid, Challenges have to be addressed lest they manifest themselves as threats to the business’ exploits.
Diversity and the Bottom of the Pyramid (Lecture 5)
Another issue that is often considered while dealing with ways of attending to the bottom of the Pyramid in international trade is the issue of Diversity. There are six ways in which diversity is manifested in the global market (Thomas, 2004).
Political diversity is expressed either as autocratic or democratic. With autocracies, the bottom of the pyramid will not have much of a say on their demands whereas in democratic systems the bottom of the pyramid is the most vocal and powerful and this demands that businesses invest heavily in adapting to their demands (Subrahmanyan and Gomez-Arias, 2008).
Economic diversity is seen in the income disparities that exist. In most regions where the bottom of the pyramid is significantly large, there is usually the challenge of a huge gap existing between the rich minority and the poor majority (Sumner, 2010). In this case the wealthier population will tend to manipulate the bottom and this is the picture that is often presented as an antithesis for the gains of capitalism (Hahn, 2008). India’s water purifier market for instance has observed that 64% of the population was using outdated methods of purifying water because that is what they could afford (FBNEWS, 2013). This created an opportunity for the purifiers whose only competition in the market is bottled water favored by the more affluent.
Regional Diversity refers to the mix between the wealthy and the austere in society (Karnani, 2005). While the focus is shifting towards the bottom it is important to continue catering for the wealthier since they are the ones who have larger control over the assets.
Cultural Diversity is brought about by the mix of cultures and ethnicities within a population (Cross and Street, 2009). Many of those in the bottom are comprised of marginalized ethnicities such as the Latin Americans in the USA. In this regard it is essential to be culturally sensitive in the marketing of products aimed at the bottom and this leads to the usage of words such as ‘affordable’ or ‘cost effective’ which are more politically correct than ‘cheap.’(Davidson, 2009)
Developmental Diversity is the variation in levels of development and industrialization from place to place. It is necessary to consider the fact that less developed countries have a greater population of the Bottom of the Pyramid than the developed countries. This poses the challenge of capacity building but is an advantage in that there are many unmet needs (Robinson and Dechant, 2004).
Demographic Diversity refers to the phenomenon of the bottom growing at a much faster rate than the rest of the world population. This primarily refers to the populations of Africa, Asia and India (Prahalad, 2012).
Conclusion
From the above analysis about the theoretical implications of the bottom of the pyramid to today’s global economy, it is clear managers of today and the future need to realign their thinking, strategies and practices so as to ensure the organizations of tomorrow are adequately prepared to maximize the potential that is presented by the bottom of the pyramid. This will be achieved through these organizations leveraging on the advantages of the different elements of the external business environment while at the same time working out strategies to minimize the challenges that are presented (Walsh et al, 2005). This way the theory of the manager as omnipotent will prevail since they will have adequately prepared the organizations they steer for business with the Bottom of the Pyramid which needs to be looked at as ‘the next big thing.’
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Lecture 3 Challenges of a Global Manager
Lecture 4 Global Management
Lecture 5 The Diverse Workforce
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