Interior, Wolf Kibel, 1930-35 (Courtesy: Iziko South African National Gallery, Cape Town)
Ideas for Leaders #659

Business Templates that Succeed in 'Bottom of the Pyramid' Environments

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Key Concept

A new company first succeeds by creating a template for doing business — a working system of organizational routines and practices. It then scales its business by replicating that template. In bottom of the pyramid environments, however, the development and replication of templates can be hindered by the extreme conditions in which organizations must operate.

Idea Summary

More than a billion people live in poverty around the world, earning less than $2 a day. A billion people may be a huge market in terms of numbers but they don’t have the disposable income that can turn them into traditional customers. However, C.K. Prahalad and other pioneer academics and entrepreneurs recognized the potential of these ‘bottom of the pyramid’ (BOP) customers for businesses offering the appropriate products at the appropriate price.

Professors Myrto Chliova of Finland’s Aalto University School of Business and Dimo Ringov of Esade Business School in Spain combined existing research on BOP business models with existing research on template development and replication to create a practical framework for creating and scaling a BOP business.

A template refers to a company’s system of organizational routines and practices — in essence a template for the way it does business. At first, the template is applied to the new company’s original location. As the company grows, this template is replicated in an expanding number of locations — a growth strategy known as growth through replication.

As detailed by Chliova and Ringov, the particular conditions of the BOP context have important implications for both template development and replication. They focus on three conditions specifically:

  • Resource scarcity. A desperate lack of money is not the only problem. Without fundamental educational and training resources, BOP employees or potential workers don’t have the same skill sets and knowledge as their ‘top of the pyramid’ (TOP) counterparts.
  • Institutional voids. Compared to TOP markets, BOP markets don’t have the same regulatory and other institutional structures in place.
  • Hybrid motivation. Most BOP entrepreneurs can accept the significantly lower profits of a BOP business because they have a hybrid motivation: the desire to make money coupled with the desire to do good.

Resource scarcity, institutional voids and hybrid motivation impact the development of templates in a variety of ways.

For example, resource scarcity requires the templates to be developed with the goal of significantly reducing costs and risks. One way a BOP template might achieve this goal is to enable the company to segment customers based on paying ability, and then allow cross-subsidization, with the higher income customers subsidizing the lowest income customers.

Business model innovation — for example, creating offerings based on the lowest level of technology since state-of-the-art technology is too expensive and poorly adapted to BOP conditions — can address the challenges of both resource scarcity and institutional voids.

Resource scarcity, hybrid motivation and institutional voids also impact a company’s efforts to grow through replication.

For example, a successful company operating in an environment marked by extreme poverty and lack of resources is expected to share its profits or provide some other financial help to those in need. Unfortunately, in many cases, the fledgling organization might look ‘rich’ from the outside but in fact is still building its business; in short, it cannot afford to share the ‘wealth’ before it has a chance to scale. Explaining the difference between early success and being in a position to support the local community financially is one of the challenges in the replication stage of a BOP enterprise. One option taken by some BOPs is to deliberately reduce the visibility of their success.

The hybrid motivation of wanting to do good as well as making a profit is what inspires many entrepreneurs to take a chance on BOP environments. However, it can also hinder the growth of their organizations as these inspired founders don’t want to give up control — but don’t have the financial means or even the mindset to expand. 

Business Application

The rules of business in TOP environments don’t necessarily apply to BOP environments. While there are obvious and fundamental differences in the resources of customers and lack of infrastructure (e.g., roads), this study reveals that there are also a number of unexpected implications that come from the conditions — notably lack of resources, the hybrid motivation of founders and their organizations, and institution voids — in which BOP organizations operate.

The need to downplay rather than highlight success, for example, is just one example of how BOP environments raise unexpected barriers to initial commercial success or the expansion of that success. At the same time, the implications are not all constraints. The desire of BOP organization to engage local residents into its activities as employees reflects the original BOP promise of business and industry helping to lift the poorest areas of the planet out of their economic misery.

Entrepreneurs should not avoid BOP environments — the opportunities to do well and do good truly exist. However, they should realize that they will be playing a completely different game. Using the concept of business templates can help frame the challenges they will face.

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Authors

Institutions

Source

Idea conceived

  • February 2017

Idea posted

  • June 2017

DOI number

10.13007/659

Subject

Real Time Analytics