Business at the base of the pyramid and Micromanage In recent years, the worlds multinational corporations (Macs) have increasingly paid attention to low-income markets In developing countries. The concept of the “Business at the base/bottom of the pyramid”(BOP) was first Introduced by Parallax and Hart (2002). They claimed that the majority of population in the world, approximately 4 billion people (Tier 4), at the base of the economic pyramid represents significant market opportunities for Macs.
However, the traditional business model that was designed to serve middle- and upper-income customers (Tier 1) will be unsuitable for the poorest. In order to take advantage of these opportunities, Macs have to develop a new business model tailored to the need and challenges of the poor (Parallax and Hart, 2002). Moreover, ASKS Micromanage and Grahame Bank involved In social banking provide financial services through micromanage In order to help poverty alleviation In developing countries. This paper will firstly focus on the difference between business models operating at BOP and traditional business models.
It will then compare and contrast the ASKS Micromanage model wit the Grahame bank model by referring to those differences Identified In the first section. A final conclusion will be drawn. Differences between traditional business models and those operating at BOP Traditionally, business strategies of Macs were designed to serve Tier 1 markets that allow companies to make high gross margins. However, for low-income markets, profits are determined by sales volume and capital efficiency. Margins are likely to be low but unit sales can be extremely high (Parallax and Hart, 2002).
Thus business models increasingly call for minimizing profit margins and increasing sales volumes (CAR European Alliance, 2008). It also demands new levels of capital efficiency through innovation on reduction and distribution to meet Tier 4 consumers’ needs. Pharaoh and Hart (2002) in their paper suggested that because market environment at the BOP are significantly different from those at the top of the pyramid (TOP), serving Tier 4 requires companies to bring together the best of technology and a global resource base to address local market conditions.
There is also a need for connecting financial success with local communities in which companies operate. Range et al (2011) suggested that business models that have increasingly focused on local communities to create private and public value as well as aim for scale are becoming more reverent. Several differences between traditional and new business models are discussed in more details below.
Firstly, contrary to traditional models that usually have large selling stores located in the city, business models operating at the bottom of the pyramid must decentralized the production, marketing and distribution of the product to reach the abundant labor force In rural area In order to build sales networks through a number of small shops (Parallax and Hart, 2002). Traditional business models have already established wide access to the market, while business t the base of pyramid must improve market access due to most Tier 4 consumers lacking (CAR European Alliance, 2008).
It is important that companies have better distribution systems and communication links to develop Tier 4 markets. Secondly, unlike more traditional business models that can be run independently, business at the base of the pyramid demands multiple players including local governments, Nags, communities and financial institutions (Parallax and Hart, 2002). For example, the host government plays a key role in supporting positive externalities that BOP business models attempt to promote. It has argued that no firms can achieve their goals successfully without creating partnership with other groups (CAR European Alliance, 2008).
Thirdly, companies at the bottom of the pyramid must put more efforts than operating traditional business models to combine their advanced technology with deep local insights. It is important to provide appropriate goods and services that meet Tier 4 consumers’ needs (CAR European Alliance, 2008). Prepared and Hart (2002) have suggested that the best approach is to combine local capabilities and market knowledge with global best practices. Fourthly, the majority f Tier 4 consumers are geographically isolated and they normally have strong local cultures and less contact with international consumer habits (Riviera-Santos and Rubin, 2010).
Thus, it appears to have a need to alter the cost structure of traditional business strategies in order to offer a low price product that is affordable to the poor. It is necessary to make adaptations on packaging and pricing strategies as well as the product itself (CAR European Alliance, 2008). Selling smaller size products could enable companies to offer low-income customers with an affordable price (Riviera- Santos and Rubin, 2010). For example, companies often produce single-serve packages rather than boxes to meet the need of frequent purchases.
Fifthly, consumer education and training activities become more important for business models operating at BOP than traditional models as many modern products especially those that have been developed through innovative production are very new to Tier 4 consumers (CAR European Alliance, 2008). Helping them understand the use of new products will enable long-term access to the market. Finally, unlike in Tier 1 markets consumers have powerful purchasing power; many people at the base of he pyramid are underemployed and usually unable to afford the cost of living.
Business has to create buying power that enables the poor to elevate themselves economically. This could be done through providing financial services to help them access commercial credit and increasing the earning potential (Parallax and Hart, 2002). The experience of Grahame Bank and ASKS Micromanage represents the most successful case for the idea of extending credit to the poor. Overall, an effective combination of local and global knowledge is needed, not a replication of the Western system. New business model needs to combine low cost, good quality, sustainability, and profitability.
The Grahame Bank model versus the ASKS Micromanage model As mentioned previously, micromanage as a new business model operating at BOP provides access to the money and credit for the poor and small enterprise that has been increasingly implemented by many banks in developing countries. This section will discuss some arguments on micromanage by making a comparison between the Grahame Bank model and ASKS Micromanage model. The comparison will be made Grahame Bank is a corporation mainly based in Bangladesh, which was initiated in 1983 (Gerundial and Baron, 2011).
Its major business is lending without collateral to landless people for economic activities. The founder of Grahame Bank is professor Muhammad Yuan’s who intended to do a research project about extending credit and banking services to the poor, which results in the establishment of Green Bank (Gerundial and Baron, 2011). The bank was established through legislation approved by Bangladesh government. Even though Grahame Bank is a for profit organization, it is tax exempt in Bangladesh. ASKS Micromanage is a for profit organization listing on the stock market.
It was transferred from a non-profit organization named ASKS Society that was founded in 1997 (Gerundial and Baron, 2011). ASKS Micromanage is now the largest lender to the poor in India. Its principal activities involve in making collateral free loans to the poor and entrepreneurs and also offer interest free loans. The founder of ASKS Micromanage is Mr.. Viking Caulk who was working in non-profit organizations and collaborated with Grahame Bank to help the poor in India (Gerundial and Baron, 2011). 2.
Environment: Bangladesh versus India Bangladesh has remained a relatively low level of health and education (Gerundial and Baron, 2011). The majority of the population in Bangladesh still lives in rural illegal. The economy growth has only based in some urban areas. However, the economy of India is much more positive. Although some rural areas have a lot of poverty similar to the situation of Bangladesh, it is already the second fastest growing economy in the world (Gerundial and Baron, 2011). Today, India becomes the largest market of micromanage in the world.
The market environment is more competitive than Bangladesh. However, a boom in micromanage in India has also led to several problems. There is a call for more regulation on the market of micromanage. Out of control? Set out committee? Crisis of micromanage, need regulation. What happened in India? 3. Organization and Governance The majority of shares in Grahame Bank are held by borrowers as shareholders of the bank and a small percentage of shares held by the government (Gerundial and Baron, 2011).
Therefore, the bank is actually owned by those borrowers. Conversely, as a result of commercial financing, ASKS Micromanage is primarily dominated by trusts (Gerundial and Baron, 2011). It is supported by a number of international investors and has raised finance externally through public stock offering. Both banks have secured most of their repayments through a group-lending model that is pendent on peer pressures within the group (Viking Caulk, 2008; Gerundial and Baron, 2011).
As typical business models operating at the base of pyramid, they have reached a considerable number of clients in rural areas through making use of technology and local workforces and gained substantial supports from the local government and Nags. By using local knowledge, both banks have designed a set of products that maintains cost effectiveness and a delivery mechanism particularly for local customers (Viking Caulk, 2008;Had, 2010;Crandall and Baron, 2011). In terms of the financial activity, Grahame Bank as a self-supporting company merely lies on donations, deposits, partners’ supports and profits retained for reinvestment.
Conversely, ASKS Micromanage has rapidly expended its business across India through commercial financing. Viking Caulk (2008) claims that even though helping as many people as they desire due to lack of access to commercial funds, high costs of controlling millions of micro-transactions and an incompetence to build scalable operating systems. He goes further by arguing that commercial capital market is the only place to get the amount of money needed to help the poor (Viking Caulk, 2008). However, in reality, (Edward and Olsen, 2006)
