BUSINESS INNOVATION
Introduction
The proliferation of the internet and the spanning out of globalization has led to an increased business presence in industries and markets. The result has been the constant saturation of the said markets. Consequently, it has led organizations to develop newer ways through which they create newer value propositions for the business and its customers. Also consistent with these trends is the shift from a focus on the supply side of a business offering to customer demand dynamics. According to Teece & Pisano, companies can no longer depend on the accumulation of technological assets to hold a considerable competitive advantage in the market (1994, p.1). Organizations now have to adopt dynamic capabilities to make sure that they capture value wherever they can find it. The shift requires the consideration other elements such as the timely response to rapid and flexible product innovation, together with an adequate management capability, for example, to coordinate and utilize the internal and external competencies efficiently (Teece & Pisano, 1994). These capabilities rest on the potential of the resources, processes, and values in an organization, as they determine what it can or cannot do and the sorts of innovations the organization can embrace (Christensen & Overdorf, 2000). In light of this, a competitive advantage is now only made possible by the exploitation of both internal and external firm-specific capabilities, and also the development of new ones. The interaction of all these factors is what represents a firm’s innovative capability. The following article discusses a business innovation that relies on a different organizational element other than its technological aspects. The discussion employs the Bottom of the Pyramid theory by C. K. Prahalad.
Innovation and its Importance
According to a definition provided by Pervez et al. (2013, p.56), innovation involves the application of novel and creative solutions to a given field, which either helps to create new products or work towards modifying existing ones (Pervez et al., 2013). Innovation can be incorporated into different parts of a business process such as the business model, the service or product offered, or the delivery process. The authors Tidd et al. note that innovation is mostly driven by the ability to identify relationships between market characteristics, spot any market gaps, and take advantage of them by treating them as possible opportunities for value-creation to the business (2013, p.3). An important note for managers is that market gaps do not entirely mean that they should rethink the entire value proposition as being the need to open a new market, it could merely mean that need to the supplement already established or mature markets with new developments (Tidd et al., 2013).
Firms are commonly referred to as information processing systems whose impulse to carry on with a given activity is dictated by how well they collect and process information to deduce reasonable interpretations (Atuahene-Gima & Li, 2004). This information processing capability is a core component of the innovation paradigm as the process requires a series of strategic decision making on the part of the organization’s management. Tidd et al. claim that while innovations can very well compound the competitive advantage of a business and thus a factor in its growth; they also require that the firm be able to mobilize knowledge, technological skills, and experience (2013, p.5). These characteristics are what determines whether the innovation will be a success or a fail. The combined action of these organization features determines how the firm will create and deliver novel offerings.
The Bottom of the Pyramid Theory (BoP)
The selected theory for this research is the bottom of the pyramid theory. Pervez et al. state that the term ‘bottom of the pyramid,’ also known as the ‘base of the pyramid,’ is one that is mostly used to refer to the group on the lowest hierarchy of the economic chain. It represents people from the most deprived socio-economic groups (2013, p.55). A majority of the people who belong to this social stratum come from regions in South Asia, Eastern Europe, Latin America, and the Caribbean. According to most economists and researchers, the state and characteristics of the BoP markets add to the intrinsic de-motivation that expanding SMEs and large MNCs experience, inclining them away from investing in these areas. According to the authors Bharti, et al., such characteristics include the lowness of income and affordability, geographical dispersion\, high level of diversity, poor infrastructure, a heterogeneous culture, lack of education, and differing lifestyles with their urban counterparts (2014, p.172). Further, the fact that there is a dominance of unemployment, illiteracy, and poor health compounded the lack of BoP popularity with a majority of the investors looking to venture into the markets (Bharti et al., 2014).
However, the BoP theory tends to argue otherwise by depicting the value that the markets at the bottom of the pyramid hold for organizations looking to build on their profits. The most prominent author behind the founding and application of the theory is the professor C. K, Prahalad, from the University of Michigan. Professor Prahalad authored The Fortune at the Bottom of the Pyramid as noted by Tidd et al. (2005, p.239). In his book, he details the degree to which the BoP markets represent a market segment with unmet needs, and thus an opportunity for those willing to invest. However, he also affirms that this particular market does not resemble the traditional one, thus warrants a dynamic approach when setting base in such regions or looking to gain market entry. Consequently, companies have, over the years, used the BoP market as a place where they can search for weak signals regarding product or service delivery, prompting them to generate new developments in such areas (Tidd et al., 2005). One important thing to note about expansion into these areas is that most companies are not usually looking to create new technologies or innovations to meet the needs of this populations. Instead, they work on acquiring enough information relevant to the area and apply existing organizational concepts to these under-served markets. The difference of the BoP with other markets is that they are faced with different challenges and assume different characteristics which may not benefit the population based on the current product and service delivery processes.
Importance and Purpose of BoP Theory
The importance of applying the theory is captured in Prahalad’s depiction of the high prizes that accrue to companies that choose to take advantage of the high access, low-margin marketplace. One of them is the potential that these ‘emerging markets’ may spearhead growth into the mainstream markets in the form of market disruption (Tidd et al., 2005, p.237). For example, there is a likelihood that companies that choose to target the minority market at the bottom of the pyramid may end up pulling consumers from other socio-economic strata in the process, thus working towards the benefit of the organization in terms of the customer base and overall market share.
Bharti et al. also identify the BoP markets as having peculiar market characteristics such as the collective purchasing power and an immense pool of creativity. The BoP population is thought to represent over 2.5 billion people (considered to live below the $2.5 per day) according to the findings by Pervez et al. (2013, p.55). Hence, the combined buying power of the people in these markets can have a significant impact on the overall revenue received by the company despite the low margins upon entry.
The attractiveness of these markets also transcends the mere growth of the company and possible profits to the organizations that choose to venture into them. There is the potential for elevating millions of people out of poverty by providing sustainable products and services to people living within the BoP gap. This is corroborated by the fact that there is much diversity in this population, which presents vast opportunities for creativity and innovative development with regard to the nature of the service and product offerings (Bharti, 2014, p.172).
Strengths of the Theory
The strengths of the BoP theory of innovation lie within its ability to overrule some of the underlying assumptions made concerning the bottom of the pyramid market segment. Among them include the notion that the poor are not a viable market as they have no purchasing power, not brand-conscious, hard to reach, and that they are not interested in advanced technology. These are common misconceptions among marketers, and it is these fallacies that limit business penetrations to these markets. However, Bessant & Tidd (2011, p.65) and Tidd et al. (2005, p.241), have made it a point to clear these assumptions and depicting the real potential of the bottom of the pyramid markets.
People in the BoP markets pay premiums to have access to services and are thus capable of purchasing products and services. Companies that find themselves providing these offerings would benefit from finding ways through which they can deliver quality products at lower costs. There is an excellent sense of brand sensitivity and companies should work towards optimizing quality even as they reduce operational costs. The disruptive innovation potential to migrate to other markets could work against them if they fail to do so. As the number of people falling within the poverty threshold continues to grow, so does the market openness and access. Finally, the fact that most of the people in these markets have experiences with PCs, mobile devices, and the internet, shows the much interest in technology from this social group.
The Case of Walmart Supermarket
Walmart is one among the many large MNCs that have invested in emerging markets ever since its inception. In the beginning, it served the smaller towns in Middle America before their disruptive innovation gave the store its big break and expanded to the other regions both in the United States and abroad. The store has also made attempts to venture into emerging markets in other countries, mostly targeting the lower income families as their target audience. One such country is India. The next section discusses Walmart’s innovative strategy and their history of development for the giant retailer and possible reasons for international expansion into India.
Every-Day-Low-Price (EDLP) Policy
The choice of innovation for this research is the Every-Day-Low-Price policy for the Walmart Supermarket. Based on the research carried out by Singh et al. (2010, p.457) Walmart is one of the largest retailers in the United States. Its presence poses a significant threat to the other players in the supermarket industry. So far, Walmart has attained the status of the leading retail store in grocery sales. It is now known as a supercenter, which combines a full-line discount store and a full-line supermarket, all under one roof. Its stores carry merchandise, food, perishables, and a series of ancillary services as well. The supercenter has been able to survive fierce competition in the industry, primarily because of its much-celebrated Every-Day-Low-Price policy it offers its customers (Singh et al., 2010). The Every-Day-Low-Prices (EDLP) model was an innovative maneuver by Walmart Supermarket at its point of entry into the market back in 1962. It was both a market entry strategy and also a competitive advantage source point which has continued to pose a significant challenge to new market entrants and existing retailers in the industry over the years. Through the creative policy, Walmart has been able to standardize all its store prices for the longest time without having to run any sales or marketing promotions. The only condition for change is if there is a significant change to the operational costs of the store.
History of Walmart
The first Walmart was opened in Rogers, Arkansas by Sam Walton at a time when stores relied on periodic sales and promotions to maintain their competitiveness. The strategy was effective since it would motivate customers to hold making purchases until the day of the sale. Nevertheless, Walmart relied on the Every-Day-Low-Price strategy to lower the prices of its products (Gopalakrishna et al., 2016, p.100: Spicer & Lambdin, 2012, p.3). The intention here was to cut down the cost of purchase for the customers through the application of the economies of scale, computer technology, and the utilization of a hub-spoke distribution paradigm (Spicer & Lambdin, 2012). Eventually, the strategy rose Sam Walton to fame, together with driving the company to success. By 1967, the company already had 24 operation stores, and later had its first Initial Public offering in 1970. The headquarters were moved to Bentonville, Arkansas in the following year, with the EDLP philosophy entrenched into the core operations of the organization (Gopalakrishna et al., 2016).
Walmart by that time used to serve the smaller towns of Middle America with a variety of products at a relatively lower price than its competitors (Spicer & Lambdin, 2012). Walmart was then quick to become a retail giant. It was in the 80s that the supercenter concept and Sam’s Club warehouse chain began. By 1985, there were more than 800 stores, 104,000 associates, and sales worth $USD 8.4 billion. By 2005, Walmart U.S, International, and Sam’s Chain store had expanded their reach to serve 15 countries abroad, with more than 6,200 outlets, and 1.6 million associates. Spicer & Lambdin (2012, p.3) claim that approximately 84% of Americans had shopped at a Walmart at the time. By the year 2014, the annual revenues for the store were at $476.2 billion, which was a 1.6% increase from the previous year. Gopalakrishna et al. (2016, p.100) indicate that as much as the US operations accounted for 59% of the overall store sales, store sales were currently declining, recording low growth rates of 0.6%. In addition to this, the increased competition from other stores created the need for the store to invest in a weak economy to offset the current stagnation experienced in the United States.
Application of the Bottom of the Pyramid Theory for Walmart
Based on the analysis carried out by Pervez et al., (2013, p.56), for a business’s strategy must fulfill some certain attributes. They include the provision of a newness aspect, successful commercialization into the market, the emergence of a new product or improvement of a new one, and also span out the product, service, or process to the market or the target audience to fit an innovation. Walmart’s EDLP policy fits the criteria. First of all, it was a new concept in the market, one which was unmatched by other retailers that were already involved in the American market. Second, it was successfully commercialized and spearheaded the growth of the then small market entrant to the giant retailer it is today. Third, Walmart wanted to stand out from the competition by not waiting for a sale to make profits. Hence, it incentivized its consumers to make purchases for the lower prices they would have paid during periodical sales, at any time they chose to. They were able to standardize prices for all their stores, thus ensuring that consumers had easy access to quality products, at a much affordable price. They also had to make changes in the overall process to delivery such low prices for their products. The low margin profits they received from the sale of products were counter-balanced by the economies of scale they benefited from when purchasing products from suppliers.
The Indian market represents an emerging market because at the time Walmart was making its entry into the country, the economy was unevenly growing, despite the population growing exponentially. As many as 56% of the population in India is unable to meet their basic needs according to Gopalakrishna et al. (2016, p.102). The middle-class individuals form 25% of the population as at 2013. Although the demographics are forecasted to improve, it is quite evident that a majority of the people live within the poverty line. However, the organization was still able to own 15 stores in India. First of all, it could have leveraged the fact that a majority of the people were not new to the retail industry as a significant portion of the people already made purchases from smaller retail stores way before Walmart ventured into the market. Nevertheless, most of these purchases were on bargaining basis, with most of the stores operating on fixed price policies. In addition to this, goods once sold were not returnable, especially for perishable goods (Bhandari, 2017, p.210). It was evident that the people living at the bottom of the pyramid had buying power. The products offered nu Walmart were far superior, however than what was available in the market then.
As pointed earlier, Walmart was looking to expand to markets abroad since it needs to invest in a weak economy to offset the stagnation that it was experiencing in the United States. India was an excellent target since the organization already had an entry strategy, through the joint venture agreement made with the Bharti company, and the EDLP as a competitive advantage. One of the innovation solutions suggested by Tidd et al. (2005, p.240) and Bessant & Tidd (2011, p.66) for companies looking to invest in BoP markets is to think of creative ways to create their distribution networks. Walmart’s ticket into the heart of Indian retailing was through the joint venture with the well-known cell phone retailer Bharti Airtel. It was convenient on Walmart’s side as they did not have to build their brand image from scratch. Instead, they capitalized on the market following that Bharti already had in a bid to market their discounted offerings, using the EDLP model they had utilized back in the United States. The two companies later broke up in the year 2012, so that each could go their separate ways (Bhandari, 2017, p.214).
Based on the historical development Walmart back in Arkansas, the research can speculate that the Indian market may experience a similar case of a disruptive innovation situation where the products of the new market entrant attract customers of other existing retailers. So far, there is a 40% market of unorganized rural retail in India, which is the opportunity for Walmart. Nonetheless, it is not without its limitations based on Gopalakrishna et al. (2016, p.103:105). The older generations seem to be reluctant on shifting from their family-based stored to the more modern retailing at Walmart. It is compounded by other barriers to entry such as restrictive government legislation. Nevertheless, just as Christensen states in her research (1997, p.180), managers should focus on plans for learning rather than implementing incase innovations fail to kick off as expected. The past failure to effectively capture this BoP market should direct them in gathering critical information which they can use to make amendments to their overall strategy. Even so, economists speculate that the Indian economy has room for more growth. It means that the purchasing power of people in India; both the middle class and the BoP markets, might increase the number of consumers served. In any case, what had started out as a strategy to help serve the small towns of Middle America turned out to be a multinational company. The same can be possible for the 56% of the targeted population in India.
Conclusion
The research discusses business innovation using the bottom of the pyramid (BoP) theory as the basis of research into Walmart’s use of the Every-Day-Low-Price policy. Walmart’s expansion into the Indian country is essential to the analysis as it is one of the countries with a large number of people falling into the BoP market bracket. It goes ahead to highlight the historical developments made by the organization, which is followed by a comparative analysis on the current development and the future potential using the identified theory.
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