University of Twente Student Theses

Value creating business strategies at the base of the pyramid: assessing a customer perceived value approach via value chain activities within the Brazilian food processing industry to suit low-income consumer preferences

Krause, Daniel (2012) Value creating business strategies at the base of the pyramid: assessing a customer perceived value approach via value chain activities within the Brazilian food processing industry to suit low-income consumer preferences.

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Abstract:	Recently the world’s population exceeded the seven billion people mark. Most of them, around 80%, live in developing or emerging countries rather than in the rich markets of the world. These statistics have not been left unnoticed and interfere today in the strategies of companies around the world. As markets in the developed world are largely saturated, the focus turns to poor countries where companies see the opportunity to also sell their products and generate growth and profit on the long run. Their business scope within emerging economies, however, was until now often limited to high income customers, where similar business models and products to those from developed markets could be applied. The reason for this cautious approach is due to the fact that companies, especially from well developed countries, lack essential knowledge about the poorer mass markets in developing and emerging countries, the so called “Base of the Pyramid” (BoP) markets. These markets are the ones where most of the population resides and that are characterized by a totally different competitive and institutional environment compared to the more developed markets. According to the Base of the Pyramid proposition the population’s accumulated spending power radiates attractiveness and entices companies from all kind of industries and businesses. However, business investments at BoP markets do not naturally turn into overwhelming success stories. Still, too often western business models are applied and fail in BoP markets because they do not correspond to the market conditions and lack to consider low-income consumer values enough. Some companies cannot and others will not afford to miss out this market opportunity and have to innovate their strategic approaches. Successful ventures at the BoP are those that maximize the functionality of their products from the low-income consumer’s perspective. In other words, companies need to meet consumer expectations and create and deliver value through their products’ value propositions. The integration of BoP consumer intelligence into business and transforming it into viable strategies is therefore a major concern for the private sector. Knowing that, however, is certainly not sufficient and does not supply insights on how this is done and the way it impacts and determines corporate strategies at the BoP. Though the importance of understanding low-income consumer expectations and values, as well as being responsive to them, is widely discussed among BoP literature, it lacks on providing further and more detailed knowledge for practical application. This scientific gap has been worth to be investigated in order to contribute to reduce the existing lack of knowledge. Considering widespread scientific belief, a distinct appreciation of products and services occurs at BoP markets, creating an urgent demand for providing findings on corporate strategies that create a product value proposition in the light of the buyer’s perception VI of product value within the BoP market segment. So, the study at hand investigated company strategies by focussing on their value chain activities as the primary sources of value creation. We took a look at their strategic orientation and the options they provide to correspond to the specific influences of consumer characteristics and preferences on the customer perceived value. This study acknowledges the interest of recent scientific discussions in Base of the Pyramid research regarding corporate strategies. The study’s approach towards this interesting research field is to determine strategic positions of value creation by analysing primary value chain activities of a variety of companies. These strategic positions, for instance quality or distribution, are the outcome of and are based on the performance of the entire primary value chain activities and are part of successful business conduct at the BoP, as they have been found to contribute to the satisfaction of consumer expectations, for instance through quality enhancement or widely dispersed distribution. The value creating potential of the strategies is tested through the Brazil-specific customer perceived value (CPV) model. It conceptualizes the consumer’s value perception as an evaluation between perceived quality, perceived risk and perceived sacrifice, whereas these perception indicators are influenced by the consumer’s assessment of extrinsic and intrinsic cues, such as brand, store format or price, among others. Further, the model receives its country-specific touch through the integration of the four parameters that represent the Brazilian low-income consumer values as a whole (e.g. dignity and low self-esteem, social inclusiveness, personal relationship, abundance), through which the cues are evaluated accordingly. As the CPV model encompasses these consumer preferences and aspirations of the Brazilian BoP market, the determined strategic positions contribute to the creation of a customer value proposition that satisfies the consumer by making sure that the consumer aspirations are addressed by the strategic positions, and as such deliver value to the consumer. Hence, this study connects the very particular low-income consumer preferences and aspirations in Brazil with corporate strategies arising from the performance of primary value chain activities at the Brazilian BoP. Through this connection the study discloses focal points for the design of the strategic positions at the Brazilian BoP, which determine the value creating potential of the strategies and that are essential for sustainable business engagement at the Brazilian BoP. Eventually the study presents ideas and theories about the strategic positions, such as that they have to create strong bonds and continuous contact with the low-income consumer. Those theories have scientific and practical implications, as pointing out the strategic positions that create value for the consumers at the BoP adds knowledge to the research area and allows companies to use this knowledge for their BoP business model design. VII For reasons of clarity this research referred to only one country, which is Brazil. Brazil’s Base of the Pyramid market has an estimated share of 84% of its entire population with an estimated annual spending of US$ 316 billion. By investigating a stratified sample of companies (n=7) from Brazil’s food processing industry this study was taking into account former research that have shown that food consumption constitutes a major challenge for low-income consumers and that half of the spending among BoP consumers is related to food products. To fully be able to understand the dynamics involved within the different concepts of value and the BoP market, which this study is referring to, the most relevant research literature has been considered. The general assumptions of the Base of the Pyramid concept, such as the global market size, the definition by income and the recent developments of the concept towards mutual value creation as part of a cooperation between firms and consumers are explained in detail, followed by a thorough rendition of the Brazilian BoP market in terms of size, socio-economic and geographic characteristics, as well as the determinants (e.g. education, culture etc.) for the current consumer values of the encompassing population. Finally, we were able to stress the four salient parameters that characterise the Brazilian low-income consumer preferences and aspirations they value (e.g. dignity and low self-esteem; personal relationship; social inclusiveness; abundance). The abstract concept of value was approached via its most common scientific definitions. These definitions assumed that consumers select the alternative that maximizes value as a relationship between benefits and costs. Working along the value concept showed that consumers’ subjective perceptions, rather than rationality, determine the consumer behaviour and purchasing decisions. Based on this, a conceptual model of customer perceived value was derived, depicting extrinsic and intrinsic cues (e.g. brand, store format, time/energy/efforts, price, physical product attributes), which are evaluated by the consumer on the basis of the above mentioned four consumer characteristics and that influence the perception of costs and benefits in terms of quality, risk and sacrifices. Hence, the model represents a tool to test the theories regarding the strategic approaches of customer value creation that come up with the analysis of the interviews via the value chain framework. Testing was done by stressing the impacts of strategies on the cues, for instance advertising strategies directly impact the brand, then using the four parameters of Brazilian low-income consumer preferences and aspirations (e.g. dignity and low self-esteem; personal relationship; social inclusiveness; abundance) to evaluate the cues in the light of these impacts and finally stressing the modes of action on the perception indicators (e.g. quality, risk, sacrifice) as the consequence of the evaluation. Eventually, a statement about the contribution to the consumers’ overall value perception, and thus, the value creating potential at the Brazilian Base of the Pyramid could be made for each strategy. VIII Furthermore, a qualitative research approach was used to cope with the study’s explorative nature. Semi-structured interviews with company executives have been conducted to gather very detailed information regarding company strategies along their value chain activities. This approach ensured an open conversation and allowed developing its own dynamic, where new topics, questions and insights came up throughout the interview that went well beyond the predefined questions. For that purpose a questionnaire with 5 subdivided parts and a total of 23 predetermined questions has been elaborated, based on the concepts of the BoP market and the value chain framework. Questions dealt with the current situation of the firm at the Brazilian BoP market, as well as with processes and strategies along the firm’s primary value chain activities, like sourcing, production, distribution, advertising or services. All of them supposed to add value to the final product. In a next step, the gathered data has been processed. Data processing started with the transcription of the digitally recorded interviews. This helped to get an overview about key words, phrases and similarities within the collected data. Afterwards the transcribed data was being analysed via the coding process. From the transcription 330 different information packages have been derived, which were categorized incident by incident with 22 different codes. Coding allowed breaking down the interviews and labelling different meanings. This conceptualising process was somehow interpretative, which has been essential for theory building. In the next sequence, the coded data has been analysed through the framework of primary value chain activities and simultaneously tested through the conceptualized customer perceived value model by stressing the impacts on the extrinsic and intrinsic cues, their evaluation and the modes of action towards the perceived value. Based on the data analysis and the depiction of the strategies’ impacts according to the Brazil-specific customer perceived value model several strategic positions of the food processing companies could be summarized, which have been found to contribute positively to the perception indicators and enhanced the overall customer’s value perception, since those positions appealed to his most salient aspirations and urges. These strategic positions have been found to compose the value proposition for the Brazilian Base of the Pyramid, and as such, are necessary strategic conditions to cope with low-income consumer satisfaction. The findings delineated the following strategic positions of high relevance:  Quality: enhancing product quality and quality image by applying quality controls, remaining within area of expertise, maintaining core operational processes, focusing marketing efforts on brand image, creating strong bonds between consumers and brand IX  Distribution: ensuring product availability at the BoP by focusing on highly dispersed small and medium sized stores, facilitating cost reductions as part of decentralization  Advertising and Communication: simplicity of messages and adaption to regional preferences that build proximity or personal connection with the product, enhancing brand/product differentiation  Price and Costs: reducing costs where possible to allow pricing that enables the consumer to start consumption by leveraging economies of scale, reducing packaging sizes, ensuring efficiency  Localization: geographical and product related local embedding that culminates in consumer trust and identification with brand/product by adapting to regional preferences on several levels  Service: simple service offers that ensure steady contact and proximity to the consumer According to the findings, companies achieve consumer satisfaction as they attend the different preferences and aspirations of the Brazilian low-income consumer based on these six positions that arise from the performance of primary value chain activities and the strategic approaches they encompass. They stimulate the totality of cues leading to a positive overall product value perception by the low-income consumer, which means creating value for him. These constantly recurring strategic positions of the companies, both individually as well as in their entirety, are designed specifically to create conditions of strong bonds and continuous consumer contact, decentralization and localization, affordability and quality. According to our study the found strategic positions recognise and respond most to the existing consumer expectations and aspirations. This leads us to conclude that the creation of these conditions (e.g. strong bonds and continuous consumer contact, decentralization and localization, affordability and quality) among strategies of primary value chain activities is a necessary premise for the generation of a value proposition that underpins a favourable value perception, as it matches with the consumer’s expectations and enhances consumer satisfaction. This research has studied corporate strategies and their value creating potential of companies at the Base of the Pyramid market, a rather new scientific research area in emerging market and strategy research. However, this study also inherits some restrictions due to its explorative nature and its scope. For instance, the four salient parameters that characterise the Brazilian low-income consumer values have been used to evaluate the cues of the customer perceived value model. However, it is worth to say that this study was not investigating, if and to what extent these parameters are used as an evaluation mechanism for the cues by the Brazilian low-income consumers, and thus, for corporate strategies of primary value chain activities. Also, this study does not provide reasons how the evaluation mechanisms work or whether they rely on X different weighting, but rather logically depicts their modes of action. These assumptions should be further investigated in future research. Furthermore, the proposed customer perceived value model has been quite specific to the Brazilian BoP market and could be adapted to a more generalist approach by integrating general overall valid BoP consumer attributes. This way the model could be conceptualized for the BoP market concept in general, allowing for an analysis of the general BoP customer perceived value and strategies that are likely to cope with them.
Item Type:	Essay (Master)
Faculty:	BMS: Behavioural, Management and Social Sciences
Subject:	85 business administration, organizational science
Programme:	Business Administration MSc (60644)
Link to this item:	https://purl.utwente.nl/essays/62768
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