The dynamics of the base of the pyramid has emerged as an important concept in business today in Kenya, where through research it has come out clearly that SMEs make up the largest group of businesses, far outnumbering the more established large firms in the market. Every year in Kenya an astounding number of businesses are started up but very few make it to the break-even point. The break-even point is that point at which the company recovers the costs it incurred while starting up. Many factors cause this failure to reach, some ranging from poor business management, to harsh market conditions or simply wrong combination of these and other factors.
How big is this group in market?
To understand just how big this group at the base of the pyramid is; according to Kenya National Bureau of Statistics, the total businesses that have been registered and fit the characteristics of the group at the base of the pyramid stand at a massive 75% – 95% . This, taking into consideration the levels of under reporting of firms that have either closed or exited in the country altogether. This is by far a large comparison to the group at the top, which represents a meager 10% of total number of firms present at most.
Understanding this group
This group, that we have already stated is densely populated by micro, small, and medium enterprises. One thing about this group is they are very creative and their growth is primarily driven by innovative products. It is a widely known fact that innovation never happens at the top and what this simply means is that the large corporations are not innovative because it does not reflect their vision statements and core values. They are very rigid, but are known to flex their muscle engulfing budding innovative enterprises and incorporating them into their business models.
Large organizations apart from having economies of scale as their major vantage point, they have also developed and perfected their cash-flow of incomes, with business models that are tuned up to ensure sustainability. By having such an organizational structure, places the small enterprises at a disadvantage since there is no way they can compete with such massive organizations.
Do SMEs have a survival chance?
SMEs may not have the technology, human resource or distribution networks to go up against the big boys, but one thing they have is innovation that will lead them to explore unchartered waters that the large corporates consider “no-go-zones” because of the risk factor involved. The small industries have been pushed to the corner, and their survival means exploring these so called unchartered waters to see if they will strike gold.
There have been examples where a small company has rallied up against a large firm, and revolutionized that industry forcing the bigger players to change tacts to similar ones being used by the small players. A good example is the sachet Marketing Revolution. Sachets since their introduction have taken the market by storm, where products could now be packed in smaller and affordable quantities encouraging consumption and providing a choice for the lower income brackets. This is one innovation that humbled the large companies to a point where they were also forced to pack products smaller if they were hoping to retain their market dominance.
Why the big boys remain at the top
However innovative small businesses may get, the large companies have one thing that keeps them at the top generating huge cash-flows and profits for sustainability. One thing that separates them from the rest is knowledge about their markets and business environment. Taking from the above example, while it may seem very profitable to pack smaller sachets, most corporates shied away from making sachets their core business. This is so because it does not make economic sense to them: it is by selling larger packages that companies can reduce their processing and transaction costs, not the other way around. Companies usually reward consumers who buy larger, or economy size packages, through pricing these larger units at lower prices, because of the cost savings to be realized.
It is important for SMEs to learn from how the large organizations do business, and try to adopt such models which have proven to be successful. They need to also build on these models to suit their type of businesses, since there are vast differences between an SME and a larger corporation.
