A lot has been written, read, discussed and debated about how companies like CavinKare created an entire segment of consumers at the Bottom of the Pyramid (BoP), with innovations in product, packaging, promotion and pricing, especially in the FMCG sector. Several MNCs like Hindustan Unilever and established players tried to do the catching up game, but have not been very successful, or are forced to cater to the BoP segment at a loss simply to maintain a presence in the segment.
A paper by Angeli and Jaiswal (2013) analyses the reasons behind the not-so-successful attempts by the FMCG MNCs and interprets the findings based on institutional theory. MNCs are typically considered to have a competitive advantage by means of their presence and experience across various geographies. At the same time, MNCs also have to contend with their “foreignness” since quite often the corporate headquarters are situated in countries that are far from the markets where the game unfolds. MNCs are affected by “institutional dualism” as they try to gain internal as well as external legitimacy. Internal legitimacy refers to the company’s subunits conforming to the rules and regulations laid down by the parent company. External legitimacy refers to the responsibility of the company towards the society in which it operates.
Citing an example, the paper quotes a senior official of an MNC, stating that the MNC had to adhere to certain norms in manufacturing shampoos. While the domestic company used some cheap compounds for fragrances, to keep costs low, the MNC could not use the same since the corporate policy prohibited the use of those compounds for environmental reasons. As a consequence, the MNC could not come out with shampoos of the preferred fragrance and lost market share to the domestic company.
The paper is an engrossing and thought-provoking read. It highlights several interesting examples and focusses on the impact of the institutional paradigm on a company’s performance in the market, particularly the BoP segment. However, for this article we restrict to the internal legitimacy angle.
The dichotomy in this case is very clear. When a company’s subunit is adhering to its internal policies and being internally legitimate, it loses out on market share. The options that a marketer has in such situations are clear – lose market share or lose internal legitimacy.
Let us assume that the MNC’s subunit tries to breakaway with internal norms and, to continue with the cited example, starts using the banned compounds for achieving the required fragrances in the shampoos. It might so happen that the cheap compounds result in profitability and the subunit finds it tempting to use the same compound for shampoos meant for other segments. Soon, the compounds banned by the parent company, may be used across the shampoos category which could add a little to the profitability and also to market share.
It’s quite possible that media and social activism might one day bring out the fact the company is using harmful compounds in its products. Even as the company might then try to fight negative publicity, it would not have any logic to counter the fact. This would severely hurt its brand image, and might also give rise to suspicion about its brands in other categories. There is a strong possibility that consumers might switch to other brands and the company in question will lose market share. The loss in market share in segments where the company had a strong presence and image, would result in higher losses than a smaller dent in profitability that would arise by cross-subsidizing the brands in BoP segment.
Marketers are fully aware of the costs associated with attempts at short-term gains that might be detrimental in the long run. And it is precisely for resisting the gains-at-any-cost that institutions are put in place. While marketers ought to appreciate the limits imposed by institutional postures of internal and external legitimacy, evaluating a company purely in terms of profitability and market share might not always be right.
The writer of this article wishes to thank Prof. Anand Kumar Jaiswal, Professor in Marketing area at Indian Institute of Management, Ahmedabad for encouragement. The research paper referred to in this article:
Angeli, F., Jaiswal, A.K., Competitive Dynamics between MNCs and Domestic Companies at the Base of the Pyramid: An Institutional Perspective, Long Range Planning (2013), http://dx.doi.org/10.1016/j.lrp.2013.08.010