Botswana's Wealth at The Bottom of The Pyramid

I remember back in the days, whilst an MBA student at the University of Botswana writing an essay based on the work of a reknown marketer, C.K.Prahalad. The essay was entitled: The Market/ Wealth at Bottom of the Pyramid. This is a very accurate observation, especially in the context of developing countries.

If you take a country like Botswana, it's only a few who can be characterised as rich. The fallacy for a long time has been that it's only the rich who can afford to buy significant amount of merchandise; hence companies, usually, in doing their market surveys tend to concentrate on potential disposable incomes. But, you see there are very few rich people in developing countries, as earlier pointed out. On aggregate, therefore, consumption by the rich is negligible. Besides, we also learn in economics that rich people have a low marginal propensity to consume.

In a nutshell, to succeed in a developing country like Botswana, location is very important. Specifically, you ought to locate your business nearer to the lower income groups. These are many, and their marginal propensity for consumption is higher. Look at companies like Choppies Stores. I remember in 2004 there were a small outlet situated next to the Botswana Meat Commission in Lobatse. And, they had been trading on that location for several years before then. In fact, I bet, most of their revenues might have been coming from selling basic food items mealie-meal, sugar and samp to the BMC kitchen. But, once they moved out and started operating from underpriviledged sections of the community, their growth became phenomenal.

We can learn a lot from Choppies. First, is that the poor can bring a lot of business, because of numbers. Reciprocally, and secondly, the poor do not need aid. Aid tends to create dependency and, in fact, does not lead to economic growth. What is needed are opportunities. And, still on the Choppies story, I am sure the store does employ a lot of people from the communities in which it is operating.

Cost Analysis

For us to understand costs incurred by our businesses we should be able to classify them, otherwise it would be difficult to control them to within a reasonable level. There are, actually, several ways in which costs could be classified. For instance, we could classify costs according to their elements, behaviour or function.

In terms of elements, costs could be looked at in terms of whether they are material, labour or expenses. However, this classification does not end here. We need to go further and ascertain whether these are direct (prime costs) or indirect (overheads). If we are in manufacturing or service industries, it is relatively easier to deal with the direct costs since we can trace them to the product or service we have provided, otherwise known as cost units.

The overheads on the contrary, are hard to deal with. This is because overheads can not be directly linked with any cost unit. Under traditional costing systems, the solution to the overheads problem is to: Firstly, allocate or apportion them to cost centres e.g. production department, purchasing department, engineering department etc. After this initial allocation and apportionment, we then re-apportion all overheads to those cost centres, which we can categorise as production cost centres. The reason being that if there was no production then other departments would not have incurred any overheads.

When this re-apportionment is over, we then need to find a suitable basis for absorption. This basis could be labour hours, machine hours, a proportion of material costs, a proportion of labour costs, a proportion of prime costs etc. The choice depends on which basis management feels would provide more accuracy in costing products. After this, we would then come up with an absorption rate, for overheads recovery.

The other classification of costs could be based on behaviour. This is because costs have been found to be either variable, semi-variable or fixed; that is, if we try to be simplistic. This type of classification has several uses in Cost or Management Accounting. For example, we could do a Cost-Volume-Profit (CVP) analysis only if we know the behaviour of costs. The CVP analysis, by the way, is a technique we use to try to figure out how profit would change, say, if we change costs by a certain proportion etc.

And, we could also classify costs on the basis of whether  they are production, marketing, purchasing, distribution, financial etc. This type of classification, by function, is most common when we prepare Financial Accounts.