BoP Strategies for fighting the Resource Curse

The paradox of plenty has plagued a number of countries in Asia and Africa. Terra Remer, explains the logic behind this phenomena very succinctly

"Local communities near resource deposits often suffer adverse social and environmental consequences inflicted by extraction operations. Natural resource dependent countries are more likely to experience civil wars, as witnessed this past decade in Sudan, Sierra Leone, and Indonesia." - Terra Lawson-Remer

Many regions have been trapped in these downward spiral of events. However, the resource curse is not inevitable: countries with good governance, benefit significantly from natural resource wealth. In his book, Alexander Stimpfle discusses the lessons of policy around bottom of the pyramid microfinance from Botswana. One of his suggestions is to use the mobile phone networks as a means to alleviate financial access concerns. The development of mobile phone infrastructure is still a challenge in countries with the resource curse.

There are lessons so be learnt from the strategies employed by telecom industry in India-
The Indian telecom industry has a huge customer base of $800mn. With a population of 1.2bn and quarter of the people living at or below the poverty line suffering for basic needs of food, clothing and medical care, affording cell phones should be a tough option for these people. However, Indian telecomm companies have revolutionized the space with innovations in infrastructure, low-priced devices and smart offers. Today, the largest share of revenues for these telecomm companies comes from prepaid mobile recharges that India's poorer sections employ. The telecom companies in India operate at very low Average Revenue per User but benefit form the user base. With cellular penetration projected to be at 97% by 2014, the Indian telcos seem to be doing a good job. At large, the challenges in many parts of India are corruption in government and lack of transportation infrastructure. With similar problems in the countries effected by the paradox of plenty, the Bottom of the Pyramid strategies for building infrastructure seem to be the direction to head towards.

Alchemy – making something from nothing?

Painting of an alchemist at work - source: http://teleskopos.wordpress.com

For every action there is an equal and opposite reaction. Alchemists sought to make lead into gold but found that nothing comes for free. Companies cutting costs, cutting corners, and streamlining production to cater to poorer majorities sounds almost too good to be true. But is it? Is it as simple as settling with a sustainable profit margin rather than a bloated one that will make investors pleased? I can’t help but wonder in reading about businesses pursuing more social enterprises if they are leveraging facilities that house both the human rights violations enabling low production costs and the workers in the price bracket they aim to sell to. Companies like Adidas, which is trying to develop a shoe that will sell for a single Euro. Rumors of sweatshop-like conditions for Adidas production are currently unconfirmed, but plausible given the track record of large clothing companies like Nike. 

Perhaps I am doomed to be a skeptic, but I find myself waiting for the catch. But for all of my skepticism, I believe that if businesses can really pull this off ethically and develop successful models for developing products to serve the bottom of the pyramid the flood gates are going to open in a very positive way. Already more businesses are trying to develop products in this high-risk-high-reward social space. Perhaps then my skepticism is misplaced and this really is the beginning of a trend that will be profitable for clever businesses and help lift the lower classes to a better state of living. 

dilution of yogurt and brand image

Large public organizations have a fiduciary responsibility to do one thing: to please shareholders by increasing returns which are then reflected in its stock price.  Granted, some new social organizations use a triple bottom line analysis to decision making.  Yet these organizations are few and far between, and are not nearly as lucrative from an investment standpoint to wall street investors.  Referring to the WSJ article "Danone Expands Its Pantry To Woo the World's Poor," is it in Danone SA's best interest to try to introduce products in developing nations, where many cannot afford these luxury food items?

Danone is faced with the challenge of dilution of brand image with the tradeoff of increasing market share.  Sure, Danone could price its yogurt in Senegal at 10 cents a pouch with the Danone logo on it, but the company decided to brand the product otherwise.  One of the reasons why this is the case is the significant risk of brand dilution.  Danone faces the risk of cannibalization of sales of yogurt in nearby wealthier African countries, such as Nigeria, as well as in Europe.  By naming this product "Dolima," Danone not only made the name fitting to the local culture, the company was able to distance itself from the luxury Danone brand.  Had Danone just named the product "Danone Pouch," the company risks importers taking this product to Nigeria or France and reselling it at significant margins. This would then cannibalize the sales of its luxury yogurt in these countries.

Franck Riboud is well aware of this tradeoff as he states, "I think we will put the Danone name on this once the yogurt has taken off."  Will Riboud decide to introduce a luxury yogurt brand bearing the Danone name once an established market and supply chain is born? Time will only tell, but it might be beneficial to examine how a single product can be sold for different amount around the world. Meet the Big Mac Index.

This index prices Big Macs from McDonalds and standardizes it to USD. In India, a Big Mac will run you $1.62, while in Switzerland the same burger will costs $6.81, a 420% increase in price.  I am not advocating that Danone price a branded yogurt in accordance to this index, moreover I can understand why Danone elected to create multiple brands in divergent countries.

Danone's shareholders must be satisfied with its 14% increase over the last year, especially considering this occurred during the European market crisis. Perhaps diluting rebranded yogurt is the secret ingredient for sweet returns.

Pull The Rug Out (From Under Middlemen)

This is the story of how a corporation changed the dynamics of a whole industry in India by eliminating middlemen in order to serve the poor - the story of Jaipur Rugs.

Taking Jaipur Rugs as an example of this week's theme, I would like to present it as a classic case that managed to help the rural poor with high success while still being a corporation. The company, having been in business for more than 40 years now, has not only helped the poor but also relieved them from exploitation. Social solutions couldn't have been better. The below short film from Jaipur's own YouTube channel sums it all up more than succinctly:

What's interesting here is: before Jaipur organized the industry, the skilled carpet-makers were being paid peanuts for their hard and skilled labor which adorned the homes of wealthy consumers worldwide. And the reason? Middlemen. Jaipur simply eliminated this layer by reaching out directly to the labor layer, thereby enabling the weavers to earn what they truly deserve. By doing so, Jaipur has changed the lives of the entire weaver class who were previously impoverished. This change has given the weavers access to better food, shelter, and most importantly education. And Jaipur achieved all this not by investing millions for market research on new whos, new whats or new hows, but with the good intention of helping people.

The significance of Jaipur's business model is not just India-based. The company has operations in more than 30 countries, and is currently based out of Atlanta, Georgia. It is no surprise that a noble and successful business such as Jaipur has won numerous accolades, while the impact it created resonate more solidly - 800 villages and 9000 families for whom weaving has been part of their culture for centuries. The poor yet skilled rural mass of India couldn't ask for more.

The next time you walk into a room with a carpet, there are chances (however slim) that it came from Jaipur and that some family is getting a better standard of living. A 44-year-old company has shown success and profitability by helping the rural poor, and I certainly believe it is much easier in 2012, don't you?

Frugal Innovation - The impact and ripple effects

The process of innovation in the private sector and the innovations for social impact have evolved from two very different schools of thought. In the social realm, it is often that innovation is a product of collaboration between creative users and individuals. Spread of the internet is seen widely as causing the 'tipping point' in this movement. In a talk from 2005 by Charles Leadbeater,  he talks about how the 'Clunkers' became a mainstream product and redefined the bicycle industry. Though, substantial innovation still happens in the private organizations, the impact of the 'bottom-up' innovations is very interesting. Leadbeater talks about the flow of creative application of innovation going back up the pipeline. It is very important to see that this process of validation and active feedback has been important to make innovations have practical economic and social impact.

This direct impact of this 'amateur' innovation can be easily seen in various industries, increasingly in the ICT field with open development platforms available to individuals. A more subtle impact is the change in mindset  that the frugal amateur innovation is bringing around. It is important to decouple the frugality of innovations from the affluence vs. austerity debate. Constraints on cost at times can be seen as being  a blessing in disguise for innovators. For instance, the OLPC or the $60 tablet developed by the Government of India are not just important because they make the utility of laptops or iPads accessible or affordable to a larger population (much of which is in the developing world). Similarly, the Tata Nano is produced at 1/8th the price of a Smart Car and the Toyota Prius. Although, these products are no where the same, the frugal projects highlight something that we often tend to miss. If a similar product can be produced and sold sustainably at 1/8th the price as what is the generally accepted price, the producers need to see this as a big disruptive change and as challenging the pricepoints of industrially produced products. In the economic terms, in the long term this is beneficial to both the suppliers and us as consumers.

 Every year, a lot of money is spent on very expensive yachts  which compete in what are considered to be the ultimate competition of sailing design and technology like Volvo Ocean Race. The notion that the quality of innovation is proportional to the money being spent needs to be challenged. A shape-shifting design has come up from an open innovation project - Protei, a project for a sailing drone meant to clean the ocean of oil spills. The industry needs to step back and think for itself, if the money being spent in the R&D labs is able to garner the results that it seeks. Perhaps, investment in amateur and frugal projects is a cost-effective option for the corporations to diversify the risk of  R&D investments.

To Tap the Fortune of BoP: Decreasing Cost and What Else? & Some Thoughts on Social Innovation as a Career

To Tap the Fortune of BoP: Decreasing Cost and What Else? & Some Thoughts on Social Innovation as a Career

After reading all the materials in these two recent weeks, I got a strong sense that when social entrepreneurs and some multinational corporations head to serve the needs of people at the BoP, decreasing cost of the products and services is a determining factor, sometimes it is between “life” and “death”.

One Laptop Per Child (OLPC) project failed because of cost overrun in the mass production phase. Tata’s cheapest can are stilled being picked that they are still beyond the financial outreach of millions of people.

In other words, Does the single act of decreasing cost make an enterprise “social innovative “or can the act of bringing down the cost by a MNC (like Tata) be considered as serving the need? What else should be taken into consideration besides decreasing the cost?

Given my business background, I try to analyze this question using the marketing theories- 4P

1.       Product: consumers’ need.

What they want? What their needs? Are the needs you perceive the real needs?? (refer to the former post called “Get Out Of Your Own Skin”) As for now, social innovation companies focus on the basic human needs, but I can imagine that in the future more needs will be satisfied. (Maslow's hierarchy of needs applies)

2.       Price : 

      This is where the cost comes in. no doubt, a good product with high price would not make any sense to BoP people. Companies can decrease product price by:

•        New Technology: obviously, this is the major things to do.
•      Strategic Cash flow Alteration: Micropacks, sachets and even Microfinance are all approaches      to cater to the people ’s cash flow realities.
•      Sharing!: tele lady in India… sometimes you do not need to own one, but share one with your group.

3.       Placement: the distribution methods.

I find this one interesting too. Shaky distribution networks can plague some great products. Actually Innovative distribution network can bring more benefit to the community, for instance, Jobs!

e.g.: Danone Yogurts are sold by “local women who would peddle it door to door on commission”  

4.       Promotion

Not quite sure about this point. But I am figuring that although there are needs and products, sometimes enterprises need to “Educate the market and the consumers” to let them believe that this product can satisfy their needs!

However, there might be some Ethical Problems, because in order to sell the products, company tend to overestimate and exaggerate the effects of a certain product. (e.g. I doubt that if the Danone yogurts is that effective in providing vitamin and protein…)

Some Thoughts on Social Innovation as a Career

I am excited about the fact that an increasing number of young talents start to engage in social innovation. How good is that! They can make more income, have a great sense of self-accomplishment (not only because they can generate thousands of millions of profit for the company, but more importantly they are helping bring a better world, making an impact! Something, I assume, more meaningful).

I am not sure the cases in other countries, but in China the “most popular” thing to learn is Finance, simply because it something that you can have lucrative financial gains and perceived “high social status”. Go and ask the best and brightest students in China, seven of ten will tell you that they want to go the Investment Banks…. I do not want to make any judgment on this. But it appears to me as a “loss” to a certain degree. Some of the brightest minds head to develop derivatives, swaps and so many other super complex financial products (weapons of mass destructions!!), that literally collapse the economy at a certain time.

What if they come to do some things in social innovations? They can have jobs, earn money, have very decent life, be an entrepreneur and make social impact! I am aware this sounds too idealistic or even immature… but I am picturing it really seriously… 

For-profit companies saving the world?

Going back to the first lecture in Foundations in Social Innovation and Enterprise, Professor Tim Zak mentioned at the end of class that for-profit companies are the philanthropists of the future. I wasn’t sold on that idea especially because I had the assumption that non-profit organizations were the only ones helping out the less fortunate by providing much-needed social services and programs. Now after a few more lectures and articles, I see his point. Crucible 1: The Great Rebalancing from the article What Happens Next? Five crucibles of innovation that will shape the coming decade, talks about how some companies are marketing products to emerging economies. “Rebalancing” refers to adjusting the traditional exchange of developed country companies to its own consumers into including consumers from emerging economies¹. After doing a little of my own research on this “rebalancing,” I came across a great article from Wired titled Want to Help Developing Countries? Sell them good stuff cheap. This article discusses some of the practical reasons why big “western” companies are taking notice of emerging markets by pointing out the obvious².

Wired mentions three facts: helping people is a good thing, for-profit companies are seeking new ways to make money, and many developing countries have huge populations. Another fact, selling an inexpensive product to lots of customers often produces more profit than selling an expensive product to fewer customers. All of this together makes it a no-brainer for companies to start marketing to developing countries. The key to being successful is making quality products for low prices and focusing on products that help in everyday activities. Things that we take for granted such as light, clean water, education, etc., are the subject areas where innovative products are wanted and needed. The best part of great innovations is that it helps the poor move up the economic ladder. Inventions such as the Tata Group’s Nano automobile and Global Easy Water Product’s efficient irrigation drip both help people make a living by providing inexpensive personal transportation and cheap watering capabilities for farmers. Last fact, people are willing to spend money on something that is going to make them more money².

Here’s a thought, instead of foundations only making grants to non-profits, maybe they should consider investing money to start-up, for-profit companies designed to invent, make, and distribute innovative products in developing countries. Start-up companies may be more desirable for this venture because they aren’t accustomed to catering to first-world tastes. Another benefit is that for-profit companies will feel the market pressure and be further pushed to succeed and create sustainability. This idea will be further explored in my next post.

Bibliography:

1.) “What Happens Next? Five crucibles of innovation that will shape the coming decade” Global Forces. McKinsley Global Institute.

2.)"Want to Help Developing Countries? Sell Them Good Stuff - Cheap." Wired.com. Conde Nast Digital, 27 Sept. 2010. Web. 20 Sept. 2012. <http://www.wired.com/magazine/2010/09/st_essay_pennies/>

More Sales Leading To A Better Environment...

The concurrent theme in the articles of this week aim to highlight the growing move of multinational companies that rely on a large consumer base, towards a more rural market or rather what has been called the “base of the pyramid”. As mentioned in my blog last week I highlighted this exact same approach of Unilever Pakistan Ltd to help develop its rural market by releasing smaller, more affordable, units of its main brands. The innovative approach was very successful with Unilever and led to it increasing its sales by 15% in the 1^st Quarter the innovations were introduced. By targeting the previously neglected rural sector of Pakistan Unilever aims to double its business by the year 2015 as it comprises nearly 65% of Pakistan’s population of 180 million people.

This week however I aim to highlight how this development is occurring at a reduced social impact which makes it truly revolutionary. Yes, so Unilever’s agenda is to double its sales while reducing its global environmental footprint by half! Normally increased production results in more production resulting in more waste of resources both natural and otherwise. This time around though Unilever and other multinational FMCG’s seem to be cognizant of this issue and are taking aims to rectify the environmental problems associated with previous booms in production. One reason for this is also that according to research conducted by Unilever (while I was employed there) an average person is more inclined to purchase a brand that has a history of being environmentally friendly or “socially conscious”. How exactly can an FMCG reduce its global environmental footprint? The rationale is that “Small Actions lead to Big Changes”. Let us look at how this theme could be applied to a daily aspect of our lives; doing laundry.  Unilever calculated that a significant part of its water footprint came from washing clothes by hand in rural countries, nearly 38% in fact. They went about fixing this by (a) fixing their supply chain (b) introduction of new, more environmental friendly products. For (a) they drastically reduced water use in the production process (up to 17% per ton of production) and this is also visible in their production partnerships such as of tea based products where Unilever partnered with its tea providing farmers to help innovate and introduce new water saving agricultural processes. In (b) though the real innovation comes where they introduced products like Comfort One Rinse where only one bucket of water is necessary to do an entire households clothing. This product has reached 12.5 million households and if all Unilever consumers in Asia used One Rinse we are looking at possibly saving on 500 Billion Liters of water!

This and other sustainable plans of production can be studied at http://www.unilever.pk/sustainable-living/uslp/.  There is more on how the company is dealing with waste, greenhouse gases and better livelihoods. My question for the week is one of introspection. How many of us in class would be influenced to buy a product simply because it was environmentally friendly? Would that label make any change in the average consumer according to you? Obviously companies the world over think so but it would be interesting to see how the microcosm that is our class reflects on this as there are obviously individuals from multiple nationalities and cultures and it would be interesting how this stance resonates with them.

Innovations at the base of the pyramid: a new approach?

Anderson and Markides article titled “Strategic Innovation at the base of the pyramid” explores how in developing countries, the lower income strata is a large untapped market and can be pulled in to be a viable consumer segment. The approach to target this segment is different from targeting the upper income levels- the poor will only purchase products if those products are adapted to suit their needs. These needs include the products being low priced in order to fit their tight budgets; the products being suitably adapted to the environment, their habits and their cultural sensibilities; the product being readily available via supply chain networks and market penetration; and generating awareness in the community regarding the presence and need of the product.

The portable Ultrasound machine shown in last class is one of the key examples of this approach. In order to tap into the underserved health market of the poor, the small sized machine was priced lower and was made to be transported in far flung areas on foot, where no supply chain or distribution system exists to service the people. This ties in neatly with the example of Avon cosmetics cited by the authors, whereby women in India went door to door to sell cosmetics and personal care products.

Just the concept of innovating at the Base of the Pyramid is refreshing. We tend to consider innovation to be taking place in MNCs and big corporations (and almost use it synonymously to describe Apple, Google, Lufthansa and the likes). However, there are various examples of strategic innovation that are enabling access of capital and goods to the poor. We have already read about the M-Pesa in Kenya and how it brought banking services to the unbanked poor. Another mechanism that has been existence since a very long time is that of  informal lending- such as ROSCAs (Rotating Savings and Credit Association) and ASCRAs (Accumulating Savings and Credit Association). These means have been highly successful in countries like Cameroon, Nigeria, India, Pakistan etc. Groups of people (mostly women) put an affordable amount of money in a ‘pot’ every month and by lottery give the total amount to one of the pitchers. This enables the poor to save up for large expenses. This is not to say that these informal mechanisms don’t run into problems of default, fraud or the inability of a pitcher to pay. But these societies are bound by relationships and trust can be one of utmost importance when dealing with these societies.

Financial institutions should innovate more ways of providing the poor with credit and in doing so, should adhere to the four principles of Anderson and Markides. However, belonging from a developing country myself, I would add a fifth principle to the argument- that of Trust. To launch a product in such a market, local collaboration, communication and trust are integral components for success. Given the current landscape of the Muslim developing world, however, and the growing anti-West sentiment, the question arises that how can MNCs  and foreign banks improve their image and establish trust in order to tap into the market?

Fiduciary Duty, Benefits Corporations and Patagonia

A key challenge to a for-profit centered approach to social innovation is the fiduciary obligation of a public company’s executives.  In the articles of incorporation, a company’s executives are bound to act in the financial interest of its shareholders.  Thus a corporate social responsibility policy can expose a firm to litigation should its shareholders come to believe that such a policy significantly shrinks the bottom line.  I’m not aware of may such lawsuits having actually occurred, but the possibility certainly looms large as an incentive for executives to place a low priority on CSR.  The argument that public corporation’s shouldn’t invest in CSR is compelling.  As a public company, they are stewards of the public’s money.  The public has a right to expect that the firms will maximize their financial return in accordance with the law.  

In 2012, the state of California became the 7^th state to create the category of “benefit corporations.”  B Corps broaden executives’ fiduciary duty to include the “consideration of workers, community and the environment.”  The new designation shields executives from the personal and corporate risk of pursuing socially impactful policies.  LA Times on California Benefits Corporations

The most prominent company to take advantage of the B Corp designation is Patagonia.  In additional to leading the apparel industry towards defining environmental sustainability benchmarks for production, Patagonia currently donates 1% of its revenue to grass-roots environmental advocacy groups.  Presently, the company is wholly owned by its charismatic founder Yvon Chouinard.  Since he is the sole shareholder, he is free to pursue any kind of policies.  (In other examples of potential bottom-line threatening policies Patagonia currently operates as a debt-free company, has run marketing campaigns encouraging its customers to buy less of its product and provides day-care services to its employees.)  As Chouinard progresses further into his seventies, a succession plan could potentially threaten his environmental, pro-worker and simply quirky business policies.  B Corp status embeds the legitimacy of his values and policies into the most basic framework of the company.  WSJ on Patagonia and Chouinard

In the context of the legal cannon, B Corps are newborn babies.  To my knowledge, the implications of the law have yet to be defined through litigation and case law.  Despite the platitudes of both political parties, judges do in fact shape the law – it’s their job.  I will be interested to see how the B Corp status holds up through the interpretive process of the judiciary.

At least two articles here that take a skeptical look at B Corps.

Wake Fores Law Review Article on Benefit Corporations 

Harvard Law Blog Post on B Corps

Working in non-profitable markets: The 50/50 Model

In this post I would like to draw a link to the article: A Social Solution without going non-profit. The article mentions a noteworthy distinction between profitable and non-profitable markets. I embrace the idea that if there is a possibility to transform a social need into a profitable business, without compromising the need, than this should be done. But in this post, I would like to focus on the non-profitable needs, such as humanitarian aid, child education and other services that cannot be paid for by individuals: either because the service is indivisable or because those in need are not the ones that have money for that service.

With that focus in your mind, I would like to introduce a new idea, a new concept for NGOs providing non-profitable needs: the Fifty-Fifty Model.
The idea in brief: Fifty percent of the time is spend in private business market with the main concern of making money. The other fifty percent is spend pro bono for the NGO. This means it extends the 'regular' corporate responsibility.
The advantage: Having the smartest people on the earth working on the biggest problems and paying for the expenses of the entire NGO.
How is this possible? Capability synergies and less luxury.

Some background on the idea:
The last months, I have been talking with a lot of people about their future jobs. What are they going to do? What do they like? Although they all had very different ideas, I noticed two similarities: They want to work hard, in an ambitious, professional environment. But just making money somehow feels.. empty..

Now think about this: suppose we could find a group of one hundred ambitious, smart, idealistic people who share the ideas stated above. If they could work in regular jobs for half of their time, charging $100 per hour, then they would generate around 75000 euros a year (if they also spend half of their time looking for work, which is common in consultancy for example). The other half of their time (how about 5 months a year) they could do the same analytical jobs, but this time for non-profitable problems all across the world. And I don't mean taking 5 months of and start digging wells. I mean doing the same intellectual work, but this time for a different, social cause.

One might ask: and how do they generate the same income as other hardworking people then? Well, they don't. The idea is that happiness does not reside in consumer goods. So these people would get paid less than their counterparts in purely money driven businesses. Maybe a smaller car instead of a new audi. Or a cheaper hotel instead of the Ritz at prime locations. This makes it possible for people to work on problems they really like, in a setting they like, and doing it right away, instead of first making a lot of money and then just giving it back.
The second advantage of this idea is that the largest part of our costs come from a couple of things: salaries, office space and IT equipment. If you have to have that anyway for your private business, that means that it could be basically free for the part of the time you use it for NGO purposes.

Now I hope this was at least a little thought-provoking. So ask yourself:
1. Do you believe that this model could work? What are the Pros and Cons?
2. Is it any different from what there is out there right now?
3. Which private markets could be fit for this model? Which markets would not? Why?
4. Would you be willing to do this? What would be your bottom line of less luxury?

PS: Here is a link to a TED video, which I think is based on a similar idea but then focused on architecture. Do you agree with his line of thought and could be applied to work in the same way?