an introduction to inclusive business models
TRANSCRIPT
Where Price Matters Most and Quality is Needed MostHow to win in developing economies
Nordic Growth Through Innovation Conference
April 2014
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Emerging market populations need quality more than the rest of us
• Products and services have to work within unreliable support structures(intermittent water and electricity)
• Maintenance capabilities are not easily available
• The environment can be harsh (dusty, wet, large temperature changes)
• Poorer populations cannot afford to buy twice!
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Over 1 billion people globally have no or highly limited access to electricity and rely on hazardous and polluting sources such as kerosene and candles for lighting
What is needed
• Local sources of energy (renewable)
• High levels of energy efficiency
• Ability to work in dusty and/or highmoisture environments
• Low levels of maintenance or ability tobe maintained locally
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What is needed
• Local sources of energy (renewable)
• High levels of energy efficiency
• Ability to work in dusty and/or highmoisture environments
• Low levels of maintenance or ability tobe maintained locally
Globally, 780 million people lack access to safe drinking water and ~2.1 billion people lack access to clean sanitation facilities
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India ranked 73rd out of 74 countries in PISA’s evaluation of elementary education levels globally. In India, only 10% of children complete secondary school and go on to college
What is needed
• Leveraging technology to breakcost/quality compromise
• Leapfrog curriculums
• Bridge digital divide
• Deliver education in often harsh andremote environments
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What is an inclusive business?
Poor quality infrastructure is leading to significant on-going repair costs, losses in efficiency and poor lifestyle and health outcomes
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~ 700 million people in rural China still burn solid fuels for cooking and heating, contributing to poor air quality and increased health risks
What is needed
• Development of higher quality fuels
• Reliable supply chain of high qualityfuels
• More efficient cookstoves tailored topeople’s tastes
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Challenge is…can these markets afford quality?Increasingly so…but still a long way to go
1 Figures adjusted for cost of living variations across countries; only wage earners are counted; avg world salary estimated for 72 countries
Source: ILO; Dalberg research
GROWTH IN SPENDING ON CONSUMER DURABLES
CAGR
India(2003-2009)
10%
USA(1999-2009)
3.8%
AVERAGE MONTHLY SALARY ACROSS COUNTRIES1
USD (PPP), 2012
3,263
3,065
2,903
2,522
778
609
295
279Philippines
Korea
1,480
India
Mexcio
UK
Japan
USA
Brazil
EMERGING
DEVELOPED
World average
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We have observed several successful strategies for overcoming the cost/quality compromise
• Put your money where your mouth is
• Quality without the frills
• Localize the supply chain/Partner
• Turn products into services
For Discussion
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Potential implications for the Nordics
• Co-ordinated financing platforms for selling products into emerging markets (potential to also leverage development finance for certain categories of funds)
• Significant design talent…time to apply it towards a more challenging consumer environment
• Develop trade bodies with a greater capacity to develop at vet local partnerships (currently a significant pain point and area of risk)
• Develop internal buy-in….this stuff takes time
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The benefits of quality are only observed over time long term financing demonstrates a self-belief in quality
WHAT IS IT?
• Export banks or DFIs providelong-term loans to allowemerging market institutions toafford a higher quality product
• Loan payments are sustainedbased on observed ongoingperformance (sign of quality)
WHY IS IT NEEDED?
• Buyers need some guarantee ofquality so prefer performancebased financing
• Depending on the customer,their own access to finance islimited
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Being inclusive means working with approximately 57% (~3.9B people) of the world’s population that otherwise remains poorly engaged
35%
65%
PRESENCE OF BASE OF THE PYRAMID POPULATIONS1 IN THE WORLD IN 2012 (ESTIMATES) Population in millions; Top-two countries in each region; Poverty line in 2005 PPP
Source: World Bank PovCalNet analysis tool accessed on 11 February, 2013; Dalberg research
EAST ASIA AND PACIFIC (BOP: 1251M)
Non - BoPBoP
88%
12%
EUROPE AND CENTRAL ASIA (BOP: 54M)
35%
65%
MIDDLE EAST AND N.AFRICA (BOP: 175M)
10%
90%
SUB-SAHARAN AFRICA (BOP: 778M)
68%
32%
LATIN AMERICA AND THE CARIBBEAN (BOP: 196M)
6%
94%
SOUTH ASIA (BOP: 1544M)
The Base of the Pyramid populations identified here earn USD 4/day or less
Turkey: 13mRussia: 8m
China: 831mIndonesia: 217m
India: 1100mPakistan: 165m
Nigeria: 159mEthiopia: 80m
Brazil: 56mMexico: 29m
Egypt: 59mIraq: 22.7m
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How do you make businesses inclusive?
Source: Icons from www.thenounproject.com
MANUFACTURING
/ PRODUCTIONPROCUREMENT CONSUMERSLOGISTICS AND DISTRIBUTION
MARKETING / AWARENESS AFTER SALES
• Can we buy directly from local BoP suppliers?
• Can we help increase vendor capacity by investing in training?
• Can we provide/facilitate access to finance to vendors?
• Are there non-traditional actors that can help in raising awareness generation and marketing efforts (E.g. government, civil sector, NGOs, etc.)?
• How do we use technology to provide better aftersales support to the BoP?
• Can we work with BoP entrepreneurs to help with aftersales support and consumer feedback?
• How can we optimize energy usage?• How can we build employee capacity by
investing in training and professional development?
• How can we customize benefits to suit low income employees?
• How can we minimize any negative impact on the environment?
• How do we provide access to information to our logistics partners to help them become more efficient?
• Are there local networks that we can tap into and develop for transportation and distribution?
• Can we reorganise the business to enable work with small orders/inventory sizes?
• How do we make products more affordable?• How do we provide financing to BoP
consumers who cannot afford high up front payments?
• How do I ensure effective tailoring of products to suit the BoP needs?
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BECAUSE these low-income markets have substantial spending power and are growing rapidly
45%
1,580B
34%21%
Source: Regional market sizes from “The Bottom 4 Billion,” World Resources Institute (2008); Total household spending and growth from World Bank country-level data; Dalberg research
REGIONAL MARKET SIZES AND BOP MARKET SHARE
Market sizes in USD billion (2008)
CHINA
INDIA
BRAZIL
USD 4/day and lessUSD 4/day - USD 8/dayUSD 8/day and more
718B
49%
36%15%
66%
974B
13%21%
14%15%
17%
Brazil IndiaChina
GROWTH IN CONSUMER SPENDING IN SELECTED ECONOMIES
CAGR (2008-2012)
INDICATIVE
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BECAUSE there are large opportunities in several BoP markets that businesses can invest in and capitalize across the world
NOTE: Measures here are not comprehensive. Sizing the entire BoP market for impact investments is very difficult; thus only selected businesses within five sub-sectors were analyzed in the JP Morgan report
Source: Survey of global impact investors and funds, “Impact Investments: An Emerging Asset Class,” JP Morgan (2010); Dalberg research
INDICATIVE
Housing
790210200190180100
Health
Education
Water and Sanitation
Finance
210 79010 190180 2000
Not measured
POTENTIAL INVESTED CAPITAL REQUIRED TO FUND SELECTED BOP BUSINESSES OVER THE NEXT 10 YEARS
All amounts in Billion USD
POTENTIAL INVESTED CAPITAL REQUIRED (BILLION USD) POTENTIAL PROFIT OPPORTUNITY (BILLION USD)
$ 214B-$ 786B $ 177B-$ 648B
$ 5.4B-$ 13B $ 2.9B-$ 7B
$ 0.4B-$ 2B $ 0.1B-$ 1B
USD 176B
$4.8B-$ 10B $ 2.6B-$ 11B
NOT EXHAUSTIVE
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BECAUSE engaging the BoP can spark innovation that not only overcomes emerging market barriers…
Source: Images from company websites; Dalberg research
SELECTED EXAMPLES OF INNOVATION AT THE BOP
PRODUCTS
• Problem:
− Electricity is expensive for BoP
− Supply of electricity is unreliable for majority of the BoP population
• Innovation:
− Products and appliances that are not dependent on grid connectivity to operate
− Products and appliances that emphasize energy efficiency, and entail minimal running costs
− Examples include low-voltage tablets (Aakash), LED lights (Nokero 200), and refrigerators (Godrej’s “Chotu kool”)
SERVICES
• Problem:
− Up front ability to pay is low− Access to financial services is
limited or non-existent
• Innovation:
− Pay-per-use models that prioritize increased access over asset ownership. E.g. Sarvajal for drinking water, Ecotact for sanitation
− Mobile money platforms that use local networks and mobile technology to provide basic banking services (deposits, withdrawals, loan payments, transfers, etc.) to under-covered BoP. E.g. Safaricom’s mPesa in Kenya
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There are five critical market-based challenges that limit business growth and scale
Source: Dalberg research
CHALLENGE IMPLICATIONS FOR BUSINESSES
Limited purchasing power, no financial access
• Even inexpensive products and services may be unaffordable for the average BoP consumer
• BoP businesses find it difficult to increase capacity or achieve scale (including as suppliers to other businesses)
Low education, awareness and skills
• Consumer willingness to pay suffers as they there is limited access to product information, including availability, quality, usability, prices, etc
• Suppliers, distributors and retailers may lack the knowledge and skills to deliver quality products and services, consistently, and cost effectively
Hard to reach • Standard distribution models are very costly and ineffective in reaching BoP populations
Disaggregated, low-quality supply chains
• Procurement is inefficient, with presence of several intermediaries• Procurement is unreliable given poor infrastructure and limited capacity of SMEs
Poor market data and information
• Businesses know very little about poor people—what they prefer, what they can afford, and what products and capabilities they have to offer as employees, producers and entrepreneurs
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Innovative inclusive business models have tried to address market barriers (1/2)
Source: Internet research; Company websites; Dalberg research
Limited purchasing power, no financial
access
• Purchase finance − Focus on lowering transaction costs of consumer finance and provide micro-loans to individuals/groups for small-ticket purchases
• Pay-per-use
• “Sachet” model
− Implement alternate payment models in which customers pay for each use of the product, instead of owning it
− Sell product in smaller unit sizes and lower prices
• Supplier finance − Incorporate B2B financing within IB models that engage the BoP as suppliers, including trade finance, partnering with commercial banks, etc.
Low education, awareness and skills
• Marketing / awareness
− Partner/co-invest with government bodies, donors, local bodies to implement awareness and education campaigns
• Up-skilling
• De-skilling
− Invest in technical training / professional development to fill staffing needs
− Disaggregate operations into discrete tasks that can be performed by low or un-skilled BoP populations
BUSINESS MODELS DESCRIPTIONCHALLENGES EXAMPLES
MEKONG BAMBOO
EXTERNAL
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Innovative inclusive business models have tried to address market barriers (2/2)
Source: Internet research; Company websites; Dalberg research
BUSINESS MODELS DESCRIPTION
Hard to reach
• Micro-entrepreneur/ micro-franchise
• Partnerships
− Increase points-of-sale in hard-to-reach areas by hiring and developing the BoP as micro-level entrepreneurs and franchisees
− Build linkages with SMEs, rural NGOs and other businesses etc. that are local to the target market, to leverage proven networks and systems and reach BoP consumers
CHALLENGES
Disaggregated, low-quality
supply chains
• Direct purchase − Purchase directly from BoP producers, and develop their capacity through training and investment
• BoP-owned cooperative
• Third-party aggregator
− Purchase from cooperatives or other apex organizations of BoP producers, and collaborate with them to improve / increase production capacity
− Purchase from intermediaries that aggregate supply from BoP producers
Poor market data and
information
• Various − Emphasize establishing linkages and relationships with local individuals and organizations in the business model, in order to gain context and key market information.
EXAMPLES
EXTERNAL