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Professor Stephen Lawrence Leeds School of Business University of Colorado at Boulder Entrepreneurship at the Bottom of the Pyramid ESSAM 2010

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Agenda Bottom of the Pyramid (BOP) defined BOP entrepreneurship case studies Microcredit entrepreneurs Market failure and BOP entrepreneurship BOP entrepreneurial opportunities

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What is the Bottom of the Pyramid? Prahalad & Hammond, Serving the Worlds Poor, Profitably, HBR, Sept 2002

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BOP Global Distribution World Economic Forum (2009), The Next Billions: Unleashing Business Potential in Untapped Markets, World Economic Forum, January.

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BOP Segmentation World Economic Forum (2009), The Next Billions: Unleashing Business Potential in Untapped Markets, World Economic Forum, January.

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BOP Characteristics 1 Low, fluctuating incomes Resist large up-front outlays, and installment plans Lack affordable credit Opportunity: align pricing and financing that accommodate ebb and flow of customer incomes Difficult living conditions and domestic constraints Little space or privacy Uncertain electricity and water (if any) Opportunity: deliver business and product solutions that address these constraints Smart shoppers and investors Unlikely to spend money on products they dont want But, they want high quality and reliable products Opportunity: design high quality, reliable products at low price World Economic Forum (2009), The Next Billions: Unleashing Business Potential in Untapped Markets, World Economic Forum, January.

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BOP Characteristics 2 Unfamiliar with many products, technologies, procedures Scarce communication channels; low literacy rates Opportunity: Provide product education and demonstrations for products (and when outsourcing as well) Seek out trusted advice Rely on opinions of people known and trusted Friends, family members, and direct experience strongly influence purchase decisions Opportunity: Win over local groups to advocate products and and services to friends and family; create educational networks Demand respect Want to be taken seriously; treated equitably and with dignity Opportunity: Find ways to enhance consumer dignity; show respect Face disadvantages in the market High prices, inferior goods BOP penalty Opportunity: Offer better quality, lower prices than currently available; new methods of addressing BOP market World Economic Forum (2009), The Next Billions: Unleashing Business Potential in Untapped Markets, World Economic Forum, January.

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BOP Cost Premiums Prahalad & Hammond, Serving the Worlds Poor, Profitably, HBR, Sept 2002

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What is the entrepreneurial opportunity at the BOP? Untapped potential 4 billion customers at the bottom Top line growth New sources of revenue; large latent demand Reduced costs Outsourcing; relocating service operations Innovation Hotbeds of technological experimentation Strategies Must put aside preconceptions; become com Prahalad & Hammond, Serving the Worlds Poor, Profitably, HBR, Sept 2002

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World Economic Forum (2009) The Next Billions: Unleashing Business Potential in Untapped Markets World Economic Forum, January. Addressing the BOP Marketplace

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Deploy versus Sell Focus on high-impact features for target market Devise new business models that allows consumers to access new features Assess economic viability at community level rather than individual Construct an offer that permits pooling of revenue streams, protecting company from volatile individual income Provide access rather than ownership (deploy vs. sell) Example: Grameen Telecom equipped village women with mobile handsets, who rent use of handsets to other villagers Example: Kenyan Ag Commodity Exchange sends text msgs to farmers (20 cents) share the price; allows better prices for farmers World Economic Forum (2009), The Next Billions: Unleashing Business Potential in Untapped Markets, World Economic Forum, January.

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Monetize Hidden Assets Tap local knowledge in informal networks to identify hidden assets Identify local partners with good access to community information Identify gaps in current roles; provide economically attractive incentives for partners Provide local producers with expertise and tools Example: Barclays Bank partnered with Susu collectors and moneylenders (informal financial services) in West Africa to offer savings account and small loan services World Economic Forum (2009), The Next Billions: Unleashing Business Potential in Untapped Markets, World Economic Forum, January.

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Scale Out vs. Scaling Up Decide when centralize and when to localize Where should a company and where should it scale out? Can both be effectively balanced? How to adopt decentralization, encourage innovation, and ensure product quality and effective management? Example: Aravind Eye Care (India) uses local entrepreneurs with minimal training for initial examinations; uses email consultation with doctors; tough cases referred to regional clinics Example: Fabindia (India) partners with 17 community- owned companies that supply it with ethnic-chic garments World Economic Forum (2009), The Next Billions: Unleashing Business Potential in Untapped Markets, World Economic Forum, January.

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New Design Principles Create life enhancing offering Price for the budgets of the next billion Tailor product to address local constraints; address quality Develop environmentally sustainable approaches Reconfigure the product supply chain Source from local producers Broaden reach, reduce costs by leverage local distribution Innovate to overcome infrastructure constraints Educate through marketing and communication Product benefits Word-of-mouth advocacy Aim for trust and identity with branding Collaborate with non-traditional partners Partner with communities rather than individuals Create incentives to encourage self-governance; share products, assets, knowledge World Economic Forum (2009), The Next Billions: Unleashing Business Potential in Untapped Markets, World Economic Forum, January.

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Critical BPO Questions Is BOP MNC neocolonialism all over again? Will MNCs behave differently in this space than they have in the past? Can power be successfully decentralized and distributed? Must there be a trade-off between doing well and doing good? How close does BOP come to closing that gap? What skill sets are critically needed in BOP business development? Consumer insight? Operations management? Investment management? http://compassioninpolitics.wordpress.com/2009/05/10/the-most-important-questions-at-the-base-of-the-pyramid-bop/

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Critical BOP Perspective Its not just about making consumer products cheaper, he says. Youve got to come up with products that actually meet the specific needs at the bottom of the pyramid. How do you design products that people need? You have to actually go and find out, and so we send researchers to find out how people live how they do their washing, their cleaning (and) what are their problems. Peter White, Director of Global Sustainability, Procter & Gamble http://compassioninpolitics.wordpress.com/2009/05/10/the-most-important-questions-at-the-base-of-the-pyramid-bop/

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Entrepreneurial Case Studies

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New Solutions to Global Challenges Envirofit International, Ltd. Dr. Bryan Willson, Tim Bauer, Nathan Lorenz and Ron Bills

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Envirofit International Colorado State University Leading University located in Fort Collins, Colorado USA World leader in engine technologies and clean engine development Global innovation center for Energy, Environment and Health Developed and Started Envirofit feeds Envirofit with University developed technological solutions Envirofit Non-Profit Organization Dedicated to the world wide implementation of products that offer clean technologies that reduces pollution and energy dependency, thereby yielding health and economic improvement in developing countries Envirofit is initially charity funded but becomes self sustaining within 2 years of initial project implementations http://www.envirofit.org/

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Envirofit Cook Stove Case Study http://www.envirofit.org/

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Need for Improved Cookstoves Health impacts 1.5 million 2+ million annual deaths Leading cause of death for children under 5 2 nd leading cause of death for women Contributing factor to many other causes of premature death: water quality, disease, etc. Deforestation Climate Change http://www.envirofit.org/

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Cookstove Benefits Indoor air pollution is one of the worst killers in the world World Health Organization estimates that indoor air pollution kills 1.6 million people each year In South India, people spend an average of up to 40%of their incomes on fuel or four to six hours a day collecting wood Envirofit cookstoves Reduce toxic emissions, by about 80 percent Cut fuel consumption in half Owners to save money and breathe cleaner, less polluted air. Cost between $20 and $60. http://media.www.collegian.com/media/storage/paper864/news/2009/02/17/News/CsuFounded.Company.Delivers.Clean.Burning.Cookstoves.To.India.video-3633604.shtml

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Envirofit Cook Stove for IAP http://www.youtube.com/watch?v=KCrN_R-1aCM&NR=1

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Envirofit 2-Cycle Engine Retrofit Case Study http://www.envirofit.org/

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100 million dirty 2-strokes in South Asia equals 5 billion cars ( currently only 450 million automobiles in the world) 2-Stroke Energy Use: 10 million liters / day http://www.envirofit.org/

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Tricycles in the Philippines 1,300,000 registered tricycles in the Philippines Dirty 2-stroke units are high emitters of CO, HC, and particulates (1 tricycle =>50 automobiles) A 2-stroke ban is an unrealistic & ineffective solution: Carbureted 4-strokes offer limited GHG emissions reduction Envirofit direct injection 2-stroke engines are cleaner than carbureted 4-stroke engines Carbureted 4-stroke replacement is very expensive and delivers zero economic payback to the driver Dirty 2-stroke units will merely be transferred elsewhere! http://www.envirofit.org/

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Economic Impact of Pollution The World Bank has determined that PM10 exposure in Metro Manila, Davao, Cebu & Baguio annually results in: 2,000 premature deaths resulting in an economic loss of PHP 7 billion (US$140 million) 9,000 cases of chronic bronchitis of chronic bronchitis resulting in an economic loss of PHP 6 billion (US$120 million) Countless cases of related respiratory symptoms resulting in an economic loss of PHP 8.5 billion (US$170 million) Total annual loss exceeds PHP 21.5B (US $430M) http://www.envirofit.org/

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Direct Injection Pushes out burned gasses with fresh air only Carburetion Pushes out burned gasses with raw fuel & air mix Injection of fuel after exhaust ports close Direct Injection vs Carburetion Color Key Fresh AirFuel / Air Mix Exhaust Products DI-1DI-2 DI-1 Removal of spent exhaust products (scavenging) occurs with fresh air only DI-2 Injection of fuel occurs after exhaust ports have closed Carb-1 Carbureted engines scavenge with raw incoming air and fuel mixture, losing 35% of the unburned mixture in the process Carb-1 http://www.envirofit.org/

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Carbureted 2 - Stroke Carbureted 4 - Stroke Direct Injected 2 - Stroke * SAE Technical Paper No. 2001-01-0010 ** Envirofit Draft Paper Pending Publication at BAQ Asia Conference 2006 *** Envirofit 2006 Field Test Results (5/06) Hydrocarbons Carbon Monoxide Fuel Consumption Direct Injection 2-strokes are cleaner and get better fuel economy than carbureted 4 strokes! Emissions and Fuel Consumption Comparison http://www.envirofit.org/

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Tricycle Financial Savings Daily Savings = 70Php ($1.33) Monthly Savings = 1,700Php ($32.40) Annual Savings = 20,400Php ($388.00) Retrofit Cost 15,750Php ($300) http://www.envirofit.org/

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Summary Fantastic Opportunity for Philippines Dramatically reduces pollution Increases daily income through savings and jobs Improves health and social conditions Future Retrofit Markets Philippine Expansion India China Thailand Indonesia Future Technologies Diesel retrofits Clean cook stove development and production http://www.envirofit.org/

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Home Country Benefits Case study

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Innovative Blowback Disruptive Management Practices from Asia Emerging markets catalysts for change Product and process innovation New models Localized modularization (motorcycles) Customer-driven modularity (Cummins) Process-driven services (Aravind Eye Care) Implications Emerging mass markets = opportunity at home Specialize Orchestrate process networks Orchestrate innovation networks Brown & Hagel, Innovation Blowback, The McKinsey Quarterly, #1, 2005

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Cummins Engine 2000 60% of high-output electrical generator market in India Marginal in small (