Entrepreneurship at the Bottom of the Pyramid

1. Entrepreneurship at the Bottom of the Pyramid Professor Stephen Lawrence Leeds School of Business University of Colorado at Boulder ESSAM 2011

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

3. What is the “Bottom of the Pyramid”? Prahalad & Hammond, “Serving the World’s Poor, Profitably,” HBR, Sept 2002

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

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

6. 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 don’t 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.

7. 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.

9. BOP Cost Premiums Prahalad & Hammond, “Serving the World’s Poor, Profitably,” HBR, Sept 2002

10. 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 World’s Poor, Profitably,” HBR, Sept 2002

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

12. 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.

13. 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.

14. 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.

15. 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.

16. 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/

17. Critical BOP Perspective • “It’s not just about making consumer products cheaper,” he says. “You’ve 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/

18. Entrepreneurial Case Studies

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

20. 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/

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

22. Need for Improved Cookstoves • Health impacts • 1.5 million – 2+ million annual deaths • Leading cause of death for children under 5 • 2nd 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/

23. 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

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

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

26. 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/

27. 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/

28. 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/

29. DI-1 DI-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 Direct Injection – Pushes out burned gasses with fresh air only Injection of fuel after exhaust ports close Direct Injection vs Carburetion Color Key Carb-1 Fresh Air Fuel / Air Mix Exhaust Products Carburetion – Pushes out burned gasses with raw fuel & air mix http://www.envirofit.org/

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

31. 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/

32. 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/

33. BOP Entrepreneurial Opportunities Possibilities limited only by entrepreneurial creativity!

34. Discarded Cell Phones 100 millions of cell phones are discarded annually

35. Junked Computers

36. Where do Ships go to Die? “At Alang, in India, on a six-mile stretch of oily, smoky beach, 40,000 men tear apart half of the world's discarded ships, each one a sump of toxic waste. Environmentalists in the West are outraged. The shipbreakers, of course, want to be left alone -- and maybe they should be.” Langewiesche, "The ShipBreakers," The Atlantic Monthly, April 2000, http://www.theatlantic.com/issues/2000/08/langewiesche.htm

37. Land Purchases “Outsourcings third wave,” Economist, 21-May-09

38. Microfinance (Microcredit) Creating new BOP entrepreneurs

39. What is Microcredit? • Small loans, given mainly to poor women in the developing world. • Microcredit offers access to credit to those people traditional banks will not lend to because they lack collateral. • Microcredit is community-driven development, dependent upon the innate creativity and potential of each individual. www.results.org/website/navdispatch.asp?id=1399

40. Frequently Asked Questions • What does Microcredit do? • It allows people to start and expand tiny businesses • Independent of money-lenders who demand exorbitant interest rates. • How many people is microcredit reaching? • 2,931 microcredit institutions • 81 million clients, 54.7 million among the poorest • December 31, 2003 • What does “poorest” mean? • Those people living on less than $1 a day • There are 1.2 billion such people. www.results.org/website/navdispatch.asp?id=1399

41. FAQ’s (cont.) • How many borrowers are women? • 82.5%, or 45.2 million, are women • 2004 Microcredit Summit Report • How long has microcredit been around? • It began in Bangladesh over 25 years ago. • What is a typical repayment rate? • Repayment rates vary from 95 to 98%. www.results.org/website/navdispatch.asp?id=1399

42. Why Target Women? • Most of the 1.2 billion people living on less than a dollar a day are women and their children. • Women are the primary caregivers for the world’s children. The poverty of women results in the physical and social underdevelopment of their children. • Experience proves that women are not only a good credit risk, they invest their income toward their children’s health care, education, nutrition and general well-being. • Women also obtain a higher social status within their homes and communities after they become entrepreneurs. www.results.org/website/navdispatch.asp?id=1399

43. Microcredit in Bagladesh http://www.youtube.com/watch?v=4VZ9i8NrcsY

44. Microfinance – Criticisms http://www.youtube.com/watch?v=J4wxo5IHpT0&feature=related

45. BancoCompartamos case • Why do traditional banks in Mexico not serve the poor? • What, if any, are the advantages of Compartamos relative to traditional microfinance organizations that operate as described by MuhammedYunis? • Are the critics of Compartamos right? Should the company lower its interest rates substantially? • Should more micro-finance companies be financed? If you were to form such a company, what would you do differently?

46. Entrepreneurship at the Bottom of the Pyramid Professor Stephen Lawrence Leeds School of Business University of Colorado at Boulder ESSAM 2011

47. Market Failure and Entrepreneurship

48. Types of Market Failure • Public Goods • Externalities • Monopoly Power • Inappropriate Government Intervention • Imperfect Information

49. 1. Public Goods • Non-excludable resources (e.g., air) • “Tragedy of the Commons” • Coasian entrepreneurship • Convert public to excludable goods • Entrepreneurial opportunities • Develop excludability of public goods & resources Dean & McMullin (2002), “Toward a theory of sustainable entrepreneurship,” Journal of Business Venturing 22, 50-76

50. 2. Externalities • Unpriced side effects of transactions • Pollution, noise, CO2, … • Institutional entrepreneurship • Reduction of transaction costs by creating new economic institutions • Entrepreneurial opportunities • Reduce transaction costs for pricing externalities Dean & McMullin (2002), “Toward a theory of sustainable entrepreneurship,” Journal of Business Venturing 22, 50-76