The Case for BOP as a Market Prof. Eric A. Brewer UC Berkeley ICT for Developing Regions September...
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Transcript of The Case for BOP as a Market Prof. Eric A. Brewer UC Berkeley ICT for Developing Regions September...
The Case for BOP as a MarketThe Case for BOP as a Market
Prof. Eric A. BrewerProf. Eric A. BrewerUC BerkeleyUC Berkeley
ICT for Developing RegionsICT for Developing RegionsSeptember 3, 2003September 3, 2003
Today’s FocusToday’s Focus Aid is not sustainableAid is not sustainable
It must be an investment (Profitable) businesses are sustainable(Profitable) businesses are sustainable
Also stabilize a region Promote entrepreneurism and social mobility
Prahalad:Prahalad: the poor are a viable market ICT can make a difference
4 Billion PeopleEarning less than $2,000/year
< $2,000 4,000
‘‘The Bottom of the Pyramid’The Bottom of the Pyramid’
Middle Classin developing
countries
$2,000—$20,000 2,000
WealthyNations
Annual Purchasing PowerParity (PPP) in $US
> $20,000
PopulationIn Millions
100
Source: Prahalad & Hammond, Harvard Business Review, Vol. 80, Issue 9 (Sep. 2002), pp48-58
emerging‘mass’ markets
adjacentmarkets
We Can Build Large and SustainableWe Can Build Large and SustainableBusinesses Based on These MarketsBusinesses Based on These Markets
The Poor as a MarketThe Poor as a Market Very high existing costsVery high existing costs Real purchasing powerReal purchasing power Already purchase “luxury” itemsAlready purchase “luxury” items Able to adapt to new technologyAble to adapt to new technology
Being poor is expensive…Being poor is expensive… Drinking WaterDrinking Water
4-100x the cost compared to middle class Lima, Peru: 20x base cost, plus transportation
Food: 20-30% more (even in poor areas of US)Food: 20-30% more (even in poor areas of US) Credit:Credit:
10-15% interest/day is common (>1000% APR) GrameenBank is 50% APR
Cell phone:Cell phone: $1.50/minute prepaid (about 10x) in Brazil
Suburbs of Mumbai (Bombay)Suburbs of Mumbai (Bombay)
DharaviDharavi(shantytown)(shantytown)
Warden RoadWarden Road RatioRatio
Credit (APR)Credit (APR) 600-1000%600-1000% 12-18%12-18% 60-75x60-75x
Water (100 gal)Water (100 gal) $0.43$0.43 $0.011$0.011 37x37x
Phone (cents/min)Phone (cents/min) 4-54-5 2.52.5 2x2x
Diarrhea MedsDiarrhea Meds $20$20 $2$2 10x10x
Rice ($/kg)Rice ($/kg) $0.28$0.28 $0.24$0.24 1.2x1.2x
More on DharaviMore on Dharavi Represents Represents urban poorurban poor
1300 cities with >1M people Urban ICT could reach 2B people by 2015
Dense: 44,000 people per square mileDense: 44,000 people per square mile Berkeley: 9700 Pittsburgh: 6000
6 churches, 27 temples, 11 mosques6 churches, 27 temples, 11 mosques About $450M in manufacturing revenueAbout $450M in manufacturing revenue Lots of small inefficient businesses already…Lots of small inefficient businesses already…
Rural PoorRural Poor Rural areas generate about 60% of India’s GDPRural areas generate about 60% of India’s GDP Challenge is Challenge is physical distributionphysical distribution
Drives the move toward urbanization… ICT may be the cheapest (new) infrastructure…
ICT could help with:ICT could help with: Education Over-the-network jobs
ICT could be adopted…ICT could be adopted… GrameenPhone: operators use GSM phones, GrameenPhone: operators use GSM phones,
memorize calling codes, etc…memorize calling codes, etc… Test use of palm pilots for bookkeepping (to Test use of palm pilots for bookkeepping (to
replace paper), worked well in Indiareplace paper), worked well in India Negotiation via internet phone in El SalvadorNegotiation via internet phone in El Salvador NairoBits (Kenya) teaches urban poor HTMLNairoBits (Kenya) teaches urban poor HTML See See Digital DividendDigital Dividend web site… web site…
Hindustan Lever (Unilever)Hindustan Lever (Unilever) Best example of products for BoPBest example of products for BoP Candy:Candy:
Simple high-quality fruit centers (real sugar) About $0.01/serving (not sold individually!) Fastest growing product in any category Profitable in 6 months Low margin, but high ROI
Hindustan Lever (2)Hindustan Lever (2) Ice Cream (novel technology)Ice Cream (novel technology)
About $0.04/serving Problem: no refrigeration at stores or vending
machines Solution: better packaging keeps it cold for 24 hours
Keys: mass production, supply-chain mgmt.Keys: mass production, supply-chain mgmt. Ice cream was previously a “luxury” productIce cream was previously a “luxury” product
Very high latent demand
Hindustan Lever (3)Hindustan Lever (3) Overall: $2.6B portfolio of productsOverall: $2.6B portfolio of products
Zero working capital => high ROI New businesses judged by capital required, volume
Management training:Management training: Requires all management (including CEO) to spend
time in villages and in typical stores Should lead to better products and tactics
Services for BoPServices for BoP Top three:Top three:
Education (20% of Digital Dividend projects) Credit (micro-loans) Wireless phones
TARAhaat PortalTARAhaat Portal Portal for rural IndiaPortal for rural India
Franchised village Internet centers Revenue from commissions and member fees
Biggest success: for-profit educational servicesBiggest success: for-profit educational services ICT: telephone, VSAT, diesel generatorsICT: telephone, VSAT, diesel generators Local content developed by franchiseeLocal content developed by franchisee
Mostly 2 languages, moving toward 18 Social goals met, financial unclear…Social goals met, financial unclear…
N-Logue (2)N-Logue (2) Keys: Keys:
Train LSPs, kiosk owners Deal with (severe) regulatory issues (IIT helps here) Develop local content (usually by LSP)
Challenges:Challenges: Ongoing regulatory issues Capital intensive business Technology?
Wireless PhoneWireless Phone Direct models (one per user)Direct models (one per user)
Prepaid cellular $10-20 cards in Latin America Very profitable ($1.50/minute) Very high demand
Ericsson MiniGSM 5000 users in 35km radius Ships in single container (Relatively) easy to set up
Shared WirelessShared Wireless Shared use is the easiest way to reduce cost…Shared use is the easiest way to reduce cost… GrameenPhoneGrameenPhone
Regular GSM phones and basestations (Nokia) Bid on and won a national GSM license Regular customers paid for early basestations
GrameenTelecomGrameenTelecom The social enterprise Works with rural franchisees (who get micro-loans) Shared use model
GrameenPhone (2)GrameenPhone (2) Rural phones: $93 per phone per monthRural phones: $93 per phone per month
> Twice as much as urban phones (not shared) Some phones > $1000/month But only 2% of total phones (but 8% of revenue)
Monopoly phone company is a real problemMonopoly phone company is a real problem Anti-competitive, outdated laws Limiting factor for the number of villages reached
4200 out of 65,000 so far
Room for better technology (for the rural users)Room for better technology (for the rural users)
N-Logue Rural Internet AccessN-Logue Rural Internet Access Spun out of IIT MadrasSpun out of IIT Madras Rural connectivity is very low, but demand highRural connectivity is very low, but demand high Three groups:Three groups:
“Foundation” – HW/SW partners LSPs – Local service providers (one per region)
Up to 50,000 e-mail users per LSP Kiosk owners – individual entreprenuers
Capital is about $400 per “line”
Custom Technology (but obsolete!)Custom Technology (but obsolete!) 25km line-of-sight wireless to LSP Should be able to move to newer networks
Prahalad’s SuggestionsPrahalad’s Suggestions ICT is a tool for regular businessICT is a tool for regular business
Larger reach at lower costs Lower transaction costs Better pricing, planning, supply chains…
Enlightened managementEnlightened management Focus on ROI, not margin (or product cost) Solve the whole problem (e.g. ice cream packaging) Local content, local adaptation, local training
Prahalad Suggestions (2)Prahalad Suggestions (2) Role for R&DRole for R&D
HP Labs in India, China Hindustan Level has full-scale R&D for BoP market Challenges are different than first world
Power, cost, literacy…
BoP is early (risky).. So share risksBoP is early (risky).. So share risks NGO or government help
Global Digital Opportunity Initiative (Markle & UNDP) Consortia
TARAhaat member companies share the risk
Rough SummaryRough Summary Potential for large high-growth marketsPotential for large high-growth markets
Current systems are very inefficient Opportunities to create income/jobs as well Focus on ROI (use of capital)
There is a role for technologyThere is a role for technology Simple (like ice cream) Complex (new wireless for rural areas) Users happy to adapt (and able!)
Franchising seems to be a key to scalabilityFranchising seems to be a key to scalability
Growth in Megacities—An Urban FutureGrowth in Megacities—An Urban Future
Concentrated Population can be Addressed More Efficiently
Example:Example:An Emerging Market—IndiaAn Emerging Market—India
http://www.wri.org/meb/wrisummit/pdfs/hart.pdf
Traditional MNCBusiness Model
Some MNCs?
Local Firms
FutureOpportunity?
The ‘Yes, But…’sThe ‘Yes, But…’s Corporate cost structures are a given…Corporate cost structures are a given…
“The poor cannot be our target customers because, with our current cost structures, we cannot compete in that market profitably.”
Our focus is on products, not functionality. We worry Our focus is on products, not functionality. We worry about ‘detergents’, not ‘cleanliness’about ‘detergents’, not ‘cleanliness’“The poor cannot afford, nor can they have any use for, the products and services sold in developed markets”
Our emphasis is product and process innovation, not Our emphasis is product and process innovation, not business innovationsbusiness innovations“Only the developed markets appreciate and will pay for new technology—the poor should adapt and use the last generation for themselves.”
Source: Prof C. K. Prahalad, U Mich.
Wrong!Wrong!
Wrong!Wrong!
Wrong!Wrong!
The ‘Yes, But…’sThe ‘Yes, But…’s We do not see the Bottom of the Pyramid forcing us to We do not see the Bottom of the Pyramid forcing us to
innovate around sustainable developmentinnovate around sustainable development“The Bottom of the Pyramid is not important to the long term viability of our business. It should be served by governments and non-profits.”
Managers do not get excited about business challenges Managers do not get excited about business challenges that have a humanitarian element to themthat have a humanitarian element to them“Intellectual excitement is in the developed markets—it would be hard and expensive to recruit, train and motivate managers to tackle such a challenge.”
If this was a viable and important marketplace, If this was a viable and important marketplace, someone would have already tackled it successfullysomeone would have already tackled it successfully
Source: Prof C. K. Prahalad, U Mich.
Wrong!Wrong!
Wrong!Wrong!
Wrong!Wrong!
““Bad Tech”: NestleBad Tech”: Nestle Starting in the 1970’s, Nestle pushed infant Starting in the 1970’s, Nestle pushed infant
formula to third-world mothers:formula to third-world mothers: Mistaken belief that it is was better (in US) Assumed sterile water and bottles!! Assumed mother would not dilute (saving money) Results 25x more likely to die of diarrhea Worse: use of formula for a while stopped lactation
(causing an addiction)