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New Markets, New Mindsets
     

New Markets, New Mindsets

by Tashmia Ismail, Nicola Kleyn, Gwen Ansell, Stuart L. Hart (Foreword by), Michael Gordon (Foreword by)
 

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The base of the pyramid (BOP)—the largest socio-economic group, but which also has the lowest income—is the subject of increasing attention in business practices worldwide, the current shift of which is toward creating a more sustainable market. That trend is thoroughly detailed in this helpful guide to understanding and succeeding in BOP business.

Overview

The base of the pyramid (BOP)—the largest socio-economic group, but which also has the lowest income—is the subject of increasing attention in business practices worldwide, the current shift of which is toward creating a more sustainable market. That trend is thoroughly detailed in this helpful guide to understanding and succeeding in BOP business. Utilizing case studies from South Africa, the book demonstrates that in South Africa, around 60 percent of the population is not served or underserved by current business, with similar comparisons existing globally. The book offers strategies for tapping the significant new market both effectively and ethically, and showcases pioneering BOP businesses as well as the failures—giving special focus to what makes an approach sustainable. Also included are interviews with more than 40 top players, and the case studies include Nestlé, Danone, Walmart, Blue Label Technologies, and Capitec.

Product Details

ISBN-13:
9781920292034
Publisher:
Jacana Media
Publication date:
09/26/2012
Pages:
272
Product dimensions:
6.10(w) x 9.20(h) x 2.10(d)

Read an Excerpt

New Markets, New Mindsets

Creating wealth with South Africa's low-income communities through partnership and innovation


By Tashmia Ismail, Nicola Kleyn, Gwen Ansell

Jacana Media (Pty) Ltd

Copyright © 2012 Tashmia Ismail, Nicola Kleyn and Gwen Ansell
All rights reserved.
ISBN: 978-1-920292-03-4



CHAPTER 1

Context, concepts, role-players

'To make a product cheap is easy ... but it must be affordable and relevant'

– Maria Pretorius

In this chapter, we'll look at the ideas that underlie business and economic thinking about the base of the pyramid (BoP) and why doing business with underserved communities is becoming so important. We'll look at how the concept has been defined - overseas and in South Africa - and at some of the business experts who've contributed to growing the theory. Like in all the chapters in this book, we'll begin by visiting a company that has taken steps to work with this market in South Africa, in this case, Danone.

Case study: Danone - finding a champion within


The Danimal yoghurt

'Danone is very philanthropic,' said Maria Pretorius (at the time of our interview heading up the Danimal project at Danone Southern Africa but now Business Development Manager at PepsiCo), 'our goal was to provide affordable nutrition to as many people as possible ... We wanted to reach consumers that our products do not reach ... We said: we need to have a product that is affordable but relevant. Because to make it cheap is easy, anybody can do that - you don't make quality, you don't make a difference - and we didn't want to put the Danone brand behind that. It had to be a good product, affordable, relevant - and it had to be available.'

Pretorius was talking about Danimal, a low-priced, vitamin-fortified yoghurt with a very long refrigerated shelf-life, and an extended indoor shelf-life even without refrigeration: a product produced after extensive research specifically for the township market, where many spaza shops have limited fridge space. The story of Danimal's development tells us a lot about how international enterprises can reach out to do business with South Africa's underserved and underserviced communities - and how the relationship can be mutually beneficial.

'We spent around a year,' explained Pretorius, 'developing a formula and doing lots of research: is it going to be for adults or children, what is its price, and so on. We finally developed a yoghurt which had a more affordable recipe, but enriched with Vitamin A, iron and zinc because our research discovered those are the main deficiencies of the target market.'

But there were other influences on selecting and developing Danimal. Danone Southern Africa partnered with the Danone Group worldwide, at that time engaged in an international nutrition mapping project. It also partnered with researchers at the University of Cape Town in South Africa, 'and we tested it with children to see if they liked [the taste]'. In the end, the specifications of the product 'depend on the culture of the country - but also on factory capabilities ... we had capacity on those [yoghurt] machines, and that is our expertise,' said Pretorius. Danone developed only one product in its budget cost-range; they considered others, such as a UHT yoghurt, maas (soured milk) and juice, but required more research on optimal size and packaging formats. Besides, Pretorius noted, 'the more products you have, the more complexity you have ... our factories do not cater for small volumes: the machines are huge, and producing little bits of this and that isn't going to work.'

Danone shaved costs by using a lower-cost base for the product and then fortifying it, and by using creative distribution methods that avoided high-margin supermarket chains. 'The people in the township know that if they are selling that product they are not going to be competing with [a supermarket] next door.' She recalled that when the project began there were far fewer township retail outlets than today. 'So we selected Soweto, Ga-Rankuwa, Alexandra - all the main townships around us - we used GPS sensoring [sic] and then we chased routes. Every little kiosk and spaza was GPS-ed, and we also created a second set of GPSs for communication about the product: schools, public places and so on.'

Initially, Danimal was priced at R1: a single unit of currency was by far the most manageable for tiny vendors who might not have change for a customer (although rising costs eventually pushed the price up to R1.30 - rather less convenient for vendors because of the need to hold small-coin change).

The company used buzz teams to tell communities about the product: T-shirts, brochures, small entertainments such as puppet shows with free product samples for the audience. As well as using 'normal' (truck) distribution, the company also reached out to less formal marketers: initially dubbed the 'Dani mamas' (there were eventually around 70 of these agents, about half of them women). Through newspaper advertising, Danone identified these aspiring traders, seeking people who had a bank account, a fixed address, a potential trading area (identified through the GPS mapping) that did not overlap with others, and a well-motivated rationale for wanting to do this business.

The vendors were put through a mini MBA for micro entrepreneurs which was created by Danone. So the distributors were given extensive business training with prizes awarded to high performers. The business is not for everybody,' said Pretorius. She recounted how volunteers committed to community social work often came forward, but were often 'not good business people because they wanted to do good [first], and it created a lot of stress'. However, 'a lot of people come to like the trade. They learn, and because they are doing such a good job, people ask them to put up soap and things, chicken ... and they start doing a really nice, healthy distribution business.'

Danone did not judge the Danimal SA project by the same performance indicators as other products. Although the product broke even, Pretorius's main criteria, as well as sales, included 'the number of entrepreneurs recruited and trained' and other social indicators. Vendors don't have to pay cash up front for stock 'so there is a lot of trust in this whole exercise ... but the [amount of] bad debt is very small,' she said; she worried more about the risk of robbery that cash-carrying vendors ran.

Pretorius confessed she 'loves this product. It is my passion ... It's a win-win situation: a very good project for the people [and] a lot of township kids will grow up with the product ... and will become consumers out of the township.' And it couldn't have gone as far as it did, she felt, without 'the freedom' given by the company overall to develop a completely new product to meet the needs of low-income South African consumers. 'For me, the most phenomenal thing is to have a specific, unique product for this market, completely made from scratch.'

Pretorius's story illustrates many of the strategies and tactics that can be effective for businesses reaching out to communities with limited spending power:

• Danone did not view this market as a target for cheap, substandard goods.

• Instead, they invested considerable research into developing a product that met real needs (nutritionally fortified and with a longer out-of-fridge shelf life) while matching the company's expertise and production capacity.

• They considered scalability when deciding which product to launch.

• The company used outreach entertainments and community members to inform others about the product, and to sell it.

• They mentored and evaluated the vendors and rewarded growth.

• They used non-conventional distribution methods to reach hard-to-access areas and reduce costs.

• They kept the 'front end' of the business simple and backed this up with more complex research and production capacity.

• They used nuanced accounting and evaluation procedures that did not only consider direct, immediate profit.

• Many companies fail because they allocate their inexpensive and junior staff to lead projects with high complexity, such as BoP projects. Ideal practice would be to allocate best human resources (capable, experienced, proactive).


Postscript

Our interview was conducted in 2009, when the fortified yoghurt was on the cusp of scaling and fulfilling its high-volume/low-margin potential as a BoP product. Maria Pretorius left Danone in 2010. After her departure, the project disappeared from the Danone portfolio, leaving a gap in the affordable fortified children's yoghurt market.

When Gibs researchers visited the township of Diepsloot outside Johannesburg in June 2011, they saw how some spaza shops had branded themselves with a specific stock line, to create a distinctive identity. One had called itself the 'Danoon' spaza, taking its name from a shelf crammed with Danone yoghurts. This store was well known in the area; its yoghurts were often bought as emergency infant food by mothers who could not afford formula that week. The yoghurt, however, was not the vitamin-fortified Danimal but the standard retail Danone brand. It was not refrigerated, and some stock had passed its marked expiry date. The pilot seems to have unintentionally left misconceptions about yoghurt storage requirements, shelf-life and nutritional value.

The trajectory Danimal took illustrates many key principles of building a brand successfully in a low-income market. Despite early hurdles, the product learning curve was climbed, and a business model had evolved. But the process had one major flaw: it remained a corporate champion-based project. The independence so useful to Pretorius when she was exploring possibilities turned out to be a double-edged sword; her undoubted knowledge, passion and belief in the product had not been embedded in the mainstream of the organisation. With Pretorius's departure, the impetus to continue and expand Danimal was lost. Danimal production at a small scale utilised unused factory capacity. Scaling up from the pilot would have required a commitment to switch capacity from another product - the kind of decision only possible with the backing of an influential senior champion.

Chris Linder, who has owned a Pick n Pay franchise for eight years in the township of Soshanguve, says baby care has been the fastest growing segment in his store, outstripping growth in every other product line he carries. AMPS [All Media and Products Survey] data and conversations with other large fast moving consumer goods (FMCG) companies with baby-care ranges all corroborate his experience. Other companies have identified the potential of products similar to Danimal and plan to launch these into the BoP space. Had Danimal survived the departure of its committed champion, its entrenched and trusted status in the market would have given it a major advantage over new entrants.

So the story of Danimal raises as many questions as it answers.

• What is this 'base of the pyramid' that Danone reached out to? Why are businesses and economists talking about it so much?

• How do we define it in South Africa?

• Is the effort worthwhile for South African companies too, or is it something only huge multinationals can do?

• Can the tactics Danone used be universally effective; what more might different types of companies need to do?


And the way the Daminal story ended raises big questions about continuity in project management, about changing company values to embrace BoP initiatives, and about the ethics of pilots in this space.

These are the questions the rest of this book sets out to answer, drawing on conversations with executives from more than 20 SA-based companies - local and multinational - who have taken the first steps. But first, in this chapter, let's look at the concept of BoP. Where did it come from and how did it develop?


Understanding the base of the pyramid: history and the birth of an idea

Selling to low-income markets is not a new enterprise, and nor is developing small businesses in low-income communities, in South Africa or in the rest of the world. Since the late Seventeenth Century, for example, Quaker communities in England and Ireland have encouraged small businesses and self-help as part of their charitable efforts.

In South Africa's segregated townships under apartheid, companies seeking to sell products often combined this with entertainment outreach and buzz-group activities. Singer Sibongile Khumalo remembers how her father, the late Professor Khabi Mngoma, formerly a rather rebellious and socially conscious music teacher, found work with Reckitt & Colman in just such a capacity: 'Around the early 1960s he started working for Reckitt & Colman as [some kind of] sales representative. He had to work within schools and part of his brief was to start a health project that was linked to music. It was for selling Dettol and Disprin and Senokot and all those things, making the community aware of the products. But he was able to develop an innovative way to make the work interesting and effective and genuinely educational, using choir teaching, because that was his expertise.'

Of course, for a very long time all over the world, unscrupulous traders have also concocted cheap goods targeted at the poor: adulterating wine with water, tea with sawdust and flour with plaster to do so.

Current thinking about BoP trading focuses neither on charity nor on simply dumping shoddy goods. Mngoma's innovative educational efforts provide a very relevant precursor.

'As with the tip of an iceberg, the opportunity remains invisible to the corporate world.'

- CK Prahalad & Stuart Hart

The modern interest in doing business with the world's very large, low-income markets was crystallised by business academics the late CK Prahalad and Stuart Hart in a paper called The Fortune at the Bottom of the Pyramid', published in 2000 in the Harvard Business Review. The paper observed that 4 billion people are still outside the global market system: something that both poses a challenge for and offers huge opportunities to companies. (The precise figure of 4 billion can be debated, and many researchers prefer to define the BoP by its characteristics, rather than a headcount. But it has also led to the concept being dubbed B24B: Business to the 4 billion.)

At a time when many companies - particularly the biggest - see their established markets and strategies maturing (in other words, neither growing significantly nor delivering much that is new) the initial thrust of the theory was that exploring this new market could offer trillions of dollars' worth of new markets. Ignoring these potential new markets could also have serious consequences: economist Joseph Stiglitz warned in 2002, 'Globalisation today is not working for many' and invoked the spectre of violent unrest on a world scale.

(Indeed, in America, interest in BoP ideas intensified after the tragedy of 9/11.) In addition, BoP ideas were initially attractive, particularly to the American business community, because they emphasised new routes to sustainability and profit, in contrast to corporate social responsibility (CSR) theories calling for businesses merely to spend more on benevolence.

Both Prahalad and Hart went on to write extensively on the area (see the Further Reading section) and developed the theory in slightly different directions. Prahalad's particular focus was large companies entering the Indian market. He argued that the biggest companies had the resources to take risks to penetrate this new market - but that smaller companies were more agile and flexible, and more likely to discard ineffective old ways of operating.

Out of this line of thinking have come concepts of disruptive innovation and frugal engineering: the revolutionary reshaping of company practices and products to meet the needs of these new markets - and, in the process, create businesses that are sleeker and products that are more environmentally friendly. This also relates to a growing interest in the idea of triple bottom line accounting: evaluating social/ethical and environmental performance alongside profit. Many commentators are also suggesting that a key underlying context factor is the way access, rather than property or ownership, is becoming the tool all economic actors need to structure their lives - and the way the digital space can potentially make this easier for the poor as well as the rich. We'll consider all these ideas in more detail as they arise in subsequent chapters.

Hart developed the first set of protocols for BoP, known as BoPl: a guide to business practice in the new context. These protocols helped launch and guide many business initiatives, but as Hart and his BoP Protocol co-author Erik Simanis wrote in 2008, 'in the rush to capture the "fortune" at the base of the pyramid, something may have been lost - the perspectives of the poor themselves'. Hart has therefore co-authored a revised protocol, known as BoP2, which emphasises that underserved communities are not merely consumers, but should be taken on as proactive partners in business.

Hart's BoP2 Protocol contains a diagram showing how views of the concept are changing:

[ILLUSTRATION OMITTED]

There have been continuing criticisms that BoP2, while more inclusive, has replaced the fairly concrete ideas emerging from BoPl (for example, marketing single-serving sachets) with vague concepts such as 'expand imagination' that are harder to translate into action.


(Continues...)

Excerpted from New Markets, New Mindsets by Tashmia Ismail, Nicola Kleyn, Gwen Ansell. Copyright © 2012 Tashmia Ismail, Nicola Kleyn and Gwen Ansell. Excerpted by permission of Jacana Media (Pty) Ltd.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Meet the Author

Tashmia Ismail is a fellow of the Maastricht Economic and Social Research and Training Centre on Innovation and Technology at United Nations University, and a senior lecturer at the University of Pretoria’s Gordon Institute of Business Science where she heads the Base of the Pyramid Hub program. Nicola Kleyn is a senior lecturer at the Gordon Institute of Business Science and is involved in the Base of the Pyramid Hub program. She has been awarded the University of the Witwatersrand’s Distinguished Teacher’s Award for the Faculty of Commerce and has published articles in the International Marketing Review, Journal of Business Ethics, Journal of Marketing Intelligence and Planning, and the South African Journal of Business Management. Gwen Ansell is a freelance journalist, a media trainer, a consultant, and a visiting associate at the University of the Witwatersrand in Johannesburg, South Africa. She is a contributor to Business Day and the Mail & Guardian, a representative of the South African National Editors Forum Education and Training subcommittee, and a member of the Forum of African Investigative Reporters’ advisory board. She is the author of Introduction to Journalism and Soweto Blues. Stuart L. Hart is the Samuel C. Johnson Chair in Sustainable Global Enterprise and a professor at the Johnson School of Management of Cornell University. He lives in Ithaca, New York. Michael Gordon is the Arthur F. Thurnau Professor of Social Entrepreneurship and Information Technology at the Ross School of Business of the University of Michigan. He lives in Ann Arbor, Michigan.

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