Read an Excerpt
UntappedCreating Value in Underserved Markets
By John Weiser Michele Kahane Steve Rochlin Jessica Landis
Berrett-Koehler PublishersCopyright © 2006 John Weiser, Michele Kahane, Steve Rochlin, Jessica Landis
All right reserved.
IntroductionFINDING THE OPPORTUNITIES
Domestic and international underserved markets represent a multi-trillion-dollar opportunity that is largely untapped. This market has some of the fastest-growing companies and fastest-growing business opportunities. It is also a market with the fastest-growing workforce and a rapidly expanding supplier base.
If you are interested in increasing your company's activities in these markets and want to know how to create business value and avoid business risks, this book is for you. We have distilled the experience of hundreds of companies operating in underserved markets in both developed and developing countries. By underserved markets, we mean communities in which there is a high percentage of low-income individuals, or a high percentage of ethnic minorities, or both. From the wealth of case studies we have reviewed, we have developed a set of five success factors that you can use to guide your company to profitable operations. We show you how to apply these success factors to each of four business disciplines: sales and marketing, human resources, purchasing, and product and process innovation. As the diagram below shows, individuals in underserved markets can have multiple potential relationships with business, includingcustomer, employee, supplier, and neighbor. These business disciplines help show the span of ways that companies and communities can create mutually beneficial relationships. We present many business examples that can help you understand how the success factors work in companies in a variety of industries and locations.
Are you somewhat skeptical that this approach might work well for your company? Consider the following four case studies of companies that created business value in these markets. The case studies cover both large and small companies, headquartered both inside as well as outside the United States. Consider also the following cautionary tale-an example of a foray into these markets that didn't succeed initially. The cases we describe not only will give you a more detailed understanding of the kind of success that is possible, but also will signal what kinds of pitfalls to avoid. In addition, they illustrate the five success factors.
Citigroup is one of the largest financial services companies in the world. When Banamex, Mexico's leading bank, merged into the Citigroup family of financial companies in 2001, Citibank, the retail banking arm of Citigroup, began to explore ways to create a profitable product in the market for remittances-transfers from immigrants to relatives abroad. In April 2003, Citibank introduced Citibank Global Transfers, which offers U.S. bank customers convenient money transfers domestically or to Mexico for a flat $5 fee-a significant discount from the fees of the major competitors. Citibank was able to offer this product profitably because it already had the infrastructure in place to move money inexpensively from customer accounts to ATMs anyplace in the world.
But there was a catch-this only worked if the sender was a Citibank customer and if the recipient had an ATM card. Many of the individuals sending remittances from the United States had no banking relationship at all, and many of the recipients did not have ATM cards. To reach this market segment, Citibank adapted its business model to develop a two-part solution. The most significant adaptation was the creation of the Citibank Access Account, a "checkless checking account" with features that made it attractive for immigrants to open an account with Citibank. The second adaptation was the Banamex Tricolor Card, which enabled recipients of the transferred funds in Mexico to access the funds through Banamex branches, ATMs, or debit card channels throughout the country, safely and efficiently.
By adapting its business model, Citibank has been able to successfully create a relationship that has value for both the bank and the community. The bank has tens of thousands of new, profitable customers. And immigrants in the United States, as well as their relatives in Mexico, have a lower-cost alternative for sending home funds safely and securely. As a testament to the attractiveness of this approach, consider the fact that in 2004, Citizens Bank and Sovereign Bank launched similar products (First Data, 2004).
HUMAN RESOURCES: MANPOWER
Manpower is a worldwide leader in the staffing industry, with client firms that include 94 percent of the Fortune 500. In 1999, Manpower determined that it needed to develop a strategic national workforce development program to address long-term information technology (IT) employment needs in the United States by tapping the workforce in underserved communities. Despite the current downturn in demand for IT workers, the U.S. Bureau of Labor Statistics projects that IT employment will nearly double from 2.1 million jobs in 2000 to 3.9 million jobs by 2010 in the United States. Clearly, Manpower's business model succeeds or fails based on its ability to deliver qualified workers to client employer companies. A labor pool shortage like the one of the 1990s could hurt the company's profitability.
In response to this problem, Manpower initiated TechReach, a strategic workforce development program. The program is employer driven; participants are trained in specific skill sets required by employers in each program's local area, increasing the likelihood of program graduates' placement upon their completion of the program.
In May 2003, Manpower formed a National Business Partnership with the U.S. Department of Labor, which linked thousands of local Manpower offices with the local Department of Labor branches. By creating this partnership, Manpower was able to expand the level of activity and impact of the TechReach program. Manpower is now placing thousands of individuals per year into jobs through its TechReach program. Since Manpower earns its fees through placement of individuals into jobs, this has created new profit opportunities for Manpower in addition to new job opportunities for individuals from underserved communities (Center for Corporate Citizenship, 2003; Ford Foundation, 2005).
PURCHASING: GREEN MOUNTAIN COFFEE ROASTERS
Green Mountain Coffee Roasters (GMCR) is a Vermont-based wholesale coffee company that roasts more than 75 high-quality arabica coffees. It had sales of $137 million in FY 2004 and has been recognized by Forbes magazine in the years 2002 to 2004 as one of the "200 Best Small Companies in America."
In an effort to reach new customers, Green Mountain added "Fair Trade" certified coffees to its product line. Coffee that meets the Fair Trade standard is purchased under prices and terms that enable farmers in underserved markets to earn a sustainable livelihood and produce a high-quality bean. Coffee that is sold in the U.S. markets is certified to meet the standards by TransFair USA, an independent certification organization.
Green Mountain has been able to use the Fair Trade certified standard to differentiate its coffee from other coffees that are not Fair Trade certified. And even though Fair Trade coffee is more expensive to purchase, the company has been able to set a price that enables it to make a good profit.
The Fair Trade and Organic certified line is now Green Mountain's fastest-growing product line, accounting for approximately 16 percent of its sales in FY 2004. And recently, Green Mountain Coffee announced its goal of having 35 percent of its coffee sales be Fair Trade and Organic certified by the end of FY 2008.
Fair Trade coffee has created business value for Green Mountain Coffee Roasters because it has enabled the company to expand profitably. And it has created value for small-farm coffee growers in underserved markets because it has helped ensure that their product is purchased on terms that let them earn a sustainable livelihood (Ford Foundation, 2005).
PRODUCT DEVELOPMENT: CEMEX
The development of CEMEX's Patrimonio Hoy product line is a good example of product development that has led to dramatically increased sales. In the mid-1990s, CEMEX, which is the world's second-largest cement maker and one of Mexico's largest companies, was hit hard by Mexico's crippling currency devaluation. The buying power of the peso was cut almost in half, dramatically reducing the market for CEMEX's products.
The company decided to pursue increased sales in the do-it-yourself homebuilding market, which dominates the lower-income neighborhoods in Mexico. In order to create a new product offering, the company significantly changed its typical process for gathering information on customer needs, sending a team of managers to live in these neighborhoods for a year. This innovative approach led to the creation of the "Patrimonio Hoy" group purchasing program, which combined financing, architectural advice, and building materials into one package. CEMEX worked with the customers to form buying clubs. Each member of the club would pay a small portion of his or her earnings into the club each week, and then, on a regular basis, the pooled money would be used to make a purchase from Patrimonio Hoy. This approach enabled consumers to pay for building supplies from their weekly earnings and to get advice on how to use them most effectively.
The results from the experience of the first 1,000 families in the purchasing program were dramatic. Whereas an average homebuilder had traditionally built one room every four to seven years, members of CEMEX's group purchasing program took an average of one and a half years, less than a third of the time. Not only was the speed of building (and therefore the sale of building materials) accelerated, but also as a result of the program 18 percent more families in the test region had begun building, and the average annual spending per family increased from $240 to almost $600. Families planned to build two to three more rooms than they had originally, and their constructions now contained 25 percent more cement per cubic meter. The families also used materials more efficiently because they were able to get the right amount of materials for the rooms that they planned, and they lost less material in wastage. The CEMEX program created value for communities because it helped families build housing more quickly, more efficiently, and more safely. And it has created business value for CEMEX by tapping into a market that the company couldn't reach effectively before.
Based on this initial success, CEMEX expanded the program quickly, and it now has 70,000 Mexican families enrolled in the program. CEMEX is planning to expand the program to other countries as well (CEMEX, 2005; Sandoval, 2005; Vision, 2005).
A CAUTIONARY TALE
The pathway to developing profitable opportunities in underserved markets is not always straight and easy to follow. There are numerous examples of companies that attempted to create businesses in underserved markets, only to have them collapse or be delayed for years. Pathmark's move into Harlem is a classic example. In the early 1990s, Pathmark saw a significant opportunity to open a major supermarket in Harlem. Its profitable experiences in other underserved neighborhoods helped it to see promise where others saw only problems. It worked together with several local community groups to develop a plan for putting a supermarket on a parcel of empty city-owned land on 125th Street, a major thoroughfare with good access to subway and bus transportation. Market studies showed that more than 60 percent of Harlem's retail spending occurred outside the neighborhood, suggesting a high level of untapped demand. And Pathmark had honed its product line for African American neighborhoods with stores in similar locations, such as Bedford-Stuyvesant.
But political resistance to the Pathmark store was organized by the owners of "bodegas"-small local convenience stores catering to the neighborhood residents-and by the major wholesaler who supplied those stores. Together, they were able to mount a campaign of political resistance that slowed the store development to a crawl for many years. They portrayed Pathmark as a greedy, uncaring corporation that was going to drive local business owners bankrupt. They also played on racial and ethnic tensions.
The deal was eventually approved by the city council, but only after Pathmark's community partners, particularly the Abyssinian Black Baptist Church, were able to show residents that the benefits to the community as a whole were considerable and the losses to merchants were likely to be small. Pathmark would reduce grocery costs significantly for residents and would create hundreds of well-paying jobs. And even though it would complete with local merchants, the majority of Harlem residents' grocery dollars were currently spent outside the neighborhood. Pathmark would really be competing with the bigger stores outside Harlem, not with the bodegas. After an extraordinarily tense 7-5 city council vote, the deal was approved. Construction was able to take place, and the store opened in 1999. The store is now profitable, and Pathmark has moved forward on several additional stores in New York City ethnic neighborhoods. In addition, development has taken off on 125th Street. The street now offers residents a major shopping mall including stores such as HMV, Modell, Old Navy, CVS, Disney, Costco, and Staples (Grunewald, 1999; Thomas, 2003; WinWinPartner.com, 2005).
As the previous examples indicate, there is both opportunity and risk in underserved markets. How do you seize the opportunities without succumbing to the risks? Our research provides the answers. This book is drawn from seven years of research and market testing with trailblazing companies on how to successfully adapt to the specific conditions in underserved markets. This research-organized and supported by the Ford Foundation-sought to find ways to increase corporate engagement with underserved communities in ways that created economic benefits for both communities and business. The companies in our research sample were primarily large, and approximately three-quarters were headquartered in the United States. Clearly, our lessons are most applicable to similar companies. But the research also indicates that our lessons can be adapted, both to large corporations based outside the United States as well as to smaller businesses located in the United States (Ford Foundation, 2005).
If we had to put everything we have learned into a nutshell, we would say that the most important overarching success factor is to create value for the community at the same time as you create value for business. You must create a "win-win" relationship with the communities in which you do business. For companies, the win can take the form of increased sales, reduced costs, diversification of risk, or improvements in reputation. For communities, the win can take the form of access to needed goods and services, jobs, or entrepreneurial opportunities. If you only remember one thing from this book, remember this: a win-win relationship is everything.
This is evident in the case studies above. In each of the four successful cases, the company was able to find a way to create value for itself and value for the consumers, suppliers, and residents of the community. In the cautionary tale, Pathmark's development was stalled because vocal elements of the community were able to paint its entry into the market as a "win-lose" relationship. Pathmark was only able to move forward when it created a win-win relationship with a key partner in the community.
In fact, more than two-thirds of the companies in our research that successfully tapped underserved markets had formed a partnership with an organization that brought new knowledge, skills, resources, or connections to their effort. These partnerships were with a wide range of organizations, including other businesses, government agencies, nonprofit organizations, and community groups. Frequently, these organizations were drawn to working with the companies because they were seeking to create community benefits rather than trying to make a profit themselves.
Excerpted from Untapped by John Weiser Michele Kahane Steve Rochlin Jessica Landis Copyright © 2006 by John Weiser, Michele Kahane, Steve Rochlin, Jessica Landis. Excerpted by permission.
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.