Business strategies to reach new markets, new customers

1
Business strategies to reach new markets, new
customers

• Universitas Comeniana Bratislavensis
• Dr. Brigitte Monsou Tantawy

2
Business strategies to reach new markets, new
customers

• Objective
• Explore how large organizations have adapted
  their strategy to reach new customers, new
  consumers.
• Analyse how these strategies are successful in
  reaching the Poor and addressing the Millennium
  Development Goals.

3
Business strategies to reach new markets, new
customers

• Programme
• Six lectures, two sessions of individual cases
  and two sessions of comparison of cases in two
  days
• Day one
• 900-1030 lecture
• 1045-1130 cases
• 1130-1300 lecture
• 1345-1515 lecture
• 1515-1600 cases
• 1615-1715 lecture
• Day two
• 900-1030 lecture
• 1045-1145 comparison of cases
• 1145-1315 lecture
• 1400-1530 lecture
• 1530-1630 comparison of cases
• 1630-1700 conclusion

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Business strategies to reach new markets, new
customers

• Is there an attractive market?
• Millenium Development Goals
• What role can business play?
• New business models for the Poor
• Innovative solutions through partnerships
• Finding capital for the Poor
• Measuring success
• Comparative strategies and drivers of success

5
Is there an attractive market?
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Business strategies to reach new markets, new
customers

• BOP Market for goods in the 18 largest developing
  countries represents 1.7 trillion (Hammond and
  Prahalad, 2004)
• 4 billion people lived on less than 5 a day
• Poverty Market
• lt1 / day 1.2 billion
• Submerged Market
• 1lt-lt2 /day 1.6 billion
• 2lt-lt5 /day 1.2 billion (Prahalad, 2002)
• ? often do not have bank accounts or access to
  formal credit
• But may be able to obtain loans from money
  lenders at above-market rates.

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Business strategies to reach new markets, new
customers

• In Latin America, home to the largest income
  inequality on earth, the key differentiator of
  emerging consumers resides in employment,
• In Latin America, the consumer products are the
  number one spending for the average consumers
  with housing, transportation and communications
  absorbing another large part,
• Emerging consumers represent a market larger in
  value than the upper segments in Brazil (51),
  Argentina, Colombia, Costa Rica, Mexico,
  Chile(69). G. DAndrea, G. Herrero, 2006

8
Saturation of current markets
Purchasing Power Parity in U.S. dollars
Wealthy
gt15,000
800
Population in millions
Emerging Middle Class (MOP)
Existing capability New market
1,500
1,500-15,000
New capabilityNew market
Base of the Pyramid (Prahalad Hart, 2002 Hart
Christensen, 2002 London Hart, 2004
Prahalad Hammond, 2002)
lt1,500
4,000
9
Markets growing lt1
Purchasing Power Parity in U.S. dollars
Wealthy
gt15,000
800
Population in millions
Strong growth in DE markets gt10
Emerging Middle Class (MOP)
1,500
1,500-15,000
Many isolated experiments
Base of the Pyramid (Prahalad Hart, 2002 Hart
Christensen, 2002 London Hart, 2004
Prahalad Hammond, 2002)
lt1,500
4,000
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Business strategies to reach new markets, new
customers

• Sustainable global enterprise represents the
  potential for a new private sector-based approach
  to development that creates profitable businesses
  that simultaneously raise the quality of life for
  the worlds poor, respect cultural diversity, and
  conserve the ecological integrity of the planet
  for future generations. Making such a societal
  contribution while simultaneously creating
  shareholder value will take real imagination and
  a fresh approach to business strategy.
• Stuart Hart, 2005

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Business strategies to reach new markets, new
customers

• Most global companies today are growth starved
  which leads them to explore low income
  markets.
• Competitive pressure in Consumer Goods markets in
  developed countries strengthens need to seek out
  opportunities in the developing and emerging
  (DE) markets.

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Business strategies to reach new markets, new
customers

• Heterogeneity of the Poor
• There is heterogeneity at
• Economic level (income per day)
• Geographic level (Asia, Africa, Latin America)
• Cultural level,
• Religious level (caste, untouchability,)
• Familial level (married, widow, divorced)
• Gender level
• Careful segmentation is key

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Business strategies to reach new markets, new
customers

• Heterogeneity of the Poor
• Women represent the poorest of the poor in many
  societies,
• Women not only face economic vulnerability but
  also social status, discrimination in the work
  place, violence at home and outside,
• Age and education are additional elements of
  segmentation.

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Business strategies to reach new markets, new
customers

• The Poor as Consumers
• They tend to shop frequently,
• They buy in small quantities,
• They lack of storage space or appliances to
  preserve and cook food,
• They have a lower tolerance for risk taking,
• They have a low penetration of electronic media,
• They have a high level of illiteracy,
• They have a reluctance to switch brands or adopt
  new products.

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Business strategies to reach new markets, new
customers

• The Poor as Producers
• Consumption is inherently linked to income
• ?Leveraging the productivity capacity of the poor
  is the first step
• Information and infrastructure are necessary to
  empower the poor producers

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Business strategies to reach new markets, new
customers

• The Poor as Distributors
• They have a deep knowledge of the local market,
• Low-income, community-based sales person can be
  extremely effective in building demand for goods
  in the hard-to-service rural market,
• There are basic lack of physical connectivity and
  tremendous challenges in rural areas.

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Business strategies to reach new markets, new
customers

• Purchasing strategies
• The Poor are not choosing the lowest-priced
  products but they have very sophisticated
  approach in assessing total purchasing costs,
• They have strong preference for leading and
  intermediate brands over low-priced, economy
  brands,
• It is a question of aspiration and image but also
  because of quality and performance,
• Daily shopping and cooking give poor consumers
  deeper knowledge of quality and price and best
  place to buy each category,
• What is cheap ends up being expensive

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Business strategies to reach new markets, new
customers

• Purchasing strategies
• With less disposable income, poor consumers have
  less margin for errors in their purchases,
• Category level of involvement is positively
  correlated with loyalty,
• Shopping process is driven by day-to-day needs,
• Total purchasing cost includes transportation
  costs, logistical constraints for bringing
  purchase home, time spent in commuting,
• Traditional retailers have a number of benefits
  over modern retailers small SKUs, proximity,
  service (opening hours), credit, familiar owner.

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The Millennium Development Goals
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Business strategies to reach new markets, new
customers

• The Millennium Development Goals and targets
  come from the Millenium Declaration signed by 189
  countries, including 147 Heads of States, in
  September 2000.

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Business strategies to reach new markets, new
customers

• Eradicate extreme poverty and hunger
• Achieve universal primary education
• Promote gender equality and empower women
• Reduce child mortality
• Improve maternal health
• Combat HIV/AIDS, malaria and other diseases
• Ensure environment sustainability
• Develop a global partnership for development

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Business strategies to reach new markets, new
customers

• Goal 1
• Target 1 Halve the proportion of people whose
  income is less than 1 a day
• 1990 27.9 in developing regions
• 2002 19.4
• Target 2 Halve the proportion of people who
  suffer from hunger
• 1990 29 in developing regions
• 2003 17

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Business strategies to reach new markets, new
customers

• Goal 2
• Target 3 Ensure that children everywhere, boys
  and girls alike, will be able to complete a full
  course of primary schooling
• 1990 79 in developing regions
• 2004 86
• An educational gender gap persists
• 2004
• 18 of boys out of school in developing regions
• 22 of girls

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Business strategies to reach new markets, new
customers

• Goal 3
• Target 4 Eliminate gender disparity in primary
  and secondary education preferably by 2005 and to
  all levels of education no later than 2015
• Share of women in houses of parliament
• 1990
• 15 in developed regions
• 12 in the world
• 2006
• 21 in developed regions
• 17 in the world

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Business strategies to reach new markets, new
customers

• Goal 4
• Target 5 Reduce by two-thirds the under five
  mortality rate
• Under-five mortality rate per 1000 live births
• 1990 106 in developing regions
• 2004 87
• Percentage of children immunized against measles
• 1990 71 in developing regions
• 2004 73

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Major trends in the Goals by region
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Business strategies to reach new markets, new
customers

• Goal 5
• Target 6 Reduce by three-quarters the maternal
  mortality rate
• Proportion of deliveries attended by skilled
  health care personnel
• 1990 43 in developing regions
• 2004 56

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Business strategies to reach new markets, new
customers

• Goal 6
• Target 7 Have halted by 2015 and begun to
  reverse the spread of HIV/AIDS
• Continue to rise
• 2005 38.6 million of people living with HIV
• Target 8 Have halted by 2015 and begun to
  reverse the incidence of malaria and other major
  diseases
• Number of new tuberculosis cases per 100
  000population
• 1990
• 149 in developing regions
• 28 in developed regions
• 2004
• 151 in developing regions
• 16 in developed regions

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Business strategies to reach new markets, new
customers

• Goal 7
• Target 9 Integrate the principles of sustainable
  development into country policies and programmes
  and reverse the loss of environmental resources
• Proportion of land area covered by forests
• 1990 31 World
• 2005 30
• Energy use per unit of GDP
• 1990
• 266 in developing regions
• 216 in developed regions
• 2003
• 218 in developing regions
• 189 in developed regions

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Business strategies to reach new markets, new
customers

• Goal 7
• Target 10 Have by 2015 the proportion of people
  without sustainable access to safe drinking water
  and basic sanitation
• Proportion of population using improved
  sanitation
• 1990 35 in developing regions
• 2004 50
• Proportion of population using improved drinking
  water sources
• 1990 71 in developing regions
• 2004 80
• Target 11 By 2020 to have achieved a significant
  improvement in the lives of at least 100 million
  slum dwellers
• Still growing
• In 2007, for the first time in history, the
  majority of people will live in urban areas

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Business strategies to reach new markets, new
customers

• Goal 8
• Target 12 Develop further an open, rule-based,
  predictable, non-discriminatory trading and
  financial system
• Increase Official Development Aid
• Three quarters of exports from developing
  countries now enter developed markets duty-free
• Targets 13 14 Address the special needs of the
  least developed countries, landlocked countries
  and small island developing states
• The 50 LDCs now receive about one third of all
  aid flows
• Target 15 Deal comprehensively with the debt
  problems of developing countries
• Debt payments for 29 heavily indebted countries
  have fallen by 59billion
• G8 cancelled the debt of these countries that
  meet criteria
• WB, IFC ADF will cancel debts to 19 countries

32
Business strategies to reach new markets, new
customers

• Goal 8
• Target 16 In cooperation with developing
  countries, develop and implement strategies for
  decent and productive work for youth
• Youth unemployment rates
• 1995
• 16 in developing regions
• 12 in developed regions
• 2005
• 14 in developing regions
• 14 in developed regions
• Targets 17 In cooperation with pharmaceutical
  companies, provide access to affordable essential
  drugs in developing countries
• Prices of antiretroviral drugs have decreased
  significantly
• Target 18 In cooperation with the private
  sector, make available the benefits of new
  technologies, especially information and
  communications
• 1990 530 million of fixed or mobile phones
• 2004 3 billion of phones
• 14 of the worlds population were using
  Internet

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Major trends in the Goals by region
34
What role can business play?
35
Business strategies to reach new markets, new
customers

• The fundamental role of business is
• To create wealth
• To provide goods and services
• To create jobs
• To pay taxes
• To innovate, invest and improve efficiency
• To act responsibly

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Business strategies to reach new markets, new
customers

•  Business leaders need to speak out now about
  their role in driving progress in society. For
  too long we have allowed people to think that
  business is interested in nothing other than
  profit, when in fact we see the purpose of
  business much more widely.
• We believe that the fundamental purpose of
  business is to provide continually improving
  goods and services for increasing numbers of
  people at prices that they can afford. 
• Paul Polmann, PG

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Business strategies to reach new markets, new
customers

•  We are committed to creating economic value,
  but we are not indifferent to how we do it.
• Progressive businesses are gaining competitive
  advantage by responding to societal signals. 
• We prosper by helping society to prosper. 
• Idar Kreutzer, Storebrand

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Business strategies to reach new markets, new
customers

• When a business is faced with a problem it cant
  look up to the heavens and pray for a solution.
  It rolls up its sleeves and solves the problem.
  Because if a company doesnt solve the problem,
  it goes out of business. This problem-solving
  capacity is why I think the private sector can
  provide tremendous social value in tackling
  poverty. Kurt Hoffmann, Shell Foundation

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Business strategies to reach new markets, new
customers

• The general consensus is that there is a
  significant, untapped potential for greater
  application of business skills and competencies
  to development issues
• There are certain things that the private sector
  does extremely well. These include
• operating efficiently at a large scale,
• delivering essential products and services where
  markets are functioning,
• developing innovative solutions to technical or
  operational obstacles to meet customer needs
• Taking a performance-oriented, results-driven
  approach to management

40
Business strategies to reach new markets, new
customers

• The greatest leverage for society and business is
  often found through the application of a
  companys tangible assets (such as equipments,
  innovative technologies, distribution networks)
  or intangible assets (such as management
  expertise, knowledge transfer, branding and
  marketing strength) rather than through issuing a
  cheque.

41
New business models for the Poor
42
Business strategies to reach new markets, new
customers

• Cases
• The Narayana Hrudayalaya Heart Hospital (India)
• Aspen Pharmacare (South Africa)
• Patrimonio Hoy (Mexico)
• Hindustan Lever (India)
• Shell solar (Sri Lanka)
• Gas Natural BAN (Argentina)
• TIA (Ecuador)
• Nestlé (Africa, Asia, Latin America)

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Business strategies to reach new markets, new
customers

• The Narayana Hrudayalaya Heart Hospital (India)
  (founded in 2001)
• Private sector health organisation making a
  profit and providing cardiac care for the Poor
• Dual strategy attract patients who pay the full
  price of treatment and use part of the profits to
  offer at-cost or below-cost care to the Poor
• Indicator of Quality mortality and infection
  rates comparable to those in US hospitals
• New technology and flexibility with short-term
  contracts with suppliers
• The telemedicine and the insurance programs
  receive financial and technical support from
  government

44
Business strategies to reach new markets, new
customers

• Aspen Pharmacare (South Africa) (founded in
  1997)
• Now the Africas leading generic pharmaceutical
  manufacturer
• The first African firm to enter the Anti Retro
  Viral market and the first firm in the world
  granted licenses for patented ARVs
• Low manufacturing costs, very limited RD and
  Marketing costs
• First approved supplier of the Clinton Foundation
• Funds from PEPFAR (Presidents Emergency Plan for
  AIDS Relief)

45
Business strategies to reach new markets, new
customers

• Patrimonio Hoy (Mexico)
• Launched in 1999 by CEMEX as a sales,
  distribution and savings program to serve
  self-construction market
• Tremendous success with 100 000 Mexican
  low-income families reached
• Credit through a well-planned savings program
  groups of 3 families saving for 7 cycles of 10
  weeks
• Use of local promoters (with well-established
  networks) to generate sales and monitor the
  program within assigned areas
• To date 62 offices in 29 cities, 42 million of
  construction materials
• Benefits for the families decrease the average
  time construction from 5 years to just one year,
  access to credit, improved service, increased net
  worth, improve savings habits, increased
  entrepreneurship
• Benefits for CEMEX increased sales and
  profitability, improved corporate image

46
Business strategies to reach new markets, new
customers

• Hindustan Lever (India)
• HLL is a leading company in India in consumer
  goods with thousand SKU across 20 categories
  including detergents, personal products, beverage
  and foods
• Thousands of independent retail and wholesale
  outlets characterized the Indian consumer goods
  market
• As 70 of India population reside in rural
  villages, HLL realised it could double its market
  by reaching these consumers
• Shakti was launched in 2000 to overcome the
  challenges of the rural market reach,
  communication and influence
• To Date 30 000 micro-entrepreneur women selling
  products in 100 000 villages in 15 states, 300
  partners including NGOs, banks and both state and
  local government departments
• Benefits for the Shakti women double the
  household income, education for children
• Benefits for HLL increase in sales 8,
  corporate reputation

47
Business strategies to reach new markets, new
customers

• Shell Solar (Sri Lanka)
• Shell Solars basic photovoltaic (PV) system
  gives power to customers
• Systems are covered by a 10-year warranty, PV
  system are manufactured in Shell Solar factories
  and batteries, cables, swithches are sourced
  locally
• Shell Solar establishes a direct sales channel
  supported by a consumer financing package from
  rural banks or microfinancing entities
• End of 2005 35 000 sold in Sri Lanka (15 local
  solar centers) and 20 000 in India (25 local
  solar centers)
• Grants from World Bank and IFC at the start to
  reduce the cost of each system by 25
• Each solar center is staffed by local
  coordinators and technicians
• Marketing strategy is word-of-mouth

48
Business strategies to reach new markets, new
customers

• Gas Natural BAN (Argentina)
• Main partner in the project Communizada
  Organizada a coalition of 40 NGOs based in the
  Moreno district of Buenos Aires (65 of
  population living in poverty)
• The idea was to channel existing funds for
  construction through a trust Solidarity
  Pipeline
• The trust facilitated a link among residents, the
  residents were encouraged to convince neighbours
  to take part in the project
• Residents had selected a 4-year payment plan
• Benefits for residents a significant decrease of
  cost compared to alternative fuels, a clean way
  to heat homes
• Benefits for Gas Natural BAN reaching new
  consumers
• Benefits for local government reduce the
  investment in public infrastructure

49
Business strategies to reach new markets, new
customers

• TIA (Ecuador)
• The retailer TIA opened its first store in 1960
  targeting customers in the lower half of the
  socioeconomic pyramid ? end of 2005 larger third
  retailer in the country
• Barrio Stores target customers living in very
  poor and densely populated areas
• Limited assortment of basic goods, replenished
  daily at the lowest price in the neighbourhood
• Low-cost operation few employees trained to
  perform all tasks
• Location of the stores selected in populated area
  and near a school, a church or a police station

50
Business strategies to reach new markets, new
customers

• Nestlé Milk District Model
• Nestlé set up the first Milk District outside of
  Europe in Mexico in 1930 with the objective to
  establish a steady and secure supply of fresh
  milk near a factory
• Nestlé provides veterinary expertise,
  infrastructure, training, grading systems,
  quality and safety controls, a fair and
  transparent pricing and a financial support
  system
• Benefits for the farmers increase of income and
  regular monthly payment
• Benefits for Nestlé security of procurement,
  food safety and quality of the milk

51
Business strategies to reach new markets, new
customers

• There are four main ways in which businesses
  typically engage in the process of economic
  development
• Through core business practices
• Creating employment
• Developing innovative new products
• Finding efficient, profitable ways to deliver
  affordable goods and services
• Through public-private partnerships
• Combination of business and philanthropic
  activity
• Through strategic corporate philanthropy and
  social investment
• Cash donations or in-kind contributions of
  products or expertise to fill public gaps in
  infrastructure
• Through transparent and responsible business
  engagement in public policy dialogue, rule making
  and institutional-building

52
Business strategies to reach new markets, new
customers

• Business Models
• Business models targeting low-income consumers
  require managers to change from revenue and
  margin maximisation to sales volume and market
  price for long-run profitability,
• Products for poor markets have to be cheaper and
  therefore simpler,
• To keep costs low, it is useful to synchronise
  distribution and communication channels,

53
Business strategies to reach new markets, new
customers

• Business Models
• Introduction of finance scheme is an asset to
  sell to the Poor,
• Effective communication to the Poor includes
  product sampling and direct selling,
• Word-of-mouth plays a significant role in poor
  communities the retailer and his shop are the
  key to successful communication,

54
Business strategies to reach new markets, new
customers

• Business Models
• Brands targeting the poor can benefit by
  leveraging social networks,
• Social endorsement through reference groups can
  help brand adoption,
• Product demonstrations are very effective
  communication tool,
• Demonstrations allow the rural audience to
  immediately see the benefits of the products.

55
Business strategies to reach new markets, new
customers

• Business Models
• Innovative new business models in low-income
  markets have 3 common interrelated factors
• Use of new and advanced technologies,
• Development of partnerships,
• Integration into social networks
• New model involves offering integrated service
  rather than a product.

56
Business strategies to reach new markets, new
customers

• Business Models
• Business models targeting low-income consumers
  require managers to change from revenue and
  margin maximisation to sales volume and market
  price for long-run profitability,
• Products for poor markets have to be cheaper and
  therefore simpler,
• To keep costs low, it is useful to synchronise
  distribution and communication channels,

57
Business strategies to reach new markets, new
customers

• Business Models
• Introduction of finance scheme is an asset to
  sell to the Poor,
• Effective communication to the Poor includes
  product sampling and direct selling,
• Word-of-mouth plays a significant role in poor
  communities the retailer and his shop are the
  key to successful communication,

58
Business strategies to reach new markets, new
customers

• Business Models
• Brands targeting the poor can benefit by
  leveraging social networks,
• Social endorsement through reference groups can
  help brand adoption,
• Product demonstrations are very effective
  communication tool,
• Demonstrations allow the rural audience to
  immediately see the benefits of the products.

59
Business strategies to reach new markets, new
customers

• Business Models
• Innovative new business models in low-income
  markets have 3 common interrelated factors
• Use of new and advanced technologies,
• Development of partnerships,
• Integration into social networks
• New model involves offering integrated service
  rather than a product.

60
Innovative solutions through partnerships
61
Business strategies to reach new markets, new
customers

• Guidelines for successful Public-Private
  Partnerships
• Find motivated partners and agree on common
  goals, acknowledging different competencies and
  approaches
• Choose the partnership model best suited for the
  goal
• Identify a well-connected champion to ensure
  continuity and success of the partnership
• Create a win-win partnership with measurable
  benefits and results
• Define partners roles and responsibilities
  clearly from the onset and build capabilities to
  fulfil them

62
Business strategies to reach new markets, new
customers

• Guidelines for successful Public-Private
  Partnerships
• Develop strategies for sustainable PPP financing
  and management in the early stages of partnership
  planning
• Focus on meeting the needs of customers and
  stakeholders, rather than external actors such as
  donors
• Represent and include all stakeholders in the
  planning and life cycle of the partnership
• Agree on clear targets, monitor progress, and
  agree on an exit strategy where appropriate

63
Business strategies to reach new markets, new
customers

• Guidelines for successful Public-Private
  Partnerships
• Manage PPPs as a business unit within a company
• Provide strong coordinating mechanisms and
  effective governance for collaborative PPPs
• Convene public and private stakeholders to
  catalyse and broker partnerships, share best
  practices and guidelines, and identify funding
  sources
• Conduct consistent and long-term monitoring and
  evaluation studies to evaluate PPP outcomes

64
Business strategies to reach new markets, new
customers

• Examples of successful Public-Private
  Partnerships
• Rio Tinto
• SC Johnson
• DHL
• Siemens
• Tetra Pack
• TNT

65
Business strategies to reach new markets, new
customers

• Examples of successful Public-Private
  Partnerships
• Rio Tintos Malagasy subsidiary with CARE and
  USAID for sustainable management of natural
  resources in the mining areas and setting up
  sustainable fuelwood and charcoal plantations
  over a 5-year plan (Madagascar)
• SC Johnson with ApproTEC and PBK (Pyrethrum Board
  of Kenya) for appropriate irrigation technologies
  to raise household income of local growers (Kenya)

66
Business strategies to reach new markets, new
customers

• Examples of successful Public-Private
  Partnerships
• DHL provides transportation and logistics
  services to assist the International Federation
  of the Red Cross both in emergency situations and
  in day-to-day operations.
• Siemens entered into a partnership with UNICEF
  aiming to raise awareness and gain new sponsors.
  Siemens promoted the cause among its employees,
  customers and shareholders.

67
Business strategies to reach new markets, new
customers

• Examples of successful Public-Private
  Partnerships
• Tetra Pak is working with state and federal
  government and local entrepreneurs to expand
  cassava, maize and sorghum production to replace
  imported ingredients in its heavily fortified
  NutriSip drinks. The drinks are distributed to
  children through a school feeding pilot programme
  (Nigeria)
• TNT is a primary sponsor of the UN World Food
  Programmes annual Walk the World event. TNT is
  leveraging its marketing skills and mobilising
  its employees for the cause. In addition TNT is a
  partner of WFP using its logistics and managerial
  capabilities to improve the efficiency of WEFs
  delivery systems.

68
Finding capital for the Poor
69
Business strategies to reach new markets, new
customers

• Securing finance for a business with the Poor
  requires looking for capital in non-traditional
  places.
• They are four main concepts
• Patient capital
• Distributed capital
• Project capital
• Partner capital

70
Business strategies to reach new markets, new
customers

• Key concepts
• Patient capital is investment characterised by a
  long-term horizon and particularly motivated by
  positive social and environmental impacts
• Distributed capital strategy allows companies to
  engage external capital resources to which they
  would not otherwise have access. Often this is
  through partnerships that also have the potential
  to reduce total capital needs and improve the
  business chance of operational success.

71
Business strategies to reach new markets, new
customers

• Key concepts
• Project capital is the direct resource available
  to support a sustainable business for the Poor.
  It can be straightforward financial capital, i.e.
  debt or equity that funds the business. It can
  also be non-financial resources, such as
  awareness-raising campaigns undertaken by a
  partner NGO, which will in effect reduce the
  overall costs of the business.
• Partner capital is funding for organisations that
  surround and support the project. It takes many
  forms grants, debt, equity. It reduces project
  risk and total capital need.

72
Business strategies to reach new markets, new
customers

• When to source capital in house and when to tap
  into external resources?
• To fund a business with the Poor, managers need
  to decide whether to finance internally or look
  for external resources.
• If the business requires complex partnerships and
  does not immediately offer attractive rates of
  return it might lose out to other more
  conventional business proposals in the
  competition for in-house funding.

73
Business strategies to reach new markets, new
customers

• Some companies have shift from a centralised
  capital strategy mentality in which they go it
  alone in raising funds for their business to a
  distributed capital strategy in which they also
  become capital conduits to already existing local
  expertise and capacities.
• Some companies found that they can only be
  successful in launching a business for the Poor
  if it facilitates a connection between the World
  Bank and a local government to built
  infrastructure and, at the same time, convinces a
  social investment fund to make expansion loans to
  local small and medium-sized enterprises.

74
Business strategies to reach new markets, new
customers

• External capital providers, in addition to
  reducing companys required capital commitment,
  can bring key expertise and significantly
  strengthen local commitment to the business
  venture
• A key element of effective financing involves
  creating partnerships and fostering a business
  environment that will enable business to succeed.

75
Business strategies to reach new markets, new
customers

• Internal capital They are two main obstacles to
  accessing in-house funds
• Businesses with the Poor are new and very often
  do not fit neatly into companys existing
  business development models.
• In addition these innovative businesses are also
  perceived to have a very high risk profile.

76
Business strategies to reach new markets, new
customers

• Companies have systematic process to evaluate
  business plans through a number of lenses
  including economic, strategic, environmental,
  social impact and reputation.
• The way companies treat intangible benefits in
  their financial analyses varies widely.
• These benefits may be accounted for by increasing
  cash flow projections, or by decreasing the
  discount rate that is used, or they might be part
  of a qualitative checklist that is separate from
  the quantitative analysis.

77
Business strategies to reach new markets, new
customers

• A key factor is the extent to which a compelling
  case can be made for the financial value of the
  many intangible benefits of a business with the
  Poor
• Brand value
• Corporate reputation
• Employee morale and motivation
• Community relations
• Customer loyalty
• Quantifying these important benefits is a
  long-standing problem but significant progress is
  being made.
• Social indicators are being developed to help
  measure corporate social performance and relate
  it to corporate financial health.

78
Business strategies to reach new markets, new
customers

• External capital Obtaining external patient
  capital demands new conversations around social
  impacts and long-term sustainability. Most
  importantly companies need to look for capital
  from non-traditional sources.
• Businesses with large upfront investment needs
  such as utility, natural resources or heavy
  manufacturing are the most likely to need patient
  capital support for their business with the Poor.

79
Business strategies to reach new markets, new
customers

• This external capital might have a lower interest
  rate or a longer time until repayment than
  traditional loans.
• In addition, the source of patient capital might
  be willing to take on types of risk that
  traditional capital providers would not.
• External patient capital will most commonly take
  the form of debt but can also be equity (if the
  business is set up as a joint venture) or grant
  funding.

80
Business strategies to reach new markets, new
customers

• In addition, loan guarantees and specialised
  insurance products, such as political risk
  insurance, may be used as risk reduction tools to
  allow traditional financial institutions to
  provide capital.
• To be credible when seeking capital from external
  sources companies need to have clearly identifies
  the social and environmental benefits that will
  flow from their business.
• External patient capital that supports supply
  chain businesses, often local SMEs, or
  non-for-profit partners, often international or
  local NGOs, can be crucial to success.

81
Business strategies to reach new markets, new
customers

• These partners will contribute to an improved
  business environment and help to ensure that
  benefits are widely distributed
• They also provide expertise and services that
  reduce the operational costs and/or the direct
  capital need for the project. This can be thought
  as the non-financial capital that partners
  provide.
• However, these partner organisations are often
  severely capital constrained.

82
Business strategies to reach new markets, new
customers

• How to limit risk?
• There is much higher risk profile attached to
  doing business in a developing country.
• They are political risk and economical risk.
• Political risks exist in all countries but can be
  particularly significant in some markets. These
  risks include sudden/unpredictable regulatory
  changes, asset expropriation and armed conflict.

83
Business strategies to reach new markets, new
customers

• Tools and strategies
• Multilateral Investment Guarantee Agency (MIGA),
  part of the World Bank Group
• Overseas Private Investment Corporation, US
  government agency (many other governments have
  similar programs)
• Private sector organisations rate political risk
  and institutional development such as the
  Economist Intelligence Unit and Political Risk
  Services.
• Building support among local constituencies such
  as joint venture partners, customers, employees,
  lowers the risk of asset expropriation or other
  government interference.In choosing local
  partners it is important to be sensitive to the
  local political context.

84
Business strategies to reach new markets, new
customers

• Economic risk includes factors such as currency
  fluctuations, inflation and sudden changes in
  demand or employment conditions.
• Tools and strategies
• Some financial instruments limit exposure to
  currency movements.
• Operating decisions (e.g. currency in which to
  borrow, currency in which to collect revenues,
  country from which to source raw materials) can
  act as natural hedges against currency movements.

85
Business strategies to reach new markets, new
customers

• Many companies have found it useful to tap into
  sources of external capital even when such
  investment was not essential to launching the
  project. In addition to funds, such capital
  providers can in some instances bring valuable
  expertise and strengthen local acceptance.
• However, reasons not to involve external capital
  providers include transaction costs and long
  lead-times until financing is secured.

86
Business strategies to reach new markets, new
customers

• Examples of financing strategies
• Suez
• Veolia
• Vodafone
• Eskom
• EDF
• Shell

87
Business strategies to reach new markets, new
customers

• Suez (South America) Implementing a diversified
  capital strategy
• Suez aims to develop local niche expertise to
  secure future contracts. This include finding
  solutions to providing water and sanitation
  services in rapidly growing per-urban areas with
  little existing infrastructure.
• Two major challenges arise
• How to finance high-cost infrastructure when an
  adequate return on investment is not possible
  within traditional financing structures
• How to ensure that infrastructure will be
  operated and adequately maintain long-term

88
Business strategies to reach new markets, new
customers

• Suez (South America) Implementing a diversified
  capital strategy
• Manaus (Brazil)
• In 2000, AdA, Suezs Brazilian subsidiary was
  awarded a concession to provide water and
  sanitation services in Manaus (1.5 million
  people). As part of its contractual obligations,
  the company agreed to expand the water network to
  poor neighborhoods and informal settlements.
• The bid for the concession amounted to 70
  million. Part of this was financed by the IFC and
  by BNDES, a Brazilian development bank providing
  31.5 million in the form of a market-rate
  loan.Previous experience in Argentina pushed
  Suez to borrow in local currency.
• The NGO ESSOR helped determine community needs
  for these deprived areas and also new customers
  ability to pay.
• The French Embassy in Brazil helped fund ESSORs
  participation.

89
Business strategies to reach new markets, new
customers

• Suez (South America) Implementing a diversified
  capital strategy
• La Paz and El Alto (Bolivia)
• In 1997, AdI, Suezs Bolivian subsidiary was
  granted a concession to provide water and
  sanitation services in La Paz and El Alto.
• Financing (7 500 000) is being secured through a
  public-private partnership involving the Bolivian
  government, local communities (56) and the Swiss
  State Secretariat for Economic Affairs
  (SECO40). The primary contribution of Suez was
  bringing its technical and management expertise
  (4)
• The community contribution was split between
  labor(30) and cash(70)
• Customers help excavate the trenches for the
  water and sewer networks. They also pay a
  connection fee with a long-term repayment
  schedule.
• Benefits for customers less than half of what
  they pay to existing vendors while getting four
  times as much water.

90
Business strategies to reach new markets, new
customers

• Veolia (Morocco) A concession model that promotes
  affordability
• Since 2002, Veolia has managed the water,
  sanitation and electricity services in different
  cities of Morocco. It has contractual obligations
  in these cities to provide connections to lower
  income residents.
• The public authorities are responsible for
  building the network (2/3) while Veolia is only
  responsible for constructing the final connection
  to user homes (1/3). This investment in two
  cities is approximately of 750million over 25
  years.
• In addition lower income residents are offered
  the option of paying in monthly installments over
  five to seven years. This is financed through
  local financial institutions.

91
Business strategies to reach new markets, new
customers

• Vodafone (South Africa) Co-investing with local
  entrepreneurs
• Vodacom, a joint venture between Vodafone and
  Telkom SA,needed to serve disadvantaged
  communities in South Africa.
• Vodacom set up stationary phone shops or kiosks
  (old shipping containers) with multiple lines,
  all connected to Vodacoms existing
  infrastructure through a wireless link.
• The individual phone shops are franchises owned
  and operated by local entrepreneurs who sell
  services to customers on a prepaid basis.
• The initial in-house investment of 660 000
  provides over 23 000 phone lines at around 5 000
  sites

92
Business strategies to reach new markets, new
customers

• Vodafone (South Africa) Co-investing with local
  entrepreneurs
• At the site level total capital expenditure has
  reached almost 20million.
• Vodacom pays around 3 950 to purchase and modify
  a shipping container for each individual phone
  shop.
• The local franchisees are responsible for
  purchasing the equipment and transporting the
  container to the site around 3 450. Some are
  helped by local financial institutions.
• A shop with a central location can generate
  revenues of around 1 190 per month for the
  franchisee.
• Vodacom generated 129.5million in 2003 it
  reached operational breakeven in 2004.

93
Business strategies to reach new markets, new
customers

• Eskom (South Africa) Catalysing the African power
  sector through pooled investment
• The Africa Power Investment Initiative (APII) is
  a project development company formed jointly by
  Eskom Holdings, the Industrial Development
  Corporation (IDC) and the Development Bank of
  South Africa (DBSA). The total capital commitment
  was approximately 125million form each partner.
• Eskom expects to generate a return on equity of
  12 from investments in projects, consistent with
  its other businesses.
• Political risk insurance agencies, like the MIGA
  (part of the World Bank Group) is providing
  insurance to APII projects.
• Additional benefit for Eskom
• future business opportunities
• Corporate reputation Tools and strategies

94
Business strategies to reach new markets, new
customers

• EDF (South Africa) Creating affordability with
  government subsidies
• To lower down tariffs of electricity sufficiently
  to reach the poorest population segments,
  government or donor grants are essential.
• The project required 9.8million. 59 came from
  the South African government through a grant for
  each customer fitted with a photovoltaic kit.
• 39 came from shareholders (EDF and Total)
  contributions
• 2 came from customers through a modest
  connection fee.
• The model has been further rolled-out in Mali,
  Morocco, Senegal, Madagascar,

95
Business strategies to reach new markets, new
customers

• Shell (Sri Lanka) Ensuring customer affordability
  with the help of external partners
• Shell Solar Lanka Limited decided to offer
  households solar systems providing cheaper
  electricity long term, as well as a cleaner and
  more convenient source of power.
• The World Bank and the Global environment
  Facility (GEF) provided a grant of 120 per
  system. Shell was able to offer these products
  locally for 550.
• However, many people are still not able to pay
  this upfront.
• Sarvadaya Economic Enterprise Development
  Services (SEEDS), microfinance organisation, and
  Shell developed a credit scheme.
• Under this scheme, customers pay an initial
  deposit and a monthly amount for five years.

96
Business strategies to reach new markets, new
customers

• Five different sources of capital resources
• Multilateral financial institutions
• Bilateral development agencies
• Private foundations
• Social loan and venture funds
• Microfinance institutions

97
Business strategies to reach new markets, new
customers

• Multilateral financial institutions provide
  financial support and professional advice for
  economic and social development in developing
  countries.
• World Bank (over 200billion)
• The International Development Association (IDA)
  provides interest-free credit and grant financing
• The International Bank for Reconstruction and
  Development (IBDR) promotes sustainable
  development through loans, guarantees and
  no,-lending services.
• The four regional development banks
• International Finance Corporation (IFC)

98
Business strategies to reach new markets, new
customers

• Multilateral Financial Institutions (MFI)
  provide
• Long-term loans on market interest rates
• Very long-term loans (often termed credits) with
  interest well below market rates
• Grant financing mostly for technical assistance
  and advisory services
• Debt and/or equity investment

99
Business strategies to reach new markets, new
customers

• The International Finance Corporations mission
  is specifically to promote business activity in
  developing nations.
• It is very active in promoting local private
  sector development.
• Many local business partners, suppliers and
  distributors are ideal candidates for IFC funding

100
Business strategies to reach new markets, new
customers

• Bilateral development agencies provide
  professional advice and financial support to
  developing nations.
• They are sponsored by a single government.
• The financial support that bilaterals offer
  encompasses grants, loans and equity investments.
• Similar to MFIs, bilaterals have recently
  increased their focus on financial support of the
  private sector.

101
Business strategies to reach new markets, new
customers

• Some examples of Bilateral development agencies
• UK Department for International Development
  (DFID)
• Canadian International Development Agency (CIDA)
• French Development Agency (AFD)
• German Technical Cooperation (GTZ)
• Japan International Cooperation Agency (JICA)
• Swedish International Development Agency (SIDA)
• US Agency for International Development (USAID)

102
Business strategies to reach new markets, new
customers

• Private foundations are institutions with a
  social benefit or philanthropic purpose that are
  funded by individuals or private sector
  organisations.
• Traditionally foundations committed to assisting
  developing nations have targeted their funding
  towards NGOs.
• More recently however, some foundations are
  utilising loans, loan guarantees and equity for
  allocation to for-profits operating in low-income
  communities.
• US based foundations control assets of around
  470billion and EU based ones control assets
  between 200-400billion.

103
Business strategies to reach new markets, new
customers

• There is a growing community of social loan and
  venture funds that invest in for-profit
  businesses that also have a social or
  environmental mission.
• Most funds expect investments to produce
  competitive financial returns.
• Many of these funds focus on companies based in
  developing nations or who primary serve customers
  in these countries.
• Examples
• ECo, social loan fund
• Foursome Investments, social venture fund
• Acumen fund
• Global Environment Fund
• Small Enterprise Assistance Fund
• Triodos

104
Business strategies to reach new markets, new
customers

• Microfinance institutions provide small loans to
  the self-employed poor.
• These people are not served by traditional banks
  for various reasons
• Perceived high credit risk
• Lack of bank infrastructure in poor communities
• High transaction costs relative to loan size
• Over the past 25 years, microfinance has grown to
  over 7 000 institutions in 43 countries serving
  19 million people (11million are women) with an
  average repayment rate of 96-98

105
Business strategies to reach new markets, new
customers

• Microfinance customers tend to borrow and
  reinvest these small loans at fairly high
  turnover rates to help build their businesses.
• Loans are most often used to make labor-intensive
  business more productive.