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Title: 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

4
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?
6
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.

7
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
10
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

11
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.

12
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

13
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.

14
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.

15
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

16
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.

17
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

18
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.

19
The Millennium Development Goals
20
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.

21
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

22
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

23
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

24
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

25
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

26
Major trends in the Goals by region
27
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

28
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

29
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

30
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

31
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

33
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

36
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

37
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

38
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

39
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)

43
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.
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