dd notes base of pyramid

8/8/2019 DD Notes Base of Pyramid

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Dr. Denise Dimon, University of San Diego 1

Business at the Base of the Pyramid

Emerging Markets Learning about consumers behaviors

Unilevers concept center in Shanghai has hair salons,living (or chatting) rooms, use new products whereconsumers reactions on monitored behind two-waymirrors.

Products are adjusted Unilever makes its soaps and shampoos foamier than

their Western equivalents.

P&G produces toothpaste in herbal and green-teaflavors.

PepsiCo adds spice to its potato chips. KFC and Pizza Hut are repositioned as a up-scale

market in China


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Economic Pyramid

Tier 5

Tier 4

Tiers 2 & 3

Tier 1

PPP in US dollars

> $20,000

$1,500-$20,000

$1,500

< $1,500

Population in millions

75 - 100

1,500 - 1,750

4,000

More than 4 billion constitute the bottom of the pyramid

People

Government

MultilateralOrganizations

Business

NGO


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EconomicReturn

Social Value

Conventional business

NGO

Can we be here?

Can we have a convergence of enterprises adding both social and

economic value?

Every social problem is a businessopportunity in disguise.

Peter Drucker


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New Business Models

Nokia discovered that poor people often share their phones prompted the company to make handsets with multipleaddress books.

Proctor & Gamble puts products into packages smallenough to fit on crowded shelves and uses a network of local representatives to keep the shops stocked.

India Unilever employs an army of shakti entrepreneurswho sell goods from their homes and educate their friendsin health and hygiene.

New Business Models

Grupo Elektra, a Mexican retailer, started offering credit toconsumers who did not have a bank account, and ended upholding so much financial information on its customersthat it decided to take the next step and go into banking.The company now has one of the countrys biggestnetwork of bank branches as well as one of its most

popular retail chains.

The Future Group, Indias largest retailer, has introducedorganized chaos into its shops to make consumers feel athome, breaking up long aisles with untidy-lookingdisplays.


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New Business Models East African Breweries, a division of Diageo, launched a

cut-price beer, Senator Keg, to help reduce demand for illicit alcohol, which is cheap but is frequentlycontaminated with methanol, fertilizers and battery acid.The company reduced the cost of the beer by negotiating atax waiver with the government and by distributing it inkegs rather than bottles. The company made use of theshadow economy to get the beer delivered to the outlets. Italso trained bar staff to understand the importance of rotating kegs to make sure the beer was fresh, and of washing glasses. Senator Keg is now everywhere inKenya, sold in every makeshift roadside bar, and isaffectionately known as Obama.

Total household income of $5 trillion a year

In Latin America the BOP market of $509 billionincludes 360 million people, representing 70% of the regions population but only 28% of totalhousehold income, a smaller share than in other developing regions.

Africa has a slightly smaller BOP market, at $429 billion. But the BOP is by far the regionsdominant consumer market, with 71% of

purchasing power. It includes 486 million people -95% of the surveyed population.


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Total household income of $5 trillion a year

Asia (including the Middle East) has by far thelargest BOP market: 2.86 billion people withincome of $3.47 trillion. This BOP marketrepresents 83% of the regions population and42% of the purchasing power - a significant shareof Asias rapidly growing consumer market.

Eastern Europes $458 billion BOP marketincludes 254 million people, 64% of the regions

population, with 36% of the income.


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Characteristics: Informal Market

The ILO estimates that more than 70% of the workforce in developing countriesoperates in the informal or undergroundeconomy, suggestion that most BOPlivelihoods come from self-employment or from work in enterprises that are not legallyorganized businesses.

Defined by More than Low Income

Significant unmet needs No bank accounts or access to capital Lack of access to water, health care, technology, etc.

Dependence on informal or subsistencelivelihoods

Impacted by a BOP penalty

Pay higher prices on basic goods and services Have more limited access


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Market at the Bottom of the Pyramid

How can we partner with the poor wherethe poor are actively engaged and at thesame time companies are providing

products and services to them are profitable?

There is Money at the BOP The dominate position is that the poor have no

purchasing power and therefore do not represent aviable market China: a population 1.2 billion with an average per

capital income of $1,000 = $1.2 trillion economy. AtPPP it is $5 trillion

China, India, Brazil, Mexico, Russia, Indonesia,Turkey, South Africa and Thailand (about 70% of thedeveloping world population) the collective GDP is$12.5 trillion - 90% of the developed world. (Larger than Japan, France, Germany, UK and Italy combined!)


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But.do they have money to spend? There is a poverty premium which is the result of

local monopolies, inadequate access, poor distribution, and strong traditional intermediaries. Money lenders can charge 600 percent

Citicorp started a $25 deposit-based bankingsystem in India and enrolled 150,000 customersthe first month

Cell phone company in India gave 100 freeminutes and a subscription service for $9.95 per month and had 1 million applications in the first10 days.

False assumption: Poor do not careabout brands or quality

Poor are very brand conscious - and extremelyvalue-conscious by necessity Casas Bahia in Brazil Elektra in Mexico

Challenge: make aspirational products affordable Challenge: BOP markets will force a new level of

efficiency with increased pressure on costs of development, manufacturing and distribution


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New Ways of Thinking

Affordability without sacrificing quality Single-serving packages Novel pricing schemes

Access Distribution patterns

Availability Cannot defer buying decisions

Example: $100 Laptop

Click here


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Casas Bahia

The company has more than doubled in size over the last decade, asa result of its successful sales model, which aims to make well-known brands affordable for Brazils large population of low-income consumers. Its ability to appeal to a very large customer

base is fuelled by its highly effective marketing and advertisingstrategy.

Case Study: Casas Bahia Over 500 stores, in eleven states in Brazil, employs 60,000

people, and serves more than 31 million customers. Withannual revenues of US $7 billion, they have grown to

become the largest retail chain in Latin America. Average finance term is 6 months, with interest rate of

4.13 % per month) and a price of R$440 (US$150) with adefault rate of 8.5% (average across all income levels is6.5%)

Financed sales account for 90%, with small, relativelyfrequent payments are made in stores to developrelationships

When payments are made, new credit limits are establishedto result in additional sales


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Case Study: Guayak

Guayaks partners sustainably harvest organicyerba mate from rainforest grown cultivations andreforestation projects, generating a renewableincome stream which enables these communities toimprove their lives and restore their lands.

Goal is to restore 200,000 acres of South AmericanAtlantic rainforest and create over 1,000 livingwage jobs by 2020

Case Study: CEMEX and Patrimonio Hoyclick here for intro video

During the Mexican economic crisis in 94-95 CEMEX had adrop in sales 50% in the formal sector 10-20% in the informal sector

Do-it-yourself segment accounted for 40% of sales One-third of all new homes in Mexico were informally

constructed

Typically these homes had only one room, which served asthe kitchen, living room, and bedroom for the entire family(on average consisting of 4-6 people)

Rooms lacked proper roofs, sewage facilities and oftentelephone service


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Mexican Low Income Housing Sector

Self-construction process was slow and inefficient Purchasing and construction process was often delayed

due to lack of capital to purchase all needed items at onetime

Individuals often lacked the savings habit and access tocredit to make larger purchases resulting in materials

being bought at irregular intervals and in varyingamounts

Individual families lacked knowledge to properlyconstruct a house lowing the process and leading tolower-quality homes.

Result was an average of five years to build anindividual room

Challenges CEMEX had to build trust and convince the

poor they will indeed be able to build ahouse with CEMEX

CEMEX had to increase understandingabout credit

Sales team had to change their mindset

beyond objectives of just selling cement


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PH Process (business model)

Allowed low income families to obtain access to services, cement and other building materials on credit through a well-planned savings program.

Customers were organized into groups of three families with each familycontributing US$14.80 per week for seven cycles of ten weeks.

Within each 10-week cycle, CEMEX provides access to 10 weeks worth of building materials and services after only two weeks of payment.

Families collectively pay off their debt during the remaining 8 weeks Within each weekly payment, US$12.50 is the direct payment for materials

and US$2.30 is the participation fee CEMEX gives architectural consulting and warehousing services. Local promoters are hired to generate sales and monitor the program PH leverages on CEMEXs IT strength PH leverages on Construrama network PH leverages on CEMEX small distributor network PH leverages on CEMEX financial strength

PATRIMONIO HOY: ASSOCIATES

My husband didnt want me to become acustomer, so I became a promoter withoutasking him and now I earn my own moneywhich I use for the program. Teresa Pinedo

As a promoter, I feel more confidentas a woman to speak in front of

people in my community. GeraLpez


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Market at the Base of the Pyramid

Targeting new markets Building strong customer base Generating new revenue streams Improving access and markets at the base of

the pyramid

Future Opportunities?

Growth markets New regions New consumers New understanding

Trends in trade

Trends in investment


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Predicting New Opportunities

1943: Thomas Watson, chairman of IBM "I think there is a world market for maybe five

computers.

1974: Ken Olsen, president and founder of DigitalEquipment Corporation "There is no reason anyone would want a computer in

their home."

1981: Bill Gates, chairman and CEO of Microsoft 640k ought to be enough for anybody."

dd notes base of pyramid

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