Socially Responsible Strategies for Reaching the Bottom of the Pyramid
Posted by Category: Base Of the Pyramid, Corporate Social Responsibility, Research Review.
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Socially Responsible Strategies for Reaching the
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— By: Vachani & Smith — . — Published: California Management Review, February 2008. —.
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The article “Social Responsible Strategies for Reaching the Bottom of the Pyramid”, by Vachani and Smith, focuses on distribution strategies for reaching the rural poor.
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Majority of the BOP (Base Of the Pyramid) poses distinct distribution challenges relative to the urban poor, who in many respects are easier to reach. the critical barrier to doing business in rural regions is distribution access. Overcoming this barrier is called socially responsible distribution.
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The Distribution Challenge
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The market access disadvantages suffered by the rural poor are rooted in many factors, which affect the flow of goods and services both in and out of rural areas, and adversely affect the rural population’s income and quality of life.
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- Poor Road, Communications, and Electricity Infrastructure
Poorly served by appropriate and affordable transport, which poses a physical barrier to markets. Limited local demand, combined with the high cost of transporting goods to and from remote villages, depresses farmers’ incomes and results in higher prices for the agricultural inputs and consumer goods they acquire from urban areas. Poor roads can present a significant barrier to school attendance.
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- Information Problems
Information asymmetries are a major challenge, in which small farmers are unaware of commodities’ market prices and trends and see few options regarding when and where to sell their produce, especially when those they trade with are better informed. Also disadvantaged when comes to purchasing agricultural inputs, as they lack information on competing product prices, features, and quality.
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- Lack of Knowledge and Skills
The availability of information is necessary but not sufficient for welfare enhancement. In order to extract the benefits of information, farmers must know how best to use it.
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- Illiteracy
Those who are illiterate or poorly educated naturally suffer greater disadvantage in developing the knowledge and skills to derive value from information.
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Socially Responsible Distribution Strategies
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There are three creative market-based alternatives that we identified in this research:
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1▪ Taking cost out: - This approach increases access by lowering the costs of distribution.
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2▪ Reinventing the distribution channel: - This approach increases access through innovation, by identifying different routes for reaching rural consumers and for rural producers to get their products to market. New technologies provide one type of solution. Other solutions come in business process redesign.
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3▪ Taking the long-term view and investing for the future: - This approach entails increased private sector investment anticipating a long-term payback and/or as a social commitment.
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To understand how socially responsible distribution meets the challenge of distributing goods and services, we looked at the strategies of three organizations drawn from different sectors: government, the private sector, and civil society.
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ITC
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ITC uses information technology to empower small farmers by providing them with realtime market information, and it has set up a direct procurement system that gives farmers an alternative channel for selling their produce. In addition, ITC began deriving economies of scope from its logistics infrastructure by moving products in the reverse direction, out to the villages, selling agricultural inputs to farmers. In a major strategic move begun in 2004, ITC has committed to a significant enhancement of its rural distribution by investing in a chain of mini-malls to sell a range of goods and services. It has succeeded by taking cost out and reinventing the distribution channel and, arguably, invested by taking a long-term view.
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The centerpiece of the system is the “e-Choupal,” which is a gathering place built around a computer located in the village to provide farmers with information on commodity prices, weather forecasts, farming practices and other important topics in the local language.
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To facilitate the development of its network of village representatives and to retain the goodwill of the commission agents it previously used when procuring soya in the mandi, ITC decided to co-opt some of the commission agents in its redesigned distribution chain. It used the commission agents to identify suitable farmers to serve as its village representatives.
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With the assistance of the village representative, farmers access ITC’s web portal, which provides information on commodity prices the previous day at each mandi in the state and at its own procurement center. It also presents information on prices in international markets such as the Chicago commodities exchange, which are precursors of local price.
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ITC has broadened the scope of products distributed to rural areas by building mini-malls (called Choupal Saagars) at some of its commodity procurement centers. The Choupal Saagars sell a wide variety of products and services, including packaged consumer goods, white goods, agricultural inputs, diesel, and health, insurance, and banking services for which it has entered into partnerships.
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ITC had to make significant changes to other aspects of marketing to meet the needs of the rural market.
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Gyan Shala
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Gyan Shala (“school for knowledge/wisdom”) is an example of a nonprofit entrepreneurial start-up that has developed a scalable model to provide low-cost consistent-quality education to poor rural and urban children who are inadequately served by existing public education programs. Its model provides basic education using specially developed high-quality materials that are delivered by low-wage (10th grade pass) but well-trained teachers at locations close to the homes of underprivileged children. The typical class consists of about 30 children, all at the same learning level—grade 1, 2, or 3. Gyan Shala’s design team puts together the curriculum and the schedule for daily classroom activities. The typical teacher lives in the neighborhood where the class is located. They are hired only if they pass a test of language and math skills, and feel comfortable working with Gyan Shala’s modest compensation.
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Teachers are given two weeks of initial training. An important consideration in terms of scalability is to design an organization and systems to ensure quality at large scale. Supervisors review teachers and students’ work, demonstrate effective class practices, and help teachers in dealing with children who are falling behind in learning. Senior supervisors who assist the design team and handle school level issues that supervisors cannot tackle on their own. Gyan Shala started with $18,500 from the Ratan Tata Trust. The annual cost of schooling $40 per child, which is a third or less of the typical cost in government schools.
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There are two types of problems Gyan Shala has had to address: paucity of financing, which was a bigger problem at early stages, and finding enough supervisors, which became a challenge at later stages as it scaled up.
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One of the strengths of Gyan Shala’s model is its scalability. As the number of students increases, the design team does not need expansion. While more teachers are needed, since the model is designed to employ individuals with modest qualifications, scalability is not hampered.
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Department of Post
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The Indian Postal System provides the widest communications reach into rural India. It has 155,516 post offices, of which 89%, or 139,120, serve rural areas, giving it the widest physical reach of any Indian organization. The postal system has relied on collaboration with private entrepreneurs to build this large network.
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In order to enhance its economic feasibility and derive greater benefits for consumers, it offers a wider range of services than is typical of most countries’ postal systems. Access has been increased through reinventing the distribution channel.
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The Department has a strategy of enhancing the economic viability of its investment in the postal network by offering a wide range of services. In addition to normal services such as delivering mail and money orders, it offers basic financial services such as savings accounts and life insurance.
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Given the difficulty in ensuring break-even operations in rural areas, the Department of Posts has extended the reach of its network by relying on private entrepreneurs who serve as its representatives and offer a range of postal services from their own private premises (e.g., from a small shop they might run in the village). They are paid an allowance for managing these “Extra Departmental Post Offices.”
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Technology is used to enhance service. service that is proving to be extremely valuable in rural areas is mobile telephone calling. Referred to as the Gramin Sanchar Sewa (Rural Communications Service), this program brings telephone service to areas not covered by conventional land-line or cellular service.
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Strategies
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There are specific strategies that can enable organizations to design and implement socially responsible distribution: -
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1. Selectively Bridge the Infrastructure Gap
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The examples given above show that they carefully chose technologies that were appropriate to the specific narrow objectives of providing chosen. services (such as delivering information via a web portal) that contained cost.
For e.g. ITC chose satellite connectivity
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2. Aggressively Control Cost through Differential, or Layered, Distribution
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The organizations invested heavily in the central system to design, set up, manage, and control the distribution system. They then incur only moderate levels of operating costs in keeping the central system functioning. All three organizations run village-level operations with low fixed operating costs and very low variable operating costs
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3. Outsource the “Last Mile” to BOP Entrepreneurs
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Differential distribution requires examination of the distribution chain to select activities that can be outsourced to drastically reduce distribution costs. By outsourcing the “last mile” (in reality, the last several miles) to small private BOP entrepreneurs, ITC and the Department of Posts take advantage of talented and motivated local entrepreneurs at much lower cost than employees.
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4. Leverage Distribution
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The feasibility of distribution can be improved by creating two-way flow of products and services. The distribution strategy of the Department of Posts and ITC creatively enhances the value of its logistics system by turning it into a two-way distribution chain. The extra-departmental postal representatives not only deliver mail and sell insurance to customers, but also accept cash for the savings bank and petitions under the Freedom of Information Act to forward to other government departments.
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5. Empower the BOP with Education and Information
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6. Harness Advantages of Technology
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7. Collaborate across Sectors
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8. Government Flexibility
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9. Ensure Scalability
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Setting Up Rural Distribution: -
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Procedures and Precautions:
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The following set of procedures for setting up rural operations is suggested by our observations of the three very different organizations studied.
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Procedures:
- . Develop a scalable delivery system
- . Set up strong centralized service design, supervisory, and control systems.
- . Cluster retail locations
- . Develop benchmarks for retail locations
- . Derive higher volume by shared distribution
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Precautions:
- . Engage the community to facilitate entry.
- . Select trustworthy retail representatives
- . Carefully adjust price and features
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Payoffs
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Private Sector
Lower Procurement Costs – e-Choupals results in cost savings of about 2%
Future Profits
Corporate Image
Dynamic Competitive Advantage
NGOs Enhance Impact
The Government Achieves Social Goals
Payoff for the Bottom of the Pyramid
They are better informed and, with assistance on how to use information, can raise their incomes and derive higher value from purchases of agricultural inputs and consumer goods. Some of these benefits are the direct result of entrepreneurial opportunities, services, and products provided by organizations. Part of the welfare enhancement results from strengthening bargaining power, which depends on availability of information and its transformation into knowledge, all of which is affected by the quality and state of the infrastructure. Knowledge of better agricultural practices raises productivity and income, and appreciation of health and hygiene factors improves quality of life. Entrepreneurship opportunities build self-esteem and loosen cultural constraints. Better communications with urban areas create stronger awareness of rights and opportunities. Education provides children with greater career opportunities.
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Conclusion: -
.The lessons drawn in this article can help organizations in other countries enhance the income of people at the bottom of the pyramid and present them with wider and more valuable alternatives for accessing goods and services.
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