Mohit Sewak

Socially Responsible Strategies for Reaching the

Bottom of the Pyramid

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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 (10^th 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:

1. . Develop a scalable delivery system
2. . Set up strong centralized service design, supervisory, and control systems.
3. . Cluster retail locations
4. . Develop benchmarks for retail locations
5. . Derive higher volume by shared distribution

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Precautions:

1. . Engage the community to facilitate entry.
2. . Select trustworthy retail representatives
3. . 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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Business Basics at the Base of the Pyramid

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The article “Business Basics at the Base of the Pyramid“, by Vikram Akula, gives beautiful insights about running micro finance businesses successfully from the experience of many successful micro finance firms that he has studied and some Micro Finance Bankers that he has interviewed.

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His studies (narratively in the words of MicroFinance Bankers) have shown that: -

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Women are more likely than men to reinvest profits in the household and to support others in their borrowing group.

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That’s why we lend only to women. Base-of-the pyramid customers – the potentially lucrative market segment that University of Michigan professor C.K. Prahalad has so famously drawn attention to and that many companies have had trouble reaching.

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Adopt a profit oriented approach in order to access commercial capital: -

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I felt that if the industry were going to provide the estimated $300 billion of credit needed by the poor, it would have to tap larger, commercial capital markets, and that meant structuring our businesses so that investors could expect significant returns.

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Standardize products, training, and other processes in order to boost capacity: -

Use technology to reduce costs and limit errors

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Most micro finance organizations record all their transactions on paper. Imagine how many missed zeroes and transposed digits there might be, particularly with a low-skilled workforce?

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Using local knowledge, we designed a set of products and a delivery mechanism specifically for our customers.

Our customer-first philosophy also extends to our processes and systems. The salaries of loan officers, for example, aren’t tied to repayment rates or the size of their loan portfolios.

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Instead of having borrowers visit a branch office, our loan officers journey on mopeds to their villages and schedule loan meetings as early as 7:00 am so that the women don’t miss part of the workday. Our reward for these efforts? Deep customer loyalty that ultimately results in a 99.5% repayment rate.

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How can razor-thin margins and costly customer relationships lead to high returns? The payoff comes with volume. Over the past 10 years, SKS has provided $725 million in unsecured microloans and insurance products to over 2 million people in 30,000 Indian villages and slums.

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The next step is to leverage our brand to expand an already broad distribution network. With our huge base of borrowers, we can say to makers of soap, clothes, consumer electronics, and other packaged goods, “Source high-quality products to us at the lowest cost available, and we can guarantee you a large market share.”

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The bottom line: -

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Our borrowers get high-quality, low-cost goods. Our suppliers also find new market segments, and SKS and its investors see a small profit margin.

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Making Better Investments at the

Base of the Pyramid

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The article “Making Better Investments at the Base of the Pyramid“, by Ted London, illustrates with example, how better investments can be made at the Bottom/ Base of the Pyramid (BoP), and how to do the impact assessment of such an assessment. It explains the following: -

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Who is being affected?

Any BoP venture potentially affects three groups of local stakeholders:

1. the sellers,
2. the buyers, and
3. the communities in which it operates.

How are they being affected?

Consumers may get cheaper prices and greater access to needed products and services; producers may enjoy expanded markets and higher productivity. On the flip side, however, an entrepreneur who decides to invest his own hard-earned capital in a new business may open up himself and his family to unanticipated shocks, such as those generated by health- or crop- related crises. Even when local entrepreneurs do succeed, their actions can still negatively affect the community’s economic well-being – for instance, when indigenous businesses suffer because of increased competition.

The strategic analysis: Understanding the Impact.

It does require, however, that the venture’s assessment team rigorously and collaboratively fill in the cells of the framework. List all the expected effects of the venture – both positive and negative – on local stakeholders. To avoid double counting, teams should log only direct effects in the framework – noting an increase in, say, buyers’ incomes but not how the additional income will or could be spent to improve other aspects of well-being. Listen to and respect the opinions of a variety of stakeholders – field staff, development professionals, academics, and local community members. The team should use a variety of methods to collect data – such as semi-structured surveys, focus groups, in-depth discussions, and group forums. It probably makes sense for venture managers to pay close attention to potentially high-magnitude outcomes even when the likelihood that they will happen is relatively small.

For instance, using the framework, the management team was able to recognize the potential for strife and jealousy in families and communities that weren’t used to seeing women in non-traditional roles – such as that of an entrepreneur selling wares outside the home and village.

The performance analysis:  Tracking the Impact

The process isn’t as complicated or expensive as one might think. It involves identifying and collecting baseline as well as post-intervention data on the local buyers, sellers, and communities most affected by the venture’s  activities, and, whenever possible, on a comparable unaffected group to better account for what would have happened had the venture never launched.

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Sellers:

The team members agreed that changes in the sellers’ economic situations, capabilities, and relationships could be effectively captured by measuring their incomes (a positive effect), income instability (a negative effect), and opportunity costs of not pursuing other livelihoods (a negative effect); their skills development, self-efficacy, and contentment with life; their perceptions of respect and conflict within the family; and their interactions with individuals and organizations outside their local communities.

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Buyers:

Their savings due to product affordability and convenience, and the effect that eyeglasses and vision care had on work productivity.

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Community:

The team recognized the importance of changing communities’ attitudes toward women who worked as entrepreneurs and took on non-traditional roles outside the home and village.

Case of PEACE and Du Pont’s Pioneer Hi Breed International

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The partners knew it would take time for the seeds to be accepted and had figured the pilot would be more of a learning experience than a profit-making one. If the partners had undertaken a strategic analysis of the venture’s effects on poverty alleviation, specifically looking at economics, capabilities, and relationships, they might have gained the following insights about its initial business model.

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Doing business with the venture put them at greater economic risk, given the larger initial investment required. Pioneer’s seeds at first were an unknown in the eyes of the local community; the farmers weren’t sure how best to use them to maximize their yields. Getting their seeds from PEACE instead of the local traders, for instance – they could find themselves cut off , unable to procure the rest of their farming supplies from traders bearing grudges.

The primary purpose of the BoP Impact Assessment Framework is to give managers a standardized approach for understanding the whole story. For managers, development groups, and funders, it can also generate some important insights into the types of organizational designs that are most likely to succeed with the base of the pyramid.

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Socially Responsible Distribution

DISTRIBUTION STRATEGIES FOR REACHING THE BOTTOM OF THE PYRAMID

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The article “Socially Responsible Distribution: DISTRIBUTION STRATEGIES FOR REACHING THE BOTTOM OF THE PYRAMID”, by Sushil Vachani & Craig Smith, says that inadequate attention has been given to the specific strategies and business models for effectively engaging the bottom of the pyramid. The World Bank determined that about 1.1 billion people with daily consumption income of less than $1.08 (rounded off to $1)10 lived in extreme poverty in 2001.

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Challenges for Distribution:

Poor Road, Communications, and Electricity Infrastructure. Poor roads can present a significant barrier to school attendance.

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Information Problems

Inadequate infrastructure and lack of information providers result in unavailability of the information necessary for the rural population to make informed choices about buying and selling goods and accessing services.

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Lack of Knowledge and Skills

In order to extract the benefits of information, farmers must know how best to use it. For example, they must understand how to decide what practices to adopt for tackling threats to agricultural crops.

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Illiteracy

The average years of schooling in India is only 5 years. The illiterate are especially prone to being confused by counterfeits as they rely entirely on package design to recognize and evaluate brands.

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Socially Responsible Distribution Strategies

We refer to socially responsible distribution to describe initiatives that provide poor producers and consumers with market access for goods and services by helping neutralize the disadvantages they suffer from inadequate physical links to markets, information asymmetries, and weak bargaining power.

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There are three creative market-based alternatives that we identified in our research:

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▪ Taking cost out: This approach increases access by lowering the costs of distribution.

▪ 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.

▪ 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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Poor farmers suffer significantly from lack of free and well-informed access to markets, which limits the income they can derive from the commodities they grow. The improved market access that socially responsible distribution provides the rural poor can give them better product choices and help them derive greater value from their purchases. In order to study socially responsible distribution strategies across multiple sectors in India, we chose a multinational company, an NGO and a government department that have implemented successful programs to bridge the gap. ITC Limited, Gyan Shala and Indian postal department.

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ITC Limited

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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 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.

Typically, small Indian farmers bring their produce, such as soya bean, to the “mandi,” a state-sanctioned wholesale marketplace. They are discouraged from turning down an offer because they have already incurred the sunk cost of bringing their produce to the market and would need to spend more money to take it back. ITC set up an IT-enabled procurement system. With the assistance of the village representative, farmers access ITC’s web portal, which provides information on commodity prices the previous day. The savings accrue from lower transportation as the produce moves directly from farm to ITC rather than via the mandi.

Initially, farmers were suspicious of ITC. Once it had signed on the initial set of representatives and they saw how the system worked, they were convinced of its value and it became easier to sell it to others. Using the e-choupal route, ITS now sells from salt to motorcycles some of which are its own brands.

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Gyan Shala

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Illiteracy is a significant barrier to enhancing welfare at the bottom of the pyramid. Gyan Shala relies on several key design elements:

▪ Classes are located in the village, or in the urban slum

▪ Costs are contained by hiring teachers who live in the community

▪ Teachers are given solid training and are continually and closely monitored and assisted to ensure that they deliver quality instruction.

▪ High-quality materials are developed and used, and detailed teaching plans guide delivery of each class session in the year to ensure consistent high-quality education.

Gyan Shala’s annual cost per student is about a quarter of that in government schools.

Gyan Shala has re-engineered the role of the teacher, by transferring selected tasks of traditional teachers. Gyan Shala’s design team puts together the curriculum and the schedule for daily classroom activities to translate its goals into the educational program and class experience. The team creates daily lesson plans for teachers, with

detailed worksheets and small-group activities for students. The typical class consists of about 30 children, all at the same learning level—grade 1, 2, or 3. A unique aspect of Gyan Shala classes is that they are physically located within the village or slum where children live so that they can easily—and safely—walk from home to class. The decision to establish a class in a community results from surveys conducted by field staff who visit various communities to assess their needs. When a community is identified as a potential class location, staff take time to explain their proposal to community leaders and enlist their support. Teachers are also selected from among the unemployed members of the community.

The net effect of Gyan Shala’s programs is that at the end of a 3-year education, young children can read, write, and perform basic arithmetic functions.

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Department of Posts

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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. Technology is used to enhance service. With the advent of the Internet, the Department of Posts has introduced services to bridge the digital divide.

Strategies that can enable organizations to design and implement socially responsible distribution are:

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Selectively Bridge the Infrastructure Gap

Department of Posts and ITC that are willing to bridge the infrastructure gaps, such as lack of Internet access and reliable electric power. They did not begin to build roads or set up poles to hook up power or telephone lines, which would have called for prohibitive levels of investment. They carefully chose technologies.

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Aggressively Control Cost through Differential, or Layered, Distribution

All three organizations run village-level operations with low fixed operating costs and very low variable operating costs. Outsourced the “last mile” to BOP entrepreneurs.

Broadening the distribution network’s scope and sharing it for multiple purposes such as reverse distribution and selling products of other companies.

A remarkable aspect of Gyan Shala’s model to bring basic education to the poorest children in villages and urban slums is that instead of striving to provide a rich educational environment using college graduates, it

decided to strip out non-essential aspects of education and focus on providing high-quality essential education.

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Cluster retail locations: Cluster village-level locations in a way that the infrastructural and supervisory backbone is efficiently and economically utilized.

Develop benchmarks for retail locations: Ensure that proposed village-level operations meet benchmarks for activity level and financial performance.

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For companies, the benefits include lower procurement costs, future profits, Corporate Image, Preemptive distribution and competitive advantage.

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