The power of innovative supply chains

Gonzalo Romero is an Assistant Professor of Operations Management and Statistics at the Rotman School of Management

Q. How do you define social entrepreneurship? 
I like the definition given by Nobel Peace Prize winner Muhhamad Yunus, who founded Grameen Bank: Social entrepreneurship is a form of entrepreneurship that seeks to create organizations that serve a social purpose while still being able to cover costs from  operations. However, this classic view of social entrepreneurship is limited, because it sees financial profit maximization and social profit maximization as opposites.

My research builds a more modern and nuanced view of social entrepreneurship—one where financial profit maximization and social profit maximization are not at odds. There are many opportunities to harness technology and operational innovations to enable organizations to pursue both of them simultaneously.  Many of these opportunities lie at the base of the pyramid—a term that denotes the poorest consumers in the world, which is a very fast growing market. Organizations, small and large, must look beyond ‘charity’ when serving this market. There is a huge opportunity for innovation, profitability, and positive social impact at the base of the pyramid. 

Q. Over the last two decades, there has been increased interest in life- improving technologies and products for the base of the pyramid (BoP).  Can you describe the supply and demand situation?
There is a huge demand for life-improving products—everything from water filters to solar panels to ‘green’ or smoke-free cook stoves—that address fundamental human needs. On the supply side, these technologies already exist. There are hundreds of companies producing solar panels that are specifically designed for the world’s poorest consumers, and the same applies to water filters and green stoves.  There are between 12 and 20 different brands in India alone.  So, the supply and the demand are there. Yet somehow, these products are not reaching the consumers they are designed for. This is a huge crisis. 

Q. Tell us about your work with an innovative social enterprise called Essmart.
My research partner Andre Calmon met this company’s founders,  Diana Jue-Rajasingh and Jackie Stenson, while they were studying at MIT and Harvard, respectively. They had set out to develop ‘the next generation of socially responsible technologies’.  After finishing their degrees, they travelled around India and Africa, and they were shocked to find that all of the innovative products that they and their friends were building were not being used. Diana developed her master’s thesis around this subject, with a focus on rural southern India. It became clear to them that the key issue was operational, and specifically, distribution.  There were major issues with the logistics of how these products were being presented to potential customers.
 
My personal opinion is that the incentives to do this properly were lacking. Most of these companies work on the technological side of things; they’re engineers, and their main goal is getting the next grant to develop the next patent on the next solar panel that will be even more efficient than the last one.  The problem is, even the products that are already available are not reaching  consumers. If you don’t address the distribution gap, you’re not addressing the main problem. 

Q. Clearly, business opportunities are being missed.
Definitely. The traditional mindset of a designer creating a product for the BoP is: ‘This new product will be so good that it will sell itself;  I just have to put it out there, and people will buy it’.  But that is rarely the case. Distribution in these markets is extremely challenging. Furthermore, these products cost between $10 and $30, which is a significant amount of money for the people at the base of the pyramid.  It would be the equivalent of someone in Canada buying a new fridge, or even a car.  We don’t make these decisions lightly, and neither do BoP customers. 

Companies were also missing out on two other critical pieces of the puzzle: educating consumers and providing after-sales service. On the one hand, consumers need to know that these better and safer products exist, and how they can improve their lives. But on the other hand, if the product breaks down or doesn’t fit into the buyer’s daily routine, there was no way to return it.  Think about that for a moment: If you buy a fridge and it doesn’t fit in your kitchen, at least you know that you can return it and get another one.  Unfortunately, when someone decides to buy a green stove in a low-income region of India, the idea of returning it is nearly impossible. Consumers know this, so there is a lot of risk aversion involved, which leads to low adoption rates.

Q. You and your colleagues have developed a solution to this problem.  Tell us about your Value Access Paradox model. 
The Value Access Paradox addresses four main issues associated with this problem. First, the lack of product affordability. In many cases, people have to resort to micro-loans to afford these products, which only increases the cost many times over.  Second, the lack of access to the products.  Most of these consumers buy everything they need at a local Mom and Pop shop—particularly in India, where retail is dominated 85 per cent by these local shops.  Most of the time it is impossible to buy a solar panel or a water filter in these shops—and there are good reasons for that.  These are sophisticated products that are relatively expensive; they also take up a lot of room.  These small retailers can’t afford to have a slow-moving product that costs $30 taking up space. 

Third, our model addresses the lack of understanding of the value of these products.  Green cook stoves, for example, reduce the smoke from combustion, addressing the 4.3 million estimated deaths each year due to cooking over biomass. One million of these deaths occur in India alone. These consumers are not always aware that if they buy a green stove, there will be long-term benefits for their family.  These products can actually save lives.

The fourth point that our model addresses is the lack of after-sales service.  Assume that a consumer can afford the product, they can find it at their local shop and they understand that it will be good for them and their family. Even with all of this, would you buy a car if it didn’t come with any guarantee? The companies producing these products are doing great work, but they spend very little time on resources around distributing the product and providing after-sales service. 

Q. Tell us about the alternative approach that Essmart uses.
Let’s start with what they don’t do.  Many non-profit organizations will get a grant from, say, the Bill and Melinda Gates Foundation and then they go to different villages and sell their product door-to-door.  They literally knock on every single door in a village and try to educate consumers and sell the products at a highly subsidized price to address the lack of affordability.  After–sales service is not a focus; it’s mostly about product adoptions.  This type of approach is actually very effective; the problem is, it’s not very efficient:  Usually, they get a high percentage of adoptions, but once the money runs out, that’s the end of it.  

Essmart and some other social enterprises are looking at this problem in a very different way.  They’re saying, ‘We want a strategy that is scalable and self-sufficient so that we don’t have to depend in grants. Their approach involves using the existing supply chain: The network of vendors, which in this case is the small retailers.  They asked a question that no one had asked before:  ‘What do we need to do to convince local Mom and Pop shops in India to start carrying these products?’ There was this one way of doing things—the non-profit approach that was dominant for decades.  But social enterprises like Essmart are breaking the mold and saying, ‘We can do this and be financially sustainable’.

The first thing they realized is that they had to remove the inventory risk for local retailers, and they accomplished this by using   a very low-tech approach: catalogue sales.  Rather than selling the products directly, they give each store a few sample products and a catalogue with details about all of the products.  Then, if there’s a sales opportunity, the company delivers it within the next two days via a network of motorcycles that drives between the warehouses and the local retailers.

The other aspect they addressed is the lack of understanding of product value. They follow an approach that is more scalable than knocking on every door: Instead, they have a presence at local markets.  Every day, those same people that deliver the products—their sales executives—take their motorcycle with a portable kiosk to local markets and run demonstrations.  They might bring one or two of the most popular products and have them there for people to touch and try.  If someone is interested, they refer them to their local retailer. As a result of this approach, they have great relationships with the Mom and Pop shops.  They don’t want to compete with them—they want to channel their sales through these shops. Moreover, the sales executives use their cell-phones to collect data, which allows Essmart to use analytics to come up with efficient ways to utilize their limited resources.

At first, Jackie and Diana thought that the initial distribution model would be enough; but they weren’t see the results they wanted, so they added the ‘consumer education through local markets’ element.  Then, they realized that still wasn’t enough. So, they surveyed consumers directly and found that people were afraid to make the leap. They told them, ‘What if the new stove doesn’t fit into my life?’ These consumers were used to cooking close to the ground, crouched on their knees, but the new stoves were about waist-height. The first green cook stove that Essmart put out was the best ever in terms of smoke reduction, but when people tried it, they didn’t like it.  They wanted to return them but didn’t have any way to do that, which triggered the development of after-sales service. 

Now, if a product fails, there are technicians available to fix it; and if they can’t fix it, they will exchange it for a new one.  Essmart deals directly with the manufacturer. They have the scale and the connections to do that. They also offer refunds for consumer returns. 

Q. Did Essmart consider designing a stove that was closer to the floor?  
Yes.  They listened to what they were hearing from people and all the stoves are now much closer to the floor.  They also started to curate these products. As indicated, there are hundreds, even thousands, of different products out there, so they use their experience to reduce them to a small catalogue of ‘Essmart- approved’ products.  In doing so they have reduced the search costs for consumers and retailers—which is very important, because small retailers don’t have the time to assess hundreds of products.

Q. What is the biggest challenge for a company that wants to address consumers at the BoP?
The main challenge is that most companies try to replicate what works in developed countries.  Replication is good, to some extent. But the fact is, technology allows for products that ‘leap-frog’ in terms of change.  Take Africa, for example.   Over the last five years, mobile payments have caught on throughout the continent. These consumers went directly to a mobile solution—completely skipping landline telephones and computer-screen access. That’s an example of what is possible.   The idea of simply replicating models that have been used in developed countries for more than 20 years just won’t work. 

At the same time, as indicated by the Essmart example, this is not about reinventing the wheel.  Essmart has embraced two very old-school concepts—after-sales service and consumer education. It’s not only about using the newest, high-tech tools. Developing countries come with their own structural constraints, and businesses need to understand them—and find a way to overcome them. There are significant opportunities for businesses to be creative and come up with business models with high social impact that are tailored for India and other developing countries. The demand is definitely there.

Gonzalo Romero is an Assistant Professor of Operations Management and Statistics at the Rotman School of Management.

Rotman faculty research is ranked in the top 10 globally by the Financial Times.