Lighting the World: A Business Model for Catalyzing Change
Byrnes, Adam; Sibley, Emilia; Ward, James; Sullivan, Sabrina
2014
Abstract
Worldwide over 1.3 billion people live without any access to electricity. In the world’s 50 poorest countries, almost 80 percent of the people lack access to electricity. They rely on firewood and kerosene for their energy supply, which adversely affects their environment, health and personal safety as well as hinders their opportunities for economic progress (Legros et al, 2009). The Global BrightLight Foundation was established as a not-‐for-‐profit entity to provide globally accessible and affordable energy solutions to improve the education, community environment, economic opportunities, and resulting quality of life of those living at the Base of the Pyramid (BoP) in emerging and third world countries that currently lack access to electricity and power. While in its early stages of operation, BrightLight required an understanding of the current state of the market, a review of current market actors, an analysis of BrightLight’s current capabilities, and a strategic analysis to position BrightLight to be successful amidst existing and future market dynamics. Research Objective and Methods. The objective of this Masters Opus was to derive a comprehensive understanding of the market for provision of small-‐scale solar PV solutions to BoP communities, to inform strategic conversations among BrightLight’s leadership with a focus on developing a distinct business model and a detailed business plan for the non-‐ profit to achieve their mission. A mixed methods approach for research was used to answer research questions, involving literature reviews, pilot report reviews (Rwanda and Argentinian pilot surveys on uptake of solar lanterns), and expert interviews. The project was also divided into three Phases to focus our research and deliverable set: Market Assessment, Alternative Development, and Targeted Business Plan. The Market. Four billion low-‐income people comprise the BoP. These four billion have incomes less than $3,000 in terms of local purchasing power and live in relative poverty. The BoP is characterized by significant unmet needs, dependence on informal subsistence livelihoods, and a poverty penalty. Total household income is $5 trillion a year, which makes the BoP a potentially important global market. The BoP market is underserved and dominated by an informal and relatively inefficient economy. The BoP market can be split into six income segments. The poorest segment earns $500 or less annually (less than $1.50 per day). The next poorest earns between $500 and $1,000 annually (less than $3.00 per day), and so on, up to the highest segment which earns between $2,500 and $3,000 annually (less than $9.00 per day). Spending patterns in the BoP vary by country; for example Rwanda and Djibouti spend approximately 1.9% and 10.6%, respectively, of their household income on energy. Spending on energy at the BoP is approximately 40% urban and 60% rural, but rural BoP households spend on average 44% less on energy than do urban BoP households. These income and spending differences show that each region, country, and city is a unique market with different types of customer segments to serve, requiring unique marketing and distribution strategies. As of late 2012, there are approximately 1.3 billion people without electricity access worldwide. The majority resides in Asia, but by 2030 Africa is expected to pass Asia for the largest un-‐electrified market. The solar portable light (SPL) market is focused on off-‐grid and under-‐electrified markets. The SPL market is targeted predominately at consumers and small business of the BoP. The potential for off-‐grid lighting is substantial, and market demand is growing rapidly. In addition to global population growth, there five major drivers of demand worldwide: lagging grid growth, price trends, technology and design innovation, kerosene prices, and mobile opportunities. SPLs align well with the energy needs of the BoP as a result of several factors, including rapidly declining manufacturing cost and customer payback period, rising price of kerosene, lantern quality improvements, and consumer-‐centric design. Best Practices in the BoP. Successful organizations operating at the BoP require a different type of business sense than that of modern economies. The Michigan team conducted a literature review and spoke to current or former practitioners in the field. We learned the following lessons around operating a business or organization that serves BoP customers: • Take the long view – BrightLight must be prepared for the long haul both in terms of developing relationships with local communities and developing a sustainable business model. As our contact at the International Finance Corporation stated, “Success is still early days in terms of profitability.” • Be prepared for a different landscape – Margins will be low, distribution channels need to be created, and consumers must be segmented across a number of different factors. This work will require partnerships, extensive on-‐the-‐ground research, and mutual trust with local communities. • Keep it local – BrightLight must create a local presence to build trust with end-‐ consumers. These relationships, in turn, will inform product needs, business models, marketing strategies, and partnerships. • Create your market – BrightLight will likely have to create a market for its product. This requires teaching end-‐users about the advantages of a product they know little to nothing about and for which the economics are different than their current energy purchases. • Embrace cooperation – Regardless of the business model it chooses, BrightLight will have to work with other organizations, including governments, non-‐profits, and other businesses. Cooperation is a key ingredient to success. • Don’t give the lights away – The overwhelming opinion of the practitioners with whom we spoke was that giving lights away would spoil the market. BrightLight will have to create a business model to ensure that end-‐users have skin in the game. We found that, in many respects, developing economies require business skills on steroids. Depending on the organizational and business model it chooses, BrightLight will need to do some or all of the following: determine the BoP segment it will serve, identify the right product for its customers, develop social networks based on trust to educate end-‐users about the need for lights, leverage local connections to develop “human centered” products, maintain positive local relationships to build trust, market the product(s) to end-‐users using a mix of traditional means (radio advertisements) and non-‐traditional means (puppet shows, songs, etc.), partner with NGOs to build demand, and have the patience and capital to iteratively improve the model. “Best in class” organizations have built their operating procedures and business models around these principles. While success is never guaranteed, it is imperative that BrightLight follow these best practices as it builds, pilots, refines, and scales its model. Only then will BrightLight have sustainable, lasting impact. The Solar Lantern Value Chain. The solar lantern industry has grown significantly in terms of activity, sophistication, and number of involved organizations since 2006. Donor-‐ based models comprised the majority of involved organizations in the past, but as the price of photovoltaic cells decreased and distribution channels were forged, the cost of operation dropped and market-‐based models became increasingly viable and prevalent. In turn, the quality of products has improved, in part due to the rise of BoP-‐centric lantern design, which the industry now considers critical to earning customer buy-‐in. Distribution and financing remain major market barriers, and current organizations rely on in-‐field NGO partners, microfinance banks, cooperatives, and village level entrepreneurs to help overcome them. As these hurdles are minimized in the next five to ten years, more private sector investment will flow into this industry, turning solar powered lanterns into a commodity and helping to de-‐risk and solidify distribution and financing techniques. No single organization has achieved scale in this field, due to the highly customized nature of serving diverse BoP demographics and geographies. As a result, most successful organizations advocate replicating rather than scaling, which keeps local activities small, flexible, and customizable, but still enables transfer of key principles among satellite business groups. In other words, no single product or business model works for all BoP lantern markets. The solar lantern value chain is comprised of eight segments of activity: minerals, design, assembly, wholesale, retail, training, financing, servicing. In general, private sector companies tend to operate on the upstream end of the value chain (minerals, design, assembly, and wholesale) while both private sector and non-‐profits tend to operate downstream (wholesale, retail, training, financing, servicing). Social enterprises operate across the entire value chain. After analyzing 47 industry players, we grouped them into 5 broad categories: Gorillas, Upstream, Downstream, Financiers, and Catalysts, described briefly below. We found that many companies were integrated across multiple categories, and many others chose a niche role within a category. • Gorillas are vertically integrated social enterprises that have proprietary operations along the value chain, but often rely on partners for certain activities. By relying less on partners overall however, Gorillas remain more adaptable than other companies to changing BoP market needs, which is a competitive advantage. • Upstream players are typically for-‐profits or social enterprises that focus on manufacturing, assembly, and design of lanterns, and have little direct engagement in upstream activities. As the price of PV drops and the industry matures, we predict upstream players will be driven to consolidate. • Downstream players we found to be the most diverse, ranging from private-‐sector companies or social enterprises to non-‐profit sector NGOs. These organizations engage in varying degrees in lantern distribution, training, servicing, gathering feedback to inform better design, and occasionally financing. To succeed they rely on a dedicated in-‐field staff and leverage their networks of partners and their knowledge of the BoP to achieve last-‐mile distribution. • Financiers are microfinance banks, foundations, or other investors that provide working or growth capital to fund the growth of other industry players, or provide microloans for end users to purchase solar lanterns. • Catalysts are NGOs or Foundations who work at the interfaces between value chain segments to mobilize others and enable growth by removing market barriers, matching business to business, and providing supporting services and BoP market intelligence. BrightLight’s Capabilities. For BrightLight to determine its organizational model, it must first evaluate its current capabilities. This will assist the organization in understanding its strengths, assessing where its capabilities lie on the value chain, and evaluating the effort required to achieve its chosen business model. BrightLight’s current capabilities include: • Marketing • Product testing • Fundraising • The ability to convene stakeholders • Access to utility resources – funding, energy expertise, and technical & political landscape • Direct community relationships To better understand where BrightLight’s strengths lie in this sector, we mapped the organization’s current capabilities to the value chain. This analysis suggests that BrightLight’s capabilities are not directly linked to any specific segment of the value chain, such as financing or manufacturing. Rather, BrightLight’s strengths are indirectly related to the value chain, providing unique challenges and possibilities for BrightLight’s future. We also compared how much control BrightLight has over their capabilities, determined by the extent BrightLight relies on partners to execute key work, as well as the competitive advantage those capabilities offer. Though the true competitiveness of a capability will depend on a number of external factors, the competitive analysis suggests that BrightLight’s current capabilities are generally competitive and the organization has control over its most competitive features, which include its fundraising ability and influence. However, the analysis also suggests that BrightLight is dependent on its current partnerships for many of its capabilities. One thing is clear: no matter what type of organization BrightLight hopes to become, it will require additional capabilities to the ones it currently has. We view this less as a challenge and more as an opportunity. Business Model. Capitalizing on BrightLight’s current strengths, we propose a model where GBF will serve as a connector, integrator and catalyst, facilitating delivery of region-‐ specific, service-‐effective and cost-‐efficient means to access solar-‐powered energy usable on an individual, family and community scale. GBF’s strategy recognizes the systematic nature of new market development and creates a new system of value creation through providing power to the unelectrified of the world. Unlike entities that provide a single offering GBL creates a network of players that have different positions in the value network to avoid competitive conflicts and focus on providing benefits to the communities we serve. By recognizing the potential to create a value network around a new model for electrification for the poor and developing world, GBF will play a key role in fostering not only the electrification but also the economic development of those at the base of the pyramid.Other Identifiers
236
Subjects
Electricty Base of the Pyramid
Types
Project
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