Design for the BoP – more than just profits

_41335270_developmotorola203_2Last week, the BBC had a news report on the  Emerging Market handset programme launched last year by the GSM Association. Its aims – to bridge the ‘digital divide’ and give mobile communications access to 80% of the worlds population by 2010. An ambitious programme, and one that Motorola has made strides with their handset that will retail for $30. From the article,

Mr Phillips said the GSM Association was trying to reach many of those
people who live beneath the shadow of the networks but do not have a
phone by making affordable handsets specifically for developing
markets.

US phone firm Motorola won the competition to create a
handset for so-called emerging markets and its winning designs, the
C113 and C113A, were unveiled in early 2006.

The handset costs only $30 and at the 3GSM World
Congress, the GSM Association announced that it had orders for more
than 12 million of them
.

On the other hand, this article on the potential growth of emerging markets for cellphones by the Gartner Group has an interesting snippet,

"even more competition among
manufacturers to make cheaper, affordable handsets," so the profit
margin in selling phones is shrinking
. Other observers, however, think
the exploding market in developing regions will provide opportunities
beyond those available now
from selling ever-more-complex mobile phones
to the U.S., European and Japanese markets.

This exemplifies CK Prahalad’s assertions that the ‘fortune’ at
the bottom of the pyramid will be derived from volume not margins. 12
million phones are twelve million phones – even if the profit that
Motorola makes is just a dollar a piece, that more than recoups their
investment in this development, I should say. Compare that to the cost of developing an even more advanced phone with all the bells and whistles for the first world markets – marketing and promotion alone would eat up a significant chunk of the investment. And as cellphone penetration increases, it allows even more services and schemes that support sustainable development in emerging markets. From the Beeb’s article,

One scheme in South Africa uses the cheap handsets that
allows a handset to become a mobile payphone. Under the Sharedphone
scheme, entrepreneurs can let others make calls and send text messages
using the handset.

Mr Phillips defended plans to get handsets into
developing nations from accusations that these programs were just a
cheap way for operators to double their customer base. Others have said
that there are many other things citizens in developing nations need
before a mobile phone
.
[…]
"Mobiles are no longer a luxury," he said, "they are essential business tools."

The very fact that any would argue that citizens in developing nations need many things before a mobile phone is shortsighted, imho. Yes, food, shelter, clothing, medical care et al are vital, but as much if not more are the ways and means that support a self sustainable livelihood and the means to run a business. Neelakantan writes an insightful post this morning about ‘Mobiles, mopeds and the microentreprenuer‘ that touches on this very topic,

Now imagine this. In the place where I stay, someone or other needs a
junk newspaper guy every once in a while. We post this phone number on
our notice board and it is as good as an advertisement for him. Ever
heard of a scrap dealer advertise? The mobile serves this purpose. This
is not an isolated example. Vegetable sellers, hawkers and many other
service providers expand their area of operation using mobile phones.

The
moped has, for long, been a loyal servant of these small time
entrepreneurs. With micro re charge and free incoming calls adding to
the mopeds frugal cost of ownership and maintenance, these twin
accessories are a leap for the micro trader who aspires to be big some
day.

Now, imagine this, if those 12 million phones that have been ordered all do their part – whether it is in South Africa, where the entreprenuer rents out minutes to others unable to afford a phone, or in Bangalore where the initerant traders and hawkers use them to expand their business beyond the neighbourhoods they frequent, it sets up a chain of development far beyond the immediate profit to be gained on a $400 high profile cellphone.

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8 Responses to Design for the BoP – more than just profits

  1. niblettes says:

    “This exemplifies CK Prahalad’s assertions that the ‘fortune’ at the bottom of the pyramid will be derived from volume not margins. 12 million phones are twelve million phones – even if the profit that Motorola makes is just a dollar a piece, that more than recoups their investment in this development, I should say”
    Sounds a bit long-tailish, no? Here’s a few things to consider business wise…
    1. Its an either/or game. You have to concentrate either on volume or on margin. If you go volume, and drive cost and price way down, your high margin market are going to get grumpy and start demanding crazy things like similarly cheap phones, and comparable service rates. Doesn’t take long to hear that cell phone and service prices in Kenya are 1/10 what they are here, and incur about the same cost. I don’t thing a market will take getting bilked like that for long.
    2. This then becomes a race to commoditization: a race you absolutely have to win or you’re out of business, and a race that no one really wants to start (no one that’s already making comfortable margins).
    3. In most commodities games there’s only room for 2 or 3 players (ok, that’s really just an opinion based on observation). 1 takes 2/3s of the market the other two scramble for the rest. Unless you know you’re going to be #1 this isn’t a scenario you’re too anxious to start rolling.
    So I’m not so sure this is terribly appealing to incumbent cell phone manufacturers. Maybe this could this be a great opportunity for a Chinese upstart to establish a profitable market base, and then move into high-margin markets. Disruption is best served cold.

  2. Niti Bhan says:

    Your 4 points of things to consider business wise are valid in themselves, but what is your point with respect to what I am saying? To summarize my post a little further – there is a market, it is a volume market, it is not a high margin market – consider entering it based on these facts. And, not only will the market provide volume sales but also do double duty by spearheading sustainable microentreprenuership via the potential and possiblities inherent in affordable communication tool.
    1. Businesswise, the decision is the manufacturer’s to make – a strategic decision, if you will, though I would disagree on the either/or scenario – a global manufacturer like Motorola can indeed support both the volume segment for selected markets and the margin segment for other markets. Your high margin market will not demand a stripped down phone with the barest essential features for the simple reason it has been fed on a steady diet of ‘more more more’ featurewise. That is the function of the position it is located in an ‘industry growth curve’ – it is a mature market whose primary impetus is not basic telecommunication facilities but more of a fashion oriented consumer electronic toy or gadget.
    2. As for cheaper rates in Kenya et al – it is a known fact that the United States lags behind the rest of the world in the cellular phone communication set up and facilities. Frankly, until the systems change with respect to pricing, the service provider regulations and the infrastructure, you will still have to use what is available to you. I would love nothing better than to be able to use my cellphone outside of the united states without a special set up and high price – my sister can just take hers and use it anywhere in the world without asking for a service plan change. C’est la vie is what the providers will tell you.
    3. Race to commoditization? I disagree. You are again looking at it from the point of view having all the infrastructural access you need. And in the markets where a cellular phone will provide ‘telecommunications’ there aren’t that many landlines, and those there are take years to obtain. As for “no one who is making comfortable margins wants to join the race”, they don’t have to. But then it would take another post to talk about going after only high margin markets outside of the developed world.
    My attitude is that it doesn’t have to appeal to the incumbent cellphone manufacturers, and indeed it is an opportunity for an upstart, but it won’t be a Chinese one. http://yaleglobal.yale.edu/display.article?id=7002 However, it is this very “lack of appeal” that is the shortsightedness of the “immediate high profits” corporates, you know, the ones who are feeling the pinch of saturated markets? Tell me what you think a future scenario will look like?

  3. Niti Bhan says:

    Here’s Chris Anderson’s take on the difference between the Long Tail and the BoP – one is about commodification (I’m still hesitant about that aspect) and the other is about ‘nicheification’ http://longtail.typepad.com/the_long_tail/2005/03/long_tail_vs_bo.html

  4. niblettes says:

    “but what is your point with respect to what I am saying?”
    I guess my point was that I don’t think current market leaders will be able to capitalize on the opportunity. Not for technical reasons, but rather for reasons of organizational psychology and prudent management (once you’re up-market, hooked on big margins with ever more sophisticated offerings your big customers and your own mythos woun’t let you move down-market (at least I’m not aware of any company that has done so, and done it successfully)).
    I’m not sure what the future will look like (forecasting is such a dark art). But I can imagine a couple scenarios where an upstart Wall-Martizes (huge volumes, low margins, dirt simple, for a market with little disposable income whose primary constraint is cost) the cell phone industry with a market base of developing nations. Will they then move into this market? I don’t know. Will the impact of thier success in the developing world drive incumbent market leaders to compete down market? or will it push incumbent market leaders further up market to smaller volumes but bigger margins? Not sure. But it does smell right for a shake-up (I don’t think the millions of potential customers in the developing will not be denied–for long).
    Thanks for the LT vs. BoP link–very helpful since I think I was conflating the two.

  5. Niti Bhan says:

    good point – I’m going to mull it over and see if a post develops from it. I’d just like to say, at this point, however, that the majority of companies – with the exception of luxury goods mfrs – have a range of products across numerous price points. It’s basic strategy, cover the range from the premium segment to the entry level, not just in cellphones but most products. Unless it’s not so in the developed world?

  6. niblettes says:

    But the global range of income is so much broader than the range in the US. So can this kind of global product strategy manage such global income range extremes?
    For example, let’s compare the per capita GDP of India ($3,400) with the US ($42,000) according to the CIA World Factbook. That’s more than an order of magnitude (about 12x)
    So to really over simplify the matter, to maintain the same profit level on volume rather than margin a company would have to either
    1) find 12 times the number of buyers in India
    or
    2) Reduce cost by a factor of 12
    or
    3) some combination of the two.
    Sure I’m ignoring many other developing nations by comparing only India and the US. But my point is that there simply *may* (cause I’m just guessing here) not be enough potential volume to make up for lost margin marketing a truly global cell phone. Indeed, with only 3 times the population of the US, and a dramatically wider income disparity hidden in its per capita GDP, sufficient profitable volume in India may not materialize.
    Counting the rest of the developing world (10x population of US and Europe) could close that shortfall–but that still seems awfully tight. Perhaps too tight for today’s big player to want to change the game from margin to volume (even if the future of their industry is volume).
    So I wonder is the global consumer’s economic tiers are just too disparate (if the standard deviations are just too big) for current market leaders and current strategies to manage.
    I’m pretty much just thinking out loud here–so please take it as such. But this leads to a bigger question (which I think you may have alluded to when you mentioned seeing if a post develops): does the economic disparity between the developed and developing worlds mean that the developing world need products that are different not just in scale, but in kind and business model as well?
    Does the developing world need an entirely different kind of cell phone that is monetized in a different way, rather than just a cheaper cell phone? Does the developing world need an entirely different of kind personal banking, automobile, fast food, etc…??
    My gut says “probably” (but then it says a lot of things, so its hard to judge). But really I just plain don’t know. This is where your personal multi-national, multi-cultural, multi-disciplinary experiences can really help provide some insight Niti.

  7. niti bhan says:

    You asked: does the economic disparity between the developed and developing worlds mean that the developing world need products that are different not just in scale, but in kind and business model as well?
    yes, and while I realize that I could on and on this topic, I’ll just give one example from my personal experience at HP. This was a few years ago, but I’m sure the contexts and concepts still apply – HP found that the biggest problem in India and China with their printer supplies (their key revenue generator, not the affordable printers) were being ‘refinished, refilled, recycled, reused’ – call it what you will – by enterprising entreprenuers in both countries. All kinds of ink refill kits were available, so much so that that they were losing revenue on new cartridge sales. In response to this, they developed a printer model specifically for India and China only (can’t remember the model number right now) that would use an ink cartridge that was not portable across their other models. This cartridge was cheaper in price AND designed so that there was no way to refill it without damaging the cartridge itself.
    While it doesn’t touch upon the question of disparate incomes or the BoP, in one sense of creating affordable products for developing markets, it does give an example of different business model in scale and kind and focus. This situation wouldn’t have risen if the economic disparity didn’t exist.
    As for comparing incomes – dollar figures are not relevant when directly compared, what is conventionally used is purchasing power parity – http://en.wikipedia.org/wiki/Purchasing_power_parity
    I’ll come back to your questions again.

  8. niti bhan says:

    And here is an interesting list (by PPP) of countries by the World Bank and the IMF. India, for example, isn’t anywhere near the bottom of the list.
    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29

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