Reaching the Bottom of the Pyramid
   A case study of Double Fortified Salt in India




                                 ...
Reaching the Bottom of the Pyramid
        A case study of Double Fortified Salt in India




“I would be hard-hearted eno...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India



Preface_____________________________...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India



Management summary__________________...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


with local parties that are trusted b...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


The consumer analysis provided insigh...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


Akzo Nobel must decide on the positio...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India




       Technology         Productio...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


business in an ethical way. By doing ...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India



Table of Contents___________________...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


2.3 Relevance………………………………………………………………...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


6.7 Market influencers and legislatio...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


10.4 Recommended actions and studies…...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India



List of Figures ____________________...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India



List of Tables______________________...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India



List of Acronyms and Abbreviations__...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


NIN                National Institute...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India



Chapter 1                      Intro...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


where iodine deficiency is greatest a...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


all kinds of salts, for a variety of ...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


After having been on the divestment l...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


salt is an ingredient that is used in...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


whereas effectiveness tests measure t...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


the race against the clock has begun....
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India



Chapter 2                        Res...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


purpose and principles of the company...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India




2.1.1    Research objective
The obj...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India




2.1.3       Definitions
Business mo...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


2.1.5    Conceptual model
The concept...
Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India


with an overview of the retail salt m...
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Reaching The BOP In India Version X
Upcoming SlideShare
Loading in …5
×

Reaching The BOP In India Version X

6,035 views

Published on

Published in: Business
1 Comment
0 Likes
Statistics
Notes
  • Dear Dirk: we are working in salinity affected areas in Gujarat in India. will be keen to discuss on our world bank development market place awarded irrigation technology for small farmers in this region.

    regards

    Biplab K Paul

    biplabkp@gmail.com

    ashoka fellow

    world bank DM 2007 awardee in India
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • Be the first to like this

No Downloads
Views
Total views
6,035
On SlideShare
0
From Embeds
0
Number of Embeds
13
Actions
Shares
0
Downloads
136
Comments
1
Likes
0
Embeds 0
No embeds

No notes for slide

Reaching The BOP In India Version X

  1. 1. Reaching the Bottom of the Pyramid A case study of Double Fortified Salt in India Dirk-Jan ter Horst Rijksuniversiteit Groningen Amersfoort, June 2007
  2. 2. Reaching the Bottom of the Pyramid A case study of Double Fortified Salt in India “I would be hard-hearted enough to let the sick die if you can tell me how to prevent others from falling sick” - Mahatma Gandhi Amersfoort, June 2007 Author: Dirk-Jan ter Horst First Supervisor: Prof. dr. L. Karsten Second Supervisor: Dr. C.H.M. Lutz Company Supervisor: R.W.J. Diederen Rijksuniversiteit Groningen Faculty of Management and Organization International Business and Small Business & Entrepreneurship All rights reserved No part of this report may be reproduced and/or published in any form or by any means, without permission in writing from the holder of the copyrights Copyrights © 2007 The copyrights of the published report are owned exclusively by Dirk-Jan ter Horst and Akzo Nobel Salt Specialties in Amersfoort, The Netherlands
  3. 3. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India Preface_______________________________________________ The report that is presented here is the result of a research conducted for Akzo Nobel Salt Specialties and is in the scope of the final phase of my International Business and Small Business & Entrepreneurship Studies at the Faculty of Management & Organization of the University of Groningen. In October 2006 I grabbed the opportunity to develop a business plan aimed at a developing country for Akzo Nobel’s salt business. A recently developed concept, developed by C.K. Prahalad, which link up perfectly with the assignment I was given, inspired me to also make a small but significant contribution to scientific progress besides providing help to the Management Team of Akzo Nobel Salt Specialties. When I started the topic Business model development for the Bottom of the Pyramid sounded interesting, but my interest has grown during the nine months I have worked on thesis. I truly believe that multinational companies can play an important role in changing the world in a positive way by including the underserved into business. I am incredibly thankful that Akzo Nobel enabled me to experience working for Akzo Nobel in The Netherlands and India. The Management Team has given me a wonderful feeling of trust by granting me the resources and total responsibility for completing the project the way I felt was best. In order to gain a good understanding of the Indian retail salt market I went to India in January and returned in March. Experiencing life for two months in this incredible country was something that I would not have missed for any amount of money. During my internship I also experienced great-scale reorganization on the department I have worked for, whereby many of the employees I directly worked with experienced uncertainty for some time and have been declared supernumerary. Hence, the last nine months have been a valuable experience. The completion of this thesis was made possible through the support and cooperation of many individuals. Thanks to my advisors from the university, Prof.dr. Luchien Karsten and Dr. Clemens Lutz, and Raoul Diederen, Cees Schut, and Justus the Jong from Akzo Nobel, who provided guidance and encouragement through what seemed to be a never-ending process. Thanks also to Deepak Pandhi, who has helped me a lot during my stay in India. I would also like to thank professor Arunachalam from Madras University, and Nelson Pichathapmi, for helping me to find students that have helped me gathering data. I am also very thankful to all the others who rendered assistance to the completion of this research. Last but not least I would like to thank everybody that is closer to me and that have put up with me during my writning process. Thanks for all the trust and comforting words in the last months! Amersfoort, June 2007 Dirk-Jan ter Horst i
  4. 4. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India Management summary__________________________________ This research has been executed for the sBU Salt Specialties of Akzo Nobel. Together with sBU Chelates ANSS has developed two concepts to fortify salt with iodine and iron simultaneously and with iodine and selenium to prevent people from health diseases of IDD, IDA, and HIV/AIDS. Since prevalence of these health problems are highest in developing countries and ANSS does not have experience yet in serving the Bottom of the Pyramid (BOP) I was asked to conduct a study on how these people can be reached in an economical sustainable way and fits Akzo Nobel’s CSR policy. The Indian government has shown concern in the health problems of IDD and IDA and they have actively called out for help to solve these problems. For this reason and due to the fact that Unilever’s Indian subsidiary HUL has shown interest in Akzo Nobel’s DFS concept a market analysis of the Indian market and the development of a business model had the highest priority when this research initiated. The objective of the research is formulated as follows: To advice Akzo Nobel Salt Specialties on the business model that should be used on the Indian retail market for the DFS(Fe) and DFS(Se) products, so that this is commercial sustainable and fits Akzo Nobel’s Corporate Social Responsibility policy. Meeting this objective means that the Indian retail salt market had to be mapped and consequently an advice had to be given on the appropriate business model for ANSS and on how to deal with the implications of that particular business model. Developing an appropriate business model for Akzo Nobel required combining the ideal business model from a theoretical point of view with the market opportunities and Akzo Nobel’s own strengths and CSR policy. Hence, first an ideal business model has been developed according to theory. C.K. Prahalad, one of the founders of one the most influential business concepts in recent years, argues that multinational companies must revolutionize how they do business in developing countries, and take the lead in alleviating poverty by treating the poor (BOP) as consumers. Because there is much untapped purchasing power at the BOP, MNCs can make significant profits by selling to them, which can also bring prosperity to the poor. Since developing business models that suit people who can afford less than people from developed countries companies are required to create capacity to consume for the BOP and think out of the box, which can result in opening new doors to serve the affluent with innovations primarily aimed at the BOP. Aneel Karnani responded by stating that the only way to alleviate poverty is to raise real income of the poor. Therefore it is necessary to view the poor primarily as producers. Combining local production and consumption could be an option although this could be done in various ways. However it all depends on the opportunities the market offers. Given the variety among BOP populations and the opportunities that arise in the market, there is no one ultimate business model that fits all. Notwithstanding which business model will be chosen it is of paramount importance to minimize the costs of running the business model and that various (fringe) stakeholders, which are not that much present in developed markets, are required to be involved. By collaborating ii
  5. 5. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India with local parties that are trusted by the BOP consumers MNCs with scale and financial power can leverage their knowledge and co-create a business model that perfectly suits the needs of these consumers. Three business models with regard to serving the BOP have emerged which are called as follows: 1. Collective accountability, 2. Scaleable embedded distribution, and 3. Livelihood partnership. Although there is no one best solution these business models provide a good understanding of how business can be structured at the BOP. After designing an ideal business model Akzo Nobel’s CSR policy has been scrutinized and checked if it aligns with the theories of CSR and BOP, which certainly is the case. Thereupon the Indian salt market has been mapped. This can be divided into a market structure analysis and a consumer 1 behaviour analysis. The former has mainly been done by interviewing various stakeholders , combined with over 50 shop visits as well as analyzing secondary data. The latter has mainly been 2 done by conducting a quota sampling survey and interviewing consumers and focused on consumption habits as well as buying and decision making patterns. Summarizing it may be stated that the Indian branded salt market holds tremendous potential to grow since 65 percent of the market consists of non-branded salt, and offers many possibilities to get a share of the pie. During the last five years the market for branded salt is growing at a pace of 11-25 percent per year. This high growth rate combined with the high margins available in the value chain is the main reason why many companies want to enter the market. Due to the fact that Gujarat, Tamil Nadu, and Rajasthan produce nearly all salt that is consumed throughout the country, transportation costs account for x percent of total costs. For this reason logistics becomes a crucial competitive factor and some major companies have decided to source salt from more than one location in the country. Currently four national players dominate the retail salt market with five brands, which is saturated with more than x local brands. Since a few years most major companies realize that rural India, with a population of over x million who mainly eat unbranded salt, is a huge opportunity. Consequently companies like HUL have developed a business model that solely focuses on the poor. Other ways of reaching the poor is getting the government involved by means of Public Distribution System or targeted systems such as ICDS or Midday Meal schemes. Currently the market is on the threshold of a ‘boom’ of iron fortified salt, commensurable to the iodization boom of two decades ago. This is why it is now the moment supreme for Akzo Nobel to decide to jump into the market with its technology and convince central and state governments of Akzo Nobel’s concept keeping in mind that this is a sensitive subject. The fact that HUL is going to launch DFS at a premium price offers possibilities in terms of even higher margins and definitely contributes to endorse the assumption of an upcoming DFS market in India. Despite the good prospects the Indian salt market is a tough terrain. The challenge is to be able to reach the people with consistent quality, being competitive with marketing spends, and building brands in a price sensitive market. It is also crucial to have grip on the supply chain. 1 59 interviews with respondents which could be part of the following categories: experts, technology developers, salt manufacturers/brand owners, government, NGO’s, intermediaries 2 1555 respondents from 4 different states across India. The respondents came from rural as well as urban parts of India iii
  6. 6. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India The consumer analysis provided insight into various consumer segments. Basically a divide can be made between middle and upper class and the BOP. The middle and upper class consumers, who mainly live in cities, account for approximately 25% of the total Indian population. The low income segment population, of which education levels generally are lower than the higher segment, mainly lives in rural and urban slum areas. Generally people from the Southern states are more traditional. This also is true for people from rural areas. In general the sample provided the following insights: On average people eat x kilograms per person per year, which is approximately x grams per person per day. This per day consumption regularly is constant, regardless of income or regional differences Income level correlates negatively with branded salt consumption. Also rural citizens (which are usually poor) consume less than their urban counterparts. The main reason why a large share of the rural population and poorer sections of society prefer non- branded non-refined is an age old habit coupled with the price factor. The majority of the rural consumers prefer powder salt over crystal salt. However, the difference in preference for powder salt over crystal salt is less clear than in urban India. In the South crystal the popularity of crystal salt is higher than in the North There is a positive correlation between iodized salt consumption and awareness of its existence Regional dietary preferences relate to the way people use their salt After purchasing salt in 1kg plastic packs Indians put the salt in a jar to prevent from moisture, and throw away the plastic Purity, Taste, Free Flow Ability, Price, Health, and Uniformity are considered as the most important factors regarding salt. Of these evaluators taste is the decisive factor for most Indians with regard to salt, regardless of place of residence or income level Low income people are price sensitive. However, the majority of the people including the poor seems to be willing to pay INR x per kg DFS Television is the most important medium for deciding which brand to buy. Poor people consider a salesperson’s advice as more important than more affluent people Indians usually buy their salt in a small shop The opportunities that emerge after gaining insight in the consumer and the salt industry have been combined with the theoretical framework and the strengths of ANSS. The sBU has nearly always focused on top segments in developed countries and built up name as supplier of semi manufactured products and technology. On the other hand, ANSS does not have experience in doing business in India, which means that a distribution network has not yet been built up. Despite being a free flowing, homogeneous, stable and cost effective solution with an acceptable appearance, the iron DFS concept has not yet been approved as food grade by the Indian government and no efficacy study has been carried out until now. iv
  7. 7. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India Akzo Nobel must decide on the position it wants to occupy in the value chain in combination with the business model that has to be chosen. Since the country is so heterogeneous one business model simply does not fit all. Keeping in mind the price sensitivity of the BOP consumers, the price level a substantial fraction of the BOP is willing to pay, the costs for DFS and the costs for keeping the distribution models, either the traditional market model or the BOP model, running, it must be concluded that double fortified salt currently cannot reach the majority of the poor unsubsidized. However, because high corruption rates amongst public officers do not fit Akzo Nobel’s business policy, reaching the poor through DFS is not doable. In short ANSS’s core competencies lie in strong product development, production, and quality assurance. It needs to build up a network of partners that are able to create demand, ensure distribution, credibly tackle the educational components of the business, and have the knowledge to 3 market products in India . Thus Akzo Nobel must bring expertise in production and/or become a supplier of premix. This can be done by either selling the premix to one of the big national brands or entering the market with a new brand working together with one or more partners. The former option is recommended because it is easiest, requires minimal resources and could bring substantial profits. Considering which business model should be used is irrelevant in this case, because ANSS only becomes a supplier of premix. The second option could also become reality. Since profitability rates in the value chain are mainly for the brand holder, AN has a strong name as producer of salt in Europe, and the market offers space for entrants because of high growth rates, AN must enter the market with a brand in combination with one or several partner(s). Targeting the urban middle and upper class holds the potential to sell a large amount of DFS at prices comparable to the current top brands. These x million people can be reached best through the traditional distribution system with CFA’s, distributors, and retailers. In these segments anaemia rates are still quite substantial, although lower than in the BOP. Selling smaller sized packages that urban 2nd and 3rd tier BOP consumers can afford, leads to increased product awareness and consumer trial. PDS is probably the only manner to reach the 4th tier BOP with DFS. However, because high corruption rates amongst public officers do not fit Akzo Nobel’s business policy, it is advised against doing that. Considering ANSS’s current organizational and financial status a BOP model, which needs resources to set up a sales force, makes this option hardly possible. No matter which option ANSS chooses the premix must be produced in Holland, because the marginal effect of transport and import duties on the incremental costs of DFS in India do not countervail higher imitation risk and the availability of machinery in Hengelo. The premix can be mixed with locally produced salt of large scale producers from Gujarat and Tamil Nadu. Referring to the market entrance option Akzo Nobel’s should use its expertise in production by helping its partner with quality control and/or processing of DFS. Thereupon distribution needs to taken care of by a partner that has built up a strong distribution network. 3 Another criteria to partners is that they are reliable and that corporate business policies do not contradict v
  8. 8. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India Technology Production of Production of Distribution Marketing End Development premix DFS consumer Product Refinement of Akzo Nobel’s UNICEF, WHO, WFP, NIN, developed in raw salt and partner with an MI, governments and collaboration with mixing premix established numerous NGOs educate AN Chelates and with local distribution communities about needs for Micronutrient producers network takes healthy diet Inititative care of distribution Figure 8.2: Partnerships throughout the value chain Creating a market for DFS and building a brand requires collaborating with various partners and using mass media, distributing samples and penetration techniques such as putting schemes. Figure 8.2 shows the partners Akzo Nobel should work with in the value chain. Selling from and to the BOP! Though it might be concluded that the BOP model is not feasible yet, a business model has been elaborated as well that goes beyond Prahalad’s concept of the BOP, because it also includes producing from the BOP. Akzo Nobel could tie up with small scale producers, who are being unexposed to the global scenario, lack the knowledge and technology and thus stand to get exploited by middlemen. This can be organized in a sort of cooperative in which the small scale producers get equity, so that the participants benefit from their membership and interests are aligned. Opposite from conventional cooperatives, this cooperation must not be run democratically, but operations, ownership and management must be separated. Akzo Nobel can participate in this business cooperative by e.g. taking equity in the company, invest in equipment and/or provide guidance to produce good quality salt. Also Akzo Nobel could set up a refinement and mixing facility. By doing this Akzo Nobel keeps control over this decentralized production approach. All the salt produced can be transported to this hub, then it can be refined and fortified, and thereupon enter the market. At this point distribution comes into play. The Shakti model of HUL proves to be successful in reaching the otherwise unreachable BOP. Therefore this model could follow the production model. However, salt cannot be sold in isolation. Thus Akzo Nobel should find partners to build an assortment of products that its micro entrepreneurs can distribute. Setting up such a distribution model requires partnering with NGO’s, governments and perhaps micro finance institutes and other private organizations. This combined model has the advantage that awareness of double fortified salt increases more quickly than in the distribution model alone. Moreover, collaboration with SSI entrepreneurs gives appreciation from the government, which will be helpful in future initiatives. If ANSS decides to participate in the B2B market the impact on the current organization is low, but the effect on the elimination of IDD and IDA in India might be substantial. The option of participating in the market as a brand holder will have a bigger influence on both the organization and society. After five years approximately 14 million people will benefit from the salt provided by ANSS. Moreover, Akzo Nobel Salt Specialties will create direct and indirect jobs in the target country, pay tax, and do vi
  9. 9. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India business in an ethical way. By doing business in an ethical way Akzo Nobel co-creates a standard together with other organizations applying the same standards. This will have an enormous effect on the way Indian companies do business in the long run. Second, the implementation will have an effect on Akzo Nobel itself. Second, the implementation will have an effect on Akzo Nobel itself. Currently it is not known where this project will be accommodated, whether it stays at ANSS, it goes to Chelates, or perhaps to the Innovation Unit. Until then it is impossible to assess what will happen with the personnel that currently work on this project. However, setting up business in India is challenging. Thus, for employees of Akzo Nobel this project could offer great opportunities. Consequently the organization structure becomes more complex as well as communication between employees in different countries. Moreover, Akzo Nobel needs to build capabilities to work with organizations with whom they have not been involved with, such as the governments, NGOs, and GOs. This requires mental mapping. Recommendations Since the commercial potential is high as mentioned above, Akzo Nobel should not be deterred too easily, because of the many actions that have to be taken in order to enter the market. Rather, the DFS project should not blow over! Due to a lack of resources and perforce prioritization on short term revenue generating projects, it is hard for ANSS to keep the project alive alone. Consequently, for the sake of the project it is recommended to accommodate it in sBU Chelates or try to get it financed by the Corporate Innovation Unit. Besides deciding where to accommodate the project, the project can only be continued if the government is convinced that the Akzo Nobel concept must be approved. This requires amongst others conducting an efficacy study in India. Since this is crucial for success in India and an efficacy trial with DFS combined with acceptance and field stability tests take approximately 18 months, this must be started as soon as possible. Convincing the Indian government cannot be done without showing you face. The other market parties can also influence the government in its decision on setting a DFS standard. Therefore Akzo Nobel must position its DFS concept in key meetings or seminars with various stakeholders. It is of paramount importance to make flyers or brochures of the DFS concept as well. In the meantime funds are needed for technical support, for experimenting with lower grade salt, because this makes our product more interesting to the major players. If the premix can be mixed up properly with lower grade salt, Akzo Nobel can provide major players a competitive advantage, th because then it might be possible for them to focus on the 4 tier BOP As was mentioned in chapter 7 in India salt is added during the cooking process. The impact of the DFS in this condition will have to be evaluated thoroughly. Also other marketing aspects need to be considered, such as identifying business partners and funding agencies, and a thorough segmentation study needs to be conducted in order to identify in which state Akzo Nobel should start doing business. If Akzo Nobel is convinced that they want to start up a business in India they should also focus a study on the production side. How high are investment costs, where should the premix be mixed with local salt, and what role should be granted to Akzo Nobel in this production process. vii
  10. 10. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India Table of Contents_______________________________________ Preface…………………………………………………………………………………………………………….i Management Summary…………………………………………………………………………………...……ii Table of Contents……………………………………….………………………...………………………….viii List of Figures………………………….………………………...…………………………………………...xiii List of Tables………………………….………………………...…………………………………………….xiv List of Acronyms and Abbreviations………………………………………………………………………xv Chapter 1 Introduction_____________________________________________1 1.1: Situation………………………….………………………...……………………………………………….1 1.1.1 Social problem………………………………………………………………………………………..1 1.1.1.1 Iodine Deficiency Disorder…………………………………………………………………………………………...1 1.1.1.2 Iron Disorder Anaemia………………………………………………………………………………………………..2 1.1.1.3 Selenium Deficiency……………………………………………………………………………………………….…2 1.1.2 Company Profile……………………………………………………………………………………..2 1.1.2.1 Akzo Nobel Salt Specialties………………………………………………………………………………………….3 1.1.2.2 Chelates………………………………………………………………………………………………………………..4 1.1.2.3 Never focused on BOP……………………………………………………………………………………………….4 1.1.3 DFS Project…………………………………………………………………………………………..4 1.1.3.1 Project as a whole…………………………………………………………………………………………………….5 1.1.3.2 Stakeholders…………………………………………………….. …………………………………………………...6 1.2 Trigger …………………………………………………………………………………………...................6 Chapter 2 Research design_________________________________________8 2.1 Problem statement…………………………………………………………………………………….…...8 2.1.1 Research objective…………………………………………………………………………………10 2.1.2 Research questions………………………………………………………………………………..10 2.1.3 Definitions…………………………………………………………………………………………...11 2.1.4 Conditions…………………………………………………………………………………………...11 2.1.5 Conceptual framework……………………………………………………………………………..12 2.2 Methodology……………………………………………………………………………………………….13 2.2.1 Research approach………………………………………………………………………………...13 2.2.2 Scope of research………………………………………………………………………………….14 2.2.3 Research methods………………………………………………………………………………....16 2.2.3.1 Preparation phase…………………………………………………………………………………………………...16 2.2.3.2 Field study phase…………………………………………………………………………………………………....17 2.2.3.3 Analyzing phase……………………………………………………………………………………………………..19 2.2.4 Data quality……..…………………………………………………………………………………..20 2.2.4.1 Secondary data analysis……………………………………………………………………………………..……..20 2.2.4.2 Semi structured interviews………………………………………………………………………………………….21 2.2.4.3 Survey…………………………………………………………………………………………………….……….….22 2.2.4.4 Observations……………………………………………………………………………………..…………………..22 viii
  11. 11. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India 2.3 Relevance…………………………………………………………………………………………….…….23 2.3.1 Practical relevance…………………………………………………………………………..……..23 2.3.2 Theoretical relevance………………………………………………………….…………………..23 Chapter 3 Theoretical Framework______________________________24 3.1 Bottom of the Pyramid…………………………………………………………………………………...24 3.2 Corporate Social Responsibility and its relation to the BOP……………………………………..27 3.3 Customer Relationship Management……………………………………………………………...….30 3.4 Ideal Business Model………………………………………………………………………...................30 Chapter 4 Hypotheses_____________________________________________34 Chapter 5 CSR Policy Akzo Nobel __________________________________35 Chapter 6 Market structure _______________________________________37 6.1 Background………………………………………………………………………………………………..37 6.1.1 India on macro level………………………………………………………………………….…….37 6.1.2 History in salt….………………………………………………………………………………….…38 6.2 Market demand and competition………………………………………………………………………39 6.2.1 Industry size and growth…………………………………………………………………….…….39 6.2.2 Alternative DFS options……………………………………………………………………………40 6.2.2.1 Cost comparison of DFS options in India………………………………………………………………………...42 6.2.3 Competitive forces………………………………………………………………………………….42 6.2.3.1 Industry competitors ………………………………………………………………………………………………..42 6.2.3.2 Suppliers.………..........................................................................................................................................44 6.2.3.3 Buyers..........................................................................................................................................................44 6.2.3.4 Potential entrants……………………………………………………………………………………………………44 6.2.3.5 Potential substitutes…………………………………………………………………………………………………44 6.3 Salt production and transportation……………………………………………………………………45 6.3.1 Production regions…………………………………………………………………………………45 6.3.2 Quality and iodization………………………………………………………………………………46 6.3.3 Transportation…………………………………………………………………………...………….47 6.4 Marketing channels………………………………………………………………………………………48 6.4.1 Conventional market driven distribution channels………………………………………….......48 6.4.2 Public distribution channels…………………………………………………………………….…49 6.4.2.1 PDS…………………………………………………………………………………………………………...………49 6.4.2.2 ICDS…………………………………………………………………………………………………………..………50 6.4.2.3 Mid-day meal scheme…………………………………………………………………………………………...…50 6.4.3 BOP distribution channels…………………………………………………………………………50 6.5 Salt varieties and pricing…………………………………………………………………………….….52 6.6 Cost analysis………………………………………………………………………………………………54 ix
  12. 12. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India 6.7 Market influencers and legislation……………………………………………………………….……57 6.8 Market trends………………………………………………………………………………………………58 6.9 Key success factors, opportunities and threats……………………………………………………59 6.10 Learnings…………………………………………………………………………………………………62 6.11 Conclusions salt industry…………………………………………………………………..…………63 Chapter 7 Consumer behaviour_____________________________________65 7.1 The Indian population……………………………………………………………………………………65 7.1.1 The upper and middle class segment……………………………………………………………66 7.1.2 The BOP segment………………………………………………………………………………….66 7.2 Consumption behaviour…………………………………………………………………………………67 7.2.1 Usage frequencies…………………………………………………………………………………67 7.2.2 Cooking and consumption habits…………………………………………………………………69 7.3 Buying and decision making process………………………………………………………………...69 7.4 The Indian Consumer…………………………………………………………………………………….73 Chapter 8 Feasible Business Model Akzo Nobel_______________________74 8.1 Company strengths and weaknesses…………………………………………………………………74 8.2 Elements of business model……………………………………………………………………………74 8.3 Options……………………………………………………………………………………………………..75 8.4 The appropriate business model………………………………………………………………………79 8.4.1 Segmentation and targeting……………………………………………………………………….80 8.4.2 Strategy……………………………………………………………………………………………...80 8.4.3 Direct or indirect?..................................................................................................................82 8.4.4 Production and sourcing…………………………………………………………………………..82 8.4.5 Distribution…………………………………………………………………………………………..83 8.4.6 Marketing……………………………………………………………………………………………83 8.4.7 Concretization of CSR policy……………………………………………………………………...85 8.4.8 Conclusion business model……………………………………………………………………….85 8.5 BOP model not feasible yet……………………………………………………………………………..86 8.6 Financial forecast…………………………………………………………………………………………88 8.7 Replicability………………………………………………………………………………………………..89 8.8 Market entry mode………………………………………………………………………………………..89 Chapter 9 Impact of implementation of Business Model on organization___91 Chapter 10 Conclusion and Recommendations___________________92 10.1 The opportunity……………………………………………………………………………….…………92 10.2 How to respond to the opportunity?..........................................................................................92 10.3 Requirements…………………………………………………………………………………………….93 x
  13. 13. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India 10.4 Recommended actions and studies…………………………………………………………………93 10.5 Recommendations BOP option……………………………………………………………………….94 Review…………………………………………………………………………………………………………..95 Bibliography…………………………………………………………………………………………………....96 Appendices……………………………………………………………………………………………………..99 Appendix I The interviewees: an overview……………………………………………………99 Appendix II Overview of the various phases in the DFS project…………………………...103 Appendix III Data India………………………………………………………………………….104 Appendix IV Overview distribution channel salt market……………………………………...105 Appendix V Questionnaire and In-depth interview schemes……………………………….106 Appendix VI Advertisement NIN concept………………………………………………….…..110 Appendix VII Incremental costs for DFS with the DFS standard 1,000 ppm iron………….111 Appendix VIII Market share and positioning national brands…………………………………112 Appendix IX Cost calculations DFS premix incl. freight costs………………………………113 Appendix X DFS Project Timeline…….……………………………………………………….114 Appendix XI Percentage Prevalence of Anaemia in Children and women per state……..115 Appendix XII Salt specifications required by law………………………………………………116 xi
  14. 14. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India List of Figures _________________________________________ Figure 1.1 IDD Problem Pyramid…………………………………………………………………………1 Figure 1.2 Organizational structure of Akzo Nobel……………………………………………………..3 Figure 1.3 DFS project stages…………………………………………………………………..………..5 Figure 1.4 Various stakeholders………………………………………………………………………….6 Figure 2.1 Mission, vision, goal and objective…………………………………………………………..8 Figure 2.2 Research structure…………………………………………………………………………..12 Figure 2.3 Process of business idea generation………………………………………….…………..14 Figure 2.4 Map of India………………………………………………..…………………………………15 Figure 2.5 Numbers of respondents per state………………………………………………….……..18 Figure 2.6 Distribution of respondents by area of residence………….………………..……………19 Figure 2.7 Distribution of respondents by income level………………………………………………19 Figure 3.1 The World Economic Pyramid……………………………………………………….……..24 Figure 3.2 Traditional and BOP Growth Patterns……………………………………………………..25 Figure 3.3 Interconnectedness as driver of co-creating value for society and corporate sector…26 Figure 3.4 The Great Leap Downward: Driving innovation from the BOP………………………….26 Figure 3.5 The Sustainable Value Framework………………………………………………………..29 Figure 3.6 Differences between developed market and BOP market business models………….31 Figure 3.7 Three emerging business models……………………………………………..…………..32 Figure 5.1 Balancing People, Planet and Profit……………………………………..…….…………..35 Figure 5.2 Perceived advantages of CSR……………………………………………………………..36 Figure 6.1 Gandhi on the Salt March…………………………………………………………………..38 Figure 6.2 Indian salt market classification…………………………………………………………….40 Figure 6.3 Porter’s five forces model…………………………………………………………………...42 Figure 6.4 Market shares in India……………………………………………………………………….42 Figure 6.5 Salt production in India……………………………………………………………………...45 Figure 6.6 Conventional market-driven branded salt channel…………………………………….…48 Figure 6.7 Edible salt varieties in India…………………………………………….…………………..52 Figure 6.8 Tata salt cost split-up in INR / ton……………………………………………..…….…..…54 Figure 6.9 Conventional market-driven branded salt channel + margins……….………………….55 Figure 7.1 Decisive purchase factors in different areas of living …………………………………...70 Figure 7.2 Decisive purchase factors related to income level………………………………..…….71 Figure 8.1 Double Fortified Salt Value Chain………………………………………………..………..75 Figure 8.2 Partnerships throughout the value chain………………………………………………….86 Figure 8.3 The market entry mode decision…………………………………………………………..90 xii
  15. 15. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India List of Tables__________________________________________ Table 2.1 Potential for DFS in various countries in Asia and Africa……………………………..…15 Table 2.2 Numbers of respondents per category……………………………………..……………..18 Table 6.1 Ease of doing Business in India according to the World Bank……………….…………38 Table 6.2 Domestic supply of iodized and vacuum / refined iodized salt…………………….……40 Table 6.3 Incremental costs for DFS providing 0.4 mg/day absorbed iron…………………..……42 Table 6.4 Regional differences in iodized salt production……………………………………….….47 Table 6.5 Direct-to-Consumer channel margins…………………………………………………..…51 Table 6.6 Retail prices of salt in India………………………………………………………….….…..53 Table 6.7 Margins of major brand holders……………………………………………………..……..56 Table 7.1 Branded salt consumption related to area of living…………….……………...…………67 Table 7.2 Branded salt consumption related to income level…………………………………….…67 Table 7.3 Area * kind of salt Cross tabulation………………………………..………………………68 Table 7.4 Iodized salt awareness * iodized salt consumption Cross tabulation……….…………69 Table 7.5 Perception of price per kg of salt people consume related to income level……..……71 Table 7.6 Maximum price people are willing to pay for DFS related to family income……..……72 Table 7.7 Reasons for shop choice related to income level……………………………………...…72 Table 7.8 Most important sources of information with regard to purchasing salt of various income groups…………………………………………………………………………………………73 Table 8.1 Positioning options…………………………………………………………………………..76 Table 8.2 Option evaluation scheme…………………………………………………………………..77 Table 8.3 Akzo Nobel’s profitability for supplying premix to HUL………………………………..…89 xiii
  16. 16. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India List of Acronyms and Abbreviations_______________________ 3 P’s People, Planet, Profit AIDS Acquired Immune Deficiency Syndrome AN Akzo Nobel ANSS Akzo Nobel Salt Specialties B24B Business to the four Billion underserved B2B Business to Business BOP Bottom of the Pyramid BU Business Unit CAGR Compound Annual Growth Rate CEO Chief Executive Officer CFA Clearing and Forwarding Agent CIF Cost, Insurance and Freight (INCOTERM) CRM Customer Relationship Management CSMCRI Central Salt and Marine Chemicals Research Institute CSR Corporate Social Responsibility DCF Discounted Cash Flow DFS Double Fortified Salt DFS(Fe) Salt for human consumption fortified with both iodine and iron DFS(Se) Salt for human consumption fortified with both iodine and selenium EOI economic value added on EVA invested capital EUR Euro EVA Economic Value Added FAC Freight Adjusted Compound Fe Ferrum FeSO4.7H20 Ferrous sulphate FMCG Fast Moving Consumer Goods GDP Gross Domestic Product GO Governmental Organization HIV Human Immunodeficiency Virus HPMC Hydroxypropyl Methylcellulose HSL Hindustan Salt Limited HUL Hindustan Lever, the Indian subsidiary of Unilever ICDS Integrated Child Development Services ICFAI Institute of Chartered Financial Analysts of India ICMR Indian Council Medical Research ICRW International Center for Research on Women IDA Iron Deficiency Anemia IDD Iodine Deficiency Disorder IHMP Institute of Health Management Pachod INR Indian Rupee IQ Intelligence Quotient ISMA Indian Salt Manufacturers Association IT Information Technology IU Innovation Unit Kg Kilogram MD Managing Director MFS Multi Fortified Salt Mg milligram MI Micronutrient Inititatve MNC Multinational Company MRP Maximum Retail Price MT Management Team MTPA Metric Tons Per Annum NaCl Natrium Chloride (salt) NACO National AIDS Control Organization NaFeEDTA Sodium iron ethylenediaminetetraacetic acid, the iron compound used in AN’s NGO Non Governmental Organization NIDDCP National Iodine Deficiency Disorders Control Programme xiv
  17. 17. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India NIN National Institute for Nutrition PDS Public Distribution System Ph.d Doctor of Philosophy PPM Parts Per Million PPP Purchasing Power Parity R&D Research & Development RBV Relative bio-availability sBU sub Business Unit SCO Salt Commissioner’s Office SE Shakti Entrepreneur SHG Self Help Group SHMP Sodium Hexametaphosphate SSI Small Scale Industry THC Terminal Handling Charges TiO2 Titanium Dioxide TNSC Tamil Nadu Salt Corporation TOP Top of the Pyramid UK United Kingdom UN United Nations UNESCO United Nations Educational, Scientific and Cultural Organization UNICEF United Nations Children's Fund US$ United States dollar USA United States of America USAID United States Agency for International Development USI Universal Salt Iodization WCD Women & Child Development WFP World Food Program WHO World Health Organization xv
  18. 18. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India Chapter 1 Introduction______________________________ This chapter provides an introduction to the research enabling you to get a clear understanding of the current situation and the necessity of this investigation. First, the current situation will be described. This will be done by the discussion of several social problems, followed by a profile of Akzo Nobel profile and of the sBU Salt Specialties in particular. Thereafter the DFS project will be described briefly as well as the involved stakeholders. At last the actual reasons of the research will be discussed. 1.1 Situation 1.1.1 Social problems To stay healthy and function well one needs to get down certain kinds of vitamins and minerals like e.g. iodine, iron, vitamin A and zinc. This group of vitamins and minerals is collectively known as micronutrients. Since over 2 billion people suffer from ‘hidden hunger’, the lack of these micronutrients represents a major threat to the health and development of populations all over the world, particularly 1 children and pregnant women in low-income countries. Major nutritional deficiencies are iodine deficiency and iron 2 deficiency. 1.1.1.1 Iodine deficiency disorder (IDD) 1% - 10% Cretinism Iodine is an essential element for human survival. It is needed for growth and 5% - 30% Some brain damage development, even before birth. Important as it is, only very small quantities are needed to prevent deficiency. 30% - 70% Loss of energy due to hypothyroidism However, according to Unicef, 740 million people suffer from iodine deficiency Figure 1.1: IDD Problem Pyramid and it is most acute in developing countries. Severe IDD affects more than 200 million children in developing countries, of which over 70 million live in India.3 Iodine deficiency is the world’s leading cause of impaired cognitive development and brain damage, with its most devastating impact on the brain of the developing fetus. Mental retardation, a lower IQ by 10-15 points4, spontaneous abortions, stillbirth, speech defects, deafness and goiter, which is often the only visible manifestation concerning IDD, could be the case 5 for children born to iodine-deficient mothers . x % of India lives in rural areas and some of the places 1 WHO, NRC Next 16/10/2006 2 Unicef, The Micronutrient Inititiative: Vitamin & Mineral Deficiency Magazine 2006 3 www.iccidd.org 4 UNICEF, ICCIDD: figure 1.1 is adapted from the website of ICCIDD 5 www.unicef.org/nutrition/23964_iodine.html 1
  19. 19. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India where iodine deficiency is greatest are in the most remote parts of the country, where roads and transport are poor and retail distribution channels are almost non-existent6. 1.1.1.2 Iron deficiency anaemia (IDA) In developing countries every second pregnant woman and about x% of preschool children are estimated to be anaemic (WHO). This means that over 2 billion people suffer from iron deficiency. One cause of IDA is insufficient dietary intake of iron; others are blood loss during menstruation and parasitic infections. According to Massachusetts Institute prevalence of anaemia in India in children under 5 years and women under 50 years is respectively x% and x%7. The Institute of Health Management, Pachod (IHMP) and International Center for Research on Women (ICRW) state that 60- x% of Indian adolescent girls are anaemic, which is the highest prevalence in the world. Common visible signs of iron deficiency include paleness of the skin, tongue and inside lips. IDA can also lead to maternal deaths, reduced work productivity and impaired physical and cognitive 8 development. Anaemia contributes to x% of all maternal deaths . 1.1.1.3 Selenium deficiency Selenium deficiency affects more than 1 billion people across the globe9. Selenium is an important mineral and antioxidant which has several functions in the human body. As an antioxidant, selenium is crucial in protecting healthy cells against damaging ones. In other words, selenium is needed for the proper functioning of the immune system. Several studies show that selenium deficiency increases among others the risk of certain types of cancer, progression of severe viral diseases like HIV/AIDS and death. In addition it could intensify conditions associated with high levels of oxidative stress, including asthma, diabetes, arthritis and muscular dystrophy. Baum found that HIV-infected adults with selenium deficiency were nearly 20 times more likely to die from HIV-related causes than those with adequate levels.10 Worldwide around 39 million people are infected with the HIV/AIDS virus. There is disagreement over how many people are currently living with HIV in India. UNAIDS estimates that there were 5.7 million people in India living with HIV by the end of 2005, suggesting that India has a higher number of people living with HIV than any other country in the world11. On the other hand, NACO has established an estimate of 5.2 million people, which indicates that there are less infected 12 people in India than in South Africa. Either way, it is clear that the number affected by the epidemic is huge. 1.1.2 Company Profile Akzo Nobel is a Global Fortune 500 company, employing 42,800 people across 80 companies in the world, headquartered in the Netherlands. Consolidated revenues for 2006 of the Chemicals and Coatings groups combined totaled EUR 10 billion. Akzo Nobel is one of the world’s major suppliers of 6 http://www.censusindia.net/results/rudist.html 7 Massachusetts Institute review, 2004 8 WHO 9 Lyons et al, 2003 10 Baum, 1997 11 UNAIDS, 2006 Report on the global AIDS epidemic 12 NACO (April 2006, HIV/AIDS epidemiological Surveillance & Estimation report for the year 2005) 2
  20. 20. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India all kinds of salts, for a variety of applications. The concern can be divided into two groups, namely Chemicals and Coatings as you can see in figure 1.2. Board of Management CSR BOP Task Force Coatings Chemicals Service Business Technology Management / R&D Base Chemicals Functional Chemicals Polymer Chemicals Pulp & Paper Chemicals Surfactants Salt Bulk Chelates Salt Specialties Export & BD Figure 1.2 Organizational structure of Akzo Nobel The Group Chemicals used to consist of six Business Units (BU’s), under which the BU Salt. In February 2005 the BU Salt was subdivided into Bulk and Specialties. The bulk section was placed under Base Chemicals and Specialties was placed on the divestment list. After having been on the divestment list for fifteen months, Salt Specialties returned as a sBU under Functional Chemicals. The organizational structure above shows that both Salt Specialties and Chelates are part of the BU ® Functional Chemicals. Chelates is the sBU that produces Ferrazone , the iron compound that is one of the sources for the DFS(Fe) product (see paragraph 1.1.3.1). Within the BU Functional Chemicals the sBU’s work autonomously and are responsible for their own profits. 1.1.2.1 Akzo Nobel Salt Specialties Akzo Nobel Salt Specialties is headquartered in Amersfoort (the Netherlands) and has experience in the salt business since 1918. Around 300 people are employed in this Sub Business Unit (sBU), divided over locations in Amersfoort (Netherlands), Hengelo (Netherlands), Dordrecht (Netherlands), Mariager (Denmark), Göteborg (Sweden), Hamburg (Germany) and Bruxelles (Belgium). Akzo Nobel Salt Specialties is known for its high quality products such as Jozo®, Nezo®, KNZ®, Sanal® and Broxo®. Partly due to the history of supplementing iodine to salt from the 1920’s to combat iodine deficiency, Akzo Nobel Salt has built up a good reputation in the field. As a consequence the perception on the Akzo Nobel Salt brands is valued as high quality. In its market approach Salt Specialties distinguishes between six market segments: Retail, Food, Pharma, Agriculture, Water Treatment and Industrial. In the Retail segment Salt Specialties holds strong positions in the Benelux, Scandinavia, UK, Germany and the Gulf Cooperation Council.13 Salt Specialties mainly targets high end consumers in the various market segments. 13 Intranet Akzo Nobel Functional Chemicals 3
  21. 21. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India After having been on the divestment list new goals were set for the sBU. The negative EOI, EVA on Invested Capital or economic value created in relation to invested capital, of five per cent must be brought back to zero within nine months and grow another 5 per cent in the coming three years. Since the saturated home markets are declining in volume recently Salt Specialties is looking for new business opportunities in emerging markets. The aim for the Export and Business Development Department of the sBU Salt Specialties is to double its revenue within three years. The intention is to build structural attractive businesses in Asia and Africa. 1.1.2.2 Chelates ® Chelates is the sBU that produces and supplies NaFeEDTA, brand name Ferrazone , the iron source for the DFS(Fe) product. Chelates is responsible for the production and supply of Ferrazone® for the ® DFS(Fe) product. The sales amount of Ferrazone is x MT per annum with an average selling price of ® € x,- per kg meaning a revenue of x per annum. Ferrazone is highly dependent on Craft, their main buyer, which accounts for over x% of total sales. ® Chelates is currently looking for channels to enter the Indian retail market. Since Ferrazone can be linked to different carriers such as salt and wheat flower Salt Specialties is not the only possibility. Besides this, and the fact that Chelates’ share in the premix value is approximately x times compared to Salt Specialties’ share, illustrates the relation between both BU’s, the valuation of the project, and the possibilities for conflicting interests. Chelates is working on the registration of Ferrazone® as a food ingredient, which will not be approved before summer 2007 at the earliest. 1.1.2.3 Never focused on BOP As mentioned before Akzo Nobel normally focuses on high-end segments in almost all businesses. The markets Akzo Nobel is doing business in are mainly developed countries. The top x% of the world accounts for x% of all Akzo Nobel’s total revenue. However, on corporate level there have been some initiatives where Akzo Nobel focused on low segments. Actually the BOP concept, which will be elaborated in chapter 3, has been introduced several times at Akzo Nobel in vain. For this reason the BOP concept is an emotionally charged subject. Until now the Board has not been convinced. The first time it has been introduced purely as a business opportunity. The second time it was tried from an anthropological perspective14. Within the Group Chemicals there has not been one initiative so far. Now Akzo Nobel Salt Specialties wants to change this with one of its current projects, the DFS project. The aim is to build a profitable and sustainable consumer salt position in several developing countries’ high and low segments. 1.1.3 DFS Project The health problems mentioned in paragraph 1.1.1 are at the heart diet problems. Three micronutrients: iodine, iron and selenium are inadequately present in diets of many people. Since even the poorest consume salt, it is globally recognized as the best vehicle for supplementing diets with e.g. iodine and iron. With DFS one can provide iron and iodine in small quantities on a daily basis since 14 The second time the initiators gave the concept formerly known as BOP a different label: emerging strategy for the low income customer 4
  22. 22. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India salt is an ingredient that is used in all foods daily and in consumed by all in the family. One of Akzo Nobel’s goals is to launch new “sustainable growth” projects. Therefore Akzo Nobel accepted the challenge to fight the problem of micronutrient malnutrition and started investing in R&D. Since 2003 Akzo Nobel Salt has worked on the development of DFS, in cooperation with sBU Chelates, and in consultation with the Micronutrient Initiative (MI). One of the major challenges was to cope with the chemical incompatibility between iodine and iron, resulting in loss of iodine. The other was to obtain DFS that provides the iron required and that is acceptable and affordable for the consumer and business wise viable. Akzo Nobel developed a technology that could tackle the social problems mentioned above by adding iron and iodine to salt. In this report this product is called Double Fortification Salt Ferrazone® or DFS(Fe). Another product Akzo Nobel is developing is called Double Fortification Salt Selenium or DFS(Se), because it adds iodine and selenium to salt. A three year intervention study on salt fortified with selenium in China revealed that the supplementation of selenium reduces viruses like hepatitis that could lead to primary liver cancer significantly. It appears that death rates from viruses and associated heart diseases like keshans can be greatly reduced by dietary selenium intake and would be similarly effective in slowing the progress if AIDS deaths.15 Now that these products have been developed we face two major challenges. Firstly, we must find a way to persuade people to switch to DFS even if it costs more than salt only fortified with iodine and even more difficult raw unfortified salt. Secondly we must find a way to reach the people who need it, which are for a major part people at the economical bottom of the pyramid, in an economical sustainable way. 1.1.3.1 Project as a whole The project can be divided into three parts, which are interrelated. Although the model below shows that these phases happen in succession, it should be clear that this is an iterative process. Technology Design Implement Development Business Model Business model The R&D department develops Management defines and designs The business model is a DFS product and an up scaling a business concept that responds implemented into business technology. Efficacy and to business circumstances. structure and business processes. efficiency tests as well as field trials Beforehand market analysis must be will be performed conducted. Relationships with local partners must be developed Figure 1.3 DFS project stages The business model to be designed is primarily aimed at India, but the project does not end after implementing it in India. As mentioned above the aim of Salt Specialties is to build structural attractive businesses in Asia and Africa. Therefore one must see India as a trial within a larger project. For both products, DFS(Fe) and DFS(Se), Akzo Nobel still is in the technology development phase. However, with regard to the tests that have been performed for both products DFS(Fe) is approximately one year ahead of DFS(Se). Efficacy tests as well as effectiveness tests have not been carried out yet. Efficacy defines the extent of the beneficial effect of a certain intervention under ideal conditions, 15 ISIS, 2004: Institute of Science in Society Press Release of July 20th 2004 “Selenium conquers AIDS” 5
  23. 23. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India whereas effectiveness tests measure the effect of the intervention when deployed in the field, so influenced by behavioral factors. Since last year Akzo Nobel is exploring co-operation on marketing and sales on DFS products with potential (local) partners such as Unilever. This research is the start of the business model design phase. In Appendix II you can find a more detailed model that gives an overview on the different phases and the related decisions that have to be taken. 1.1.3.2 Stakeholders A wide variety of people and institutions benefit from working on a societal problem such as the health problems mentioned above. These people and institutions coexist, complement each other, and are interrelated and interdependent. On the picture below one can see all different stakeholders. It should be clear that the Akzo Nobel component consists of Salt Specialties, Chelates and other stakeholders within the company. Each constituent has a role to play within the system. National and local governments Manufac- of India turers of salt Akzo Nobel Extralegal NGO’s NGO enterprises Iron, Iodide & MNC’s Distributors Selenium Deficiency in India Small and Wholesalers Medium enterprises Super BOP Markets & Consumers grocery stores Cooperatives Figure 1.4 Various stakeholders It should be clear that the importance of various components in the systems might change over time and is different in various developing countries.16 For instance, in the slums of Mumbai there are extralegal salt sellers and they coexist with global firms like HUL and Tata. 1.2 Trigger There is an immediate concern confirmed by the Indian government to solve this problem. Because of this several organizations are raring to enter the Indian market. Unilever’s Indian subsidiary HUL already entered the salt market with iodized salt in 1996, so they have already built up a distribution network. HUL is highly interested to put a certain DFS on the market and they have contacted Akzo Nobel Chelates for it. Since Akzo Nobel is not the only organization that has developed a technology 16 Prahalad, 2006: p.65 6
  24. 24. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India the race against the clock has begun. The active call from the Indian government and HUL are the main reasons why a market analysis and the development of a business model have the highest priority. Besides designing a business model for developing countries and the BOP in particular is highly important, considering the goal of building structural commercially attractive businesses in Asia and Africa within three years. Finding new markets at the BOP demands a different perspective from what Akzo Nobel is used to and the experience gained from this is extremely important in further extension of markets to be served. 7
  25. 25. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India Chapter 2 Research design___________________________ After reading chapter 1 you gained an insight into the context of the DFS project. What is the main problem of this study and how will this be solved are the central questions to be answered in this chapter. Paragraph 2.1 discusses the problem statement, followed by the methodology used (§ 2.2), and the relevance of the study (§ 2.3). The last paragraph of this chapter (§ 2.4) outlines the structure of the remainder of the report. 2.1 Problem statement This paragraph tries to clarify which problem will be ‘solved’ during the research. In this study a problem means the discrepancy between the current and ideal situation. The introduction chapter has provided you with a first insight into the problem. Now the problem will be addressed in more detail and placed in perspective. Moreover, the relationship between the company’s objective and the research objective will be shown. Understanding the objective of this research necessitates thinking beyond today's tactical need. For this reason a distinction has been made between Mission, Vision, Goal, and Objective Figure 2.1 shows how these concepts are related. Mission (Ongoing principles) Current Future Future Future state state state state Objective Goal Short-Term Aim Medium-Term Aim Vision Long-Term Aim Time Figure 2.1: Mission, vision, goal and objective This figure indicates that the factor time is the key variable when it comes to determining the difference between the various concepts. However, the underlying factor that explains the differences between the concepts is measurability. Hence, one could also refer to the distinction of official and operational goals in this respect. These official goals are sometimes formed in a mission statement, which states the overriding purpose the organization strives for. It reflects the position the company wishes to take in the world. In other words, the organization’s mission defines the identity of the organization in highly 17 general terms, which are not objectively measurable . Official goals are used to communicate the company’s purpose to all stakeholder groups, both internal and external, and to guide employees in their behaviours to align with the strategic intent of the firm as well as its values and norms. In this respect we can speak of the legitimizing function of official goals like the mission and vision statements. The distinction between mission and vision is not quite clear in literature, and sometimes the terms are sometimes used alternately. According to De Wit and Meyer a mission defines the 17 Paul, J.C.L., Gils van, M.R., Karsten, L., Offenbeek van, M.A.G. and J. de Vries, (1999):, p. 203 8
  26. 26. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India purpose and principles of the company, and the vision states what the company will look like if it achieves the plan18. Operational goals, on the other hand, are rendered into measurable terms. They should be measurable so that the company can monitor its progress and make corrections when needed. Once the firm has specified its goals it must devise a strategic plan to reach those goals. This strategic plan 19 can also be referred to as a firm’s objective . In order to devise such a plan it is essential to get a clear picture of the current situation, including opportunities and threats in the external environment of the firm. This objective could be subdivided into several sub objectives. In general it can be said that the closer a goal is set to the current situation the more objective and thus better measurable the goal is. Although it seems that goals and objectives are derivatives of the mission and vision, influencing happens from both sides. The mission of Akzo Nobel is to strive to be the first choice of customers, shareholders, and employees, and to be a respected member of society. To accomplish this Akzo Nobel wants to conduct all its activities in a socially responsible manner20. This means finding the right balance between People, Planet, and Profit and is part of Akzo Nobel’s CSR policy. Socially responsible business development has a key role to play in the company’s global activities. This will be elaborated in chapter 5. For a diversified conglomerate like Akzo Nobel the transformation of a corporate mission into missions, visions and goals on a BU level is a quite complex process. On a BU level ANSS wants to use the power of a multinational corporation to do something good for the entire local society in the broadest sense. Akzo Nobel’s corporate vision regarding the health problems discussed earlier is to become one of the major contributors to the elimination of nutritional deficiencies throughout the world. This implies for ANSS that they want to become a major global player with its DFS products, so that ANSS can help improve the health of human beings which in turn means that Akzo Nobel needs to build up BOP skills. In this respect ANSS believes that ‘adopting’ a country is the best way, because then you can eliminate the entire health problem where you are focusing on. The translation of the 21 vision into goals is the next step in the strategy planning process . Striving for this vision requires amongst others a decision on where to start. Since most of the key nutrients are lacking in adequate quantities in the diets of a majority of the people in developing countries, this developing world is the focus of ANSS. India has been chosen as the appropriate country to start the pilot. ANSS’s goal is to build up sustainable business in India in the retail salt market, especially in the BOP. The exact quantifiable targets that need to be met in favor to build a sustainable business in India are not yet known. This is the main reason that this study was initiated and shows how the overall purpose of this study and the company’s objective are related. Although the objective of the study is not quantifiable it definitely matches the company’s objective which is developing a business model to sell the DFS products. 18 Wit de, B. and R. Meyer, (2004): p. 593 19 Wit de, B. and R. Meyer, (2004): p. 594 20 Akzo Nobel Annual Yearbook 2006 21 http://www.netmba.com/strategy/process 9
  27. 27. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India 2.1.1 Research objective The objective of this research is as follows: To advice Akzo Nobel Salt Specialties on the business model that should be used on the Indian retail market for the DFS(Fe) and DFS(Se) products, so that this is commercial sustainable and fits Akzo Nobel’s Corporate Social Responsibility policy. This objective can be divided into three deliverables, namely: 1. To provide Akzo Nobel with an overview of the retail salt market in India 1.1 Mapping the structure of the market 1.2 Consumer behaviour analysis 2. To advice Akzo Nobel on which business model to use 3. To advice Akzo Nobel on how to deal with the implications of the business model that should be used 2.1.2 Research questions This objective has been made operational by formulating the following questions: 1. Which business model should Akzo Nobel use for the DFS(Fe) en DFS(Se) products on the Indian retail salt market, so that this is commercial sustainable, and fits the Corporate Social Responsibility policy of the organization? 2. How should Akzo Nobel deal with the implications of putting this business model into practice? To be able to answer these questions, a number of subquestions have been formulated. The answers to these questions will ultimately lead to the answer of the main research questions. The following subquestions are relevant for this thesis: 1. How does the ideal business model for the BOP look like regarding the BOP theory? 2. What does Akzo Nobel’s Corporate Social Responsibility policy mean? 3. How does the Indian distribution channel for salt look like, which parties are involved, with which products, how are these parties related, and how does this develop? 4. Which other factors, like legislation, play a role in developing a business model? 5. How do Indian consumers behave regarding salt and how does this affect the decision on which business model to choose? 6. Which business model is most appropriate for Akzo Nobel? 7. What is the impact of implementing the business model on the organization and society, and how should Akzo Nobel deal with this? 10
  28. 28. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India 2.1.3 Definitions Business model: A description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value 22 and relationship capital, to generate profitable and sustainable revenue streams . Corporate Social Responsibility: A continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community 23 and society at large . DFS(Fe): Salt for human consumption fortified with both iodine and iron. DFS(Se): Salt for human consumption fortified with both iodine and selenium. BOP: BOP stands for Bottom of the Pyramid. This Bottom of the Pyramid means all people with an income lower than $1500 per annum. Throughout the world over 4 billion people live below this poverty line. Distribution channel: A channel of distribution comprises a set of institutions which perform all of the activities utilised to move a product and its title from production to the end-consumer24. 2.1.4 Conditions Several requirements applied to this research which will be enumerated below: This study must be delivered within eight months after the beginning of it and obtaining information in India was limited to two months I had to conduct the research independently, because of the limited time of my Dutch colleagues. Akzo Nobel Salt Specialties is not present in India yet, which meant that I had to conduct the field study by myself There were limited financial resources available The study must meet the requirements imposed by the university, which means amongst others that it must have scientific depth 22 Osterwalder, A., Y. Pigneur, and C.L. Tucci (2005) 23 World Business Council for Sustainable Development 24 Coughlan, A.T., Anderson, E., Stern, L.W., and A.I. El-Ansary, (2006): p. xix 11
  29. 29. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India 2.1.5 Conceptual model The conceptual model shown below is at the basis of the (sub)questions stated earlier, and is used to structure the research. This model shows that this study consists of a theoretical and a practical part. In order to design a business model for the BOP that is feasible for Akzo Nobel I have tried to link theoretical concepts to the opportunity the Indian retail salt market offers so that it is in accordance with Akzo Nobel’s current CSR policy. The upper left box contains various concepts that form the theoretical framework of this thesis. It shows that the goal is to develop an ideal business model in theory by linking the CSR concept to the BOP concept. Thereupon Customer Relationship Management (CRM) must be given a place within the BOP concept. This is why an arrow points from the CRM box to the BOP box. The ultimate aim in is to work towards an ideal business model for the BOP from a theoretical perspective. As shown in this box, the theoretical framework will be discussed in chapter 3. Thereafter, the formulated hypotheses will be presented in chapter 4. Theoretical Framework Internal analysis External analysis CSR Akzo Nobel’s CSR Policy Overview Indian Retail Salt Market Ideal Business People Model BOP Planet Profit Market Consumer structure behaviour CRM Ch. 3 Ch. 5 Ch. 6 Ch. 7 Hypotheses Ch. 4 Feasible Business Model Akzo Nobel Ch. 8 Impact of implementation on organization and society Ch. 9 Conclusions & Recommendations Ch.10 Figure 2.2: Research structure In addition to the theoretical part internal as well as external analyses have been carried out. Internal means that Akzo Nobel’s CSR policy has been scrutinized and checked if it is aligned with the theories of CSR and BOP (chapter 5). This Internal analysis box is situated in the upper middle part of the model. The upper right box concerns the field study, which has been carried out to provide Akzo Nobel 12
  30. 30. Reaching the Bottom of the Pyramid: a case study of Double Fortified Salt in India with an overview of the retail salt market in India. This market research can be divided into a market structure analysis and consumer analysis, which will be stressed in chapter 6 and 7 respectively. Developing the appropriate business model for Akzo Nobel necessitates combining these three parts. The funnel reveals that the business model that should be applied will have an impact on both the organization as the (local) society. Recommendations on how to cope with these implications will be elaborated in the Conclusions & Recommendations part. 2.2 Methodology This paragraph addresses the scope of this study as well as the research approach and methods that are used during this study. After reading this section you will be able to judge the reliability of the results presented in this report. 2.2.1 Research approach Both an inductive and deductive approach are used during this research. Hypotheses were formed by findings in primary and secondary data as well as theories. The hypotheses, whether formulated based on findings or theories, are tested deductively. The advantage of this approach is that unconstrained observations and other findings lead to insights that could have been left out if only a deductive approach was used. Besides solving the research problem this inductive approach could also lead to theory development. Deductively formed hypotheses on the other hand could give an extra dimension on the problem from the theoretical perspective. By using both approaches the downside of deduction, constraining the analysis because of prejudice, is overcome. Hence, the approach chosen forms the best of both worlds! Figure 2.2 has showed that CRM must play a role in developing a business model. This means that the end consumer plays a crucial role in the market research that has been conducted. The influence of the end consumer has its effect on both the starting point of the study, and the way the research is conducted. Target costing forms the starting point for the development of a business model and this has an effect on the way the study is conducted. It is of paramount importance to understand the willingness of the people to pay a certain amount of money for a package of salt in order to understand if a business model is sustainable or not. Moreover, understanding market prices for different segments helps to realize the feasibility of reaching the BOP. The study is performed from the perspective of the end consumer. It was essential to start the analysis from the end consumer and work the way back to the producer. Mapping the distribution channel started for example by asking people where they buy their salt25. Model 2.426 shows exactly how important the end consumer is regarding this project in general and this research in particular. The very first thing people must do to generate business ideas is to try to understand the consumer and its behaviour. Subsequently this understanding must be translated into insights, which in turn can be transformed into new business concepts or products. 25 See Appendix 5: Questionnaire 26 Adopted from a presentation from Branddoctors (www.branddoctors.nl) 13

×