Martin on Base of the Pyramid

Sustainable Business Models Base of Pyramid, Micro-Credit and – Insurance o ikos Spring Meeting 2009, Oslo Friday, 28 March 2009 Martin Herrndorf o ikos PhD Fellow, University of St.Gallen m [email_address]

Workshop Overview 9:00-9: 20 Presentation 9:20-10:00

Group Reading and Discussion

Base of the Pyramid (BoP): Business strategies for pro-poor innovation

Micro-Finance: Approaches and Recent Developments

Micro-Insurance: The Next Revolution?

10:00-10:30 KeyQuestions Presentation 10:30-10:50 Collection for OpenSpace 10:50-11:00 Feedback on session and outlook

Sustainable Business Models Background „ Business cannot succeed in a society that fails” Björn Stigson, World Business Council for Sustainable Development Oslo Conference on Partnerships for Sustainable Development, 28 March 2007

Population x Footprint WWF Living Planet Report 2008

Human Development vs. Footprint Ecological Footprint Human Development Index

Environmental issues as cost driver Source: Herrndorf (2006): Greening SMEs in Developing Countries Cost structure of micro-enterprises in Mexico: Costs for material and energy 3.6 as high as salaries paid. Environmental, social and economic synergies!

Overview: Three sub-topics

Access to products and services Prahalad, C. K. and Allen L. Hammond. 2002. What Works: Serving the Poor, Profitably. Harvard Business Review 4-11. The poor do not have access to adequate products and services at acceptable prices Business can innovate more adequate products and services cost in poor quarter cost in rich quarter

Market Size — One Estimation Hammond, A. L., W. J. Kramer, R. S. Katz, J. T. Tran and C. Walker. 2007. The Next 4 Billion – Market Size and Business Strategy At the Base of the Pyramid . Washington, DC: International Finance Corporate, World Resources Institute.

Constraints & Strategies UNDP. 2008. Creating Value for All: Strategies for Doing Business With the Poor . United Nations Development Programme.

Base of the Pyramid (BoP) Seelos, Christian and Johanna Mair. 2007. Profitable Business Models and Market Creation in the Context of Deep Poverty: A Strategic View. Academy of Management Perspectives 21

Assuring sustainability? Herrndorf, Martin and Burcu Tunçer. forthcoming. Consume More, Use Less: Business Strategies for Sustainable Consumption in Base-of-the-Pyramid Markets . CSCP, SEI, Swedish Ministry of Environment.

BoP — A critical perspective Karnani, Aneel. 2009. Romanticizing the Poor. Stanford Social Innovation Review 38-43. ‘ BoP Proposition’ ‘ Reality’ The BOP market size is $13 trillion to $15 trillion. The BOP market size is only $360 billion. The poor have untapped purchasing power. The poor have a low savings rate and little untapped purchasing power. Profit margins in BOP markets are high. BOP markets are not very proitable because customers are price sensitive and the cost of serving them is high, given small transaction sizes and poor infrastructure. Companies can reduce prices dramatically without reducing quality. For most products, the only way to reduce prices significantly is to reduce quality. Single-serve packages increase affordability. Single-serve packages do increase convenience and help poor people manage cash flow. But the only way to increase real affordability is to reduce the price per use. Large multinational corporations should take the lead in the BOP initiative to sell to the poor. Markets for selling to the poor usually do not involve large-scale economies, and so small- to medium-sized local firms are better suited for these opportunities.

The BoP Readings Prahalad, C.K. and S.L. Hart. 2002. The Fortune At the Bottom of the Pyramid. Strategy+Business 26:54-67. Seelos, Christian and Johanna Mair. 2007. Profitable Business Models and Market Creation in the Context of Deep Poverty: A Strategic View. Academy of Management Perspectives 21 Karnani, Aneel. 2009. Romanticizing the Poor. Stanford Social Innovation Review 38-43.

Access to financial services

Effect on consumption

Effect on consumption Khandker, Shahidur R. 2005. Microfinance and Poverty: Evidence Using Panel Data From Bangladesh. The World Bank Economic Review 19:263-286.

Effect on poverty Khandker, Shahidur R. 2005. Microfinance and Poverty: Evidence Using Panel Data From Bangladesh. The World Bank Economic Review 19:263-286.

Microfinance — a business approach? Akula, Vikram. 2008. Business Basics At the Base of the Pyramid. Harvard Business Review 86:53-57. Akula / SKS approach Traditionally Adopt a proﬁt-oriented approach in order to access commercial capital.

Non-profit / low-profit organisations

Financially self-sustaining

Establish “social businesses” (Yunnus)

Standardize products, training, and other processes in order to boost capacity — like „Startbucks and McDonalds“.

Locally adapted, learn on the ground

Process of socialisation, recruit officers from former clients

Average training time: 4-6 month (2 month at SKS)

Use technology to reduce costs and limit errors.

Paper-based bookkeeping, local technology

SKS: Handhelds, internet-linked, special software

Impacts of the Financial Crisis?

Microfinance Institutions have been very relatively stable in past crises, but risks exist:

General credit restrictions in global economy make re-financing of loan portfolios difficult

Or: Micro-Finance Investment Vehicles as a save heaven?

Falling exchange rates of local currency against the dollar

Withdrawal of local deposits as customers loose trust

Littlefield, Elizabeth. 2008. Microfinance and the Financial Crisis. In Weblog, ed., Crisis Talk - Emerging Markets and the Financial Crisis . World Bank.

The Microfinance Readings Khandker, Shahidur R. 2005. Microfinance and Poverty: Evidence Using Panel Data From Bangladesh. The World Bank Economic Review 19:263-286. Akula, Vikram. 2008. Business Basics At the Base of the Pyramid. Harvard Business Review 86:53-57. Littlefield, Elizabeth. 2008. Microfinance and the Financial Crisis. In Weblog, ed., Crisis Talk - Emerging Markets and the Financial Crisis . World Bank.

Micro-Insurance Definition „ Microinsurance is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved” Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation.

Micro-Insurance Principles

Same general principle as in “normal” insurance

But different target group: the poor!

Double benefit:

New, untapped market for businesses

Protection of the poor against risks: Vulnerability

Different operational principles

Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation.

Micro-Insurance Principles Micro-Insurance Product Design (Example: Health)

Product manufacturing

Define benefit package

Identify providers

Pricing for sustainability

Controls for fraud, moral hazard, adverse selection

Product sales

Information provision

Underwriting

Product servicing

Assistance with claims

Manage relationship with care providers

Long-term relationship with clients

Product servicing

Maintenance of long-term stability

Financial management

Risk monitoring & management (reinsurance)

Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation.

Operational Principles Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation. Principles Key Question Relevant to the risks of low-income households What do we know about the risks the poor face? As inclusive as possible

How can we reach the greatest number of poor people?

Affordable premiums

How much can the poor pay, when, in which form?

Grouping for efficiencies

How can we overcome transaction costs in rural markets?

Clearly defined and simple rules and restrictions

How can everybody (even illiterates) understand the product offer?

Easily accessible claims documentation requirements

How can the poor claim insurance payments quickly?

Strategies to overcome the wariness of customers

How can ignorance of insurance as a principle be overcome?

Involvement of large insurers Michael Anthony, Allianz SE, Presentation at Utopia Conference, Berlin Explain insurances and risks covered to the heads of village. To raise understanding and awareness about micro-insurances mass rallies are being held by Care and local NGO. Village officials explain and discuss with its members the concept of insurance. During these awareness campaigns a puppet theatre and microinsurance song are shown to explain insurance. 1 2 3 4

Involvement of large insurers Why get involved as a large insurer? Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation. Internal factors External factors

Corporate social responsibility

Risk diversification

Securing or growing revenue

Push for new markets and innovative products

Growing competition in traditional markets

Shrinking margins in traditional markets

Regulatory requirements

Political and activist pressure

Liberalization of previously closed markets

The Micro-Insurance Readings Brown, W. 2001. Microinsurance - the Risks, Perils and Opportunities. Small Enterprise Development 12:11-24. Kuper, Andrew. 2008. From Microfinance Into Microinsurance: Insurers Should Think Small to Tap Into One of Their Biggest Opportunities for Growth: Serving Poor People. Forbes.com Insurance Price, Michelle. 2008. Small Fortunes. The Banker { Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation. }

Please split up!

Distribute texts and cross-read — focus on relevant information!

Go through text with others that had the same reading — What is unclear? Where do you have questions?

Start a group sub-discussion — you build on the following questions:

What are the key approaches you can identify in the readings?

Which limitations or potential problems can you identify ?

What are debates or open questions?

Back together

What do I want to chew on?

/ idea / topic

/ open issue / question / debate

Good Bye Thanks!

Sustainable Business Models Base of Pyramid, Micro-Credit and – Insurance o ikos Spring Meeting 2009, Oslo Friday, 28 March 2009 Martin Herrndorf o ikos PhD Fellow, University of St.Gallen m [email_address]