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Tuesday, August 03, 2010

"Machine Powered" Entrepreneurs: Infrastructure-based Microfranchising

By Shital Shah

One of Husk Power Systems mini plants.

This post is part of a series that introduces iuMAP, a web-based social enterprise directory developed by Ayllu and launched in media partnership with NextBillion. The purpose of the series is gathering feedback from the NextBillion community as the map unfolds and to share some of the information we've collected and analyzed. You can help triple iuMAP's size by submitting social enterprises and giving feedback. Read the previous entries of the series here.

This post is part of a series focused on microfranchising, a common way many social enterprises distribute their products.  There has been some great discussion of microfranchising recently (such as this SSIR article) and  this series provides an overview of different types of microfranchising. It also profiles many enterprises that are employing this method, and provides information for both investors and those looking for funding.  The last post focused on the business-in-a-bag model.  This post focuses on infrastructure-based models.

* * *

Continuing our exploration of microfranchising, we'll move on from discussing the business-in-a-bag model to one that requires a larger physical presence for the franchise: infrastructure based models.   As suggested by the title of this post, some social enterprises offer services, such as electricity or water, that require small scale machinery to provide.  To franchise operations, they need to equip each franchise with the appropriate infrastructure to offer the service to their customers.  Generally, those interested in forming franchises buy a machine and then can use it to earn continued revenue off customers by becoming, for example, their source of water or power.  Franchise owners continue to make money well after the initial investment is paid off, offering a sustainable livelihood option. 

Several existing models demonstrate the use and success of the infrastructure approach.  Sarvajal, based in India, establishes water franchisees that provide customers with clean water.  More on Sarvajal's operations can be read here.  In order to provide the clean water, each "water entrepreneur" operates a water filtration unit and charges customers for the filtered water.  Nuru Lights, profiled here, offers a low cost rechargeable LED light kit as an alternative to kerosene in East Africa and India.  Franchisees, usually shopkeepers, are equipped with pedal-powered chargers and customers pay them to have their lights recharged.  By creating "solar entrepreneurs" who sell power to community members using RFID cards, Solar Energy Foundation similarly creates "solar entrepreneurs" who sell power to community members using RFID cards.  All these businesses include a machine or technology and local entrepreneurs who buy the infrastructure or rent-to-own, creating a basic franchising framework.

There are also a number of other models that offer these same types of services by placing infrastructure in underserved communities, but do not quite fit the framework of microfranchising because they do not involve an entrepreneur.  For example, Naandi Water uses a community owned and managed user fee based model that expands access to safe drinking water;  Husk Power Systems uses miniature power plants that use gasification technology powered by rice husks;  IDEAAS leases solar technology to the poor in Brazil.  While we do not place these models under the infrastructure microfranchise category, we would like to hear if others have a different take.

Infrastructure based microfranchising rests on several key factors.  At the center of this model is, of course, the entrepreneur running the franchise.  Creating a successful franchise requires robust processes to identify, recruit, train, and retain the franchisee owners.  The social enterprise essentially has to trust the franchisee to offer quality services using a prescribed process.  Training is especially important in this approach since operating and caring for the machines may require some technical knowledge.  Moreover, trust becomes an issue as the enterprise relies on the microentrepreneur to manage cash and report statistics accurately; as cheating to get a little extra money can pose a risk to the enterprise's profitability and brand name.  Another issue for the enterprise is that this approach entails providing repairs, troubleshooting, and general support for the franchise, particularly since the business requires the machinery to be operational to function.

Since this model does involve infrastructure, there are also capital costs that go along with the machines.  Financing the franchise poses a challenge, and the social enterprise often has to assist the franchises in obtaining a loan or finding ways to cover their costs at the beginning.  In turn, this issues impacts the profitability of the social enterprise and how attractive it may look to investors.  Operating leases could provide relief to enterprises who take on franchisee debt, but while such leases are common in the private sector, they have not yet found their way into the social enterprise world. 

For social enterprises that offer a service centered around equipment or machines, the infrastructure approach is an appropriate way to scale up and continue to offer services locally, strengthen branding, and encourage entrepreneurship.  As more businesses test out this idea and innovate on ways to address the challenges, the potential for scaling up will grow stronger.  However, not all social enterprises can apply this model, and the next post in this series will cover yet another option for microfranchising: the conversion approach.  

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