Guest Post: Platform Strategies for Scaling
Guest blogger Francisco Mej?a is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogot?, the leading economic think tank and research institution in Colombia, and consulted for various international organizations.
Autor’s note: The views expressed in this blog contribution do not necessarily reflect those of the IADB.
In this post, Mej?a responds to Allen Hammond’s series on taking Base of the Pyramid models to scale. This week, NextBillion.net will publish responses from a number of BoP experts and practitioners, followed by a concluding post from Hammond.
By Francisco Mej?aThe “sector approach to scale” that Al Hammond is advocating is entirely consistent with the fact that needs are “sector specific”: we all have housing, health or education needs. And it is also consistent with the idea that scale can be achieved by taking advantage of the notion that similarities in sector specific market conditions and industry structures might validate “easy” translation of business models from one place to another.
But this approach has shortcomings, one of which we could dub the “lost in translation” challenge. If one tried to replicate the CEMEX Patrimonio Hoy self-construction model from Mexico to Chile or Argentina, one would find that in those markets, self construction is virtually non existent.
Nevertheless, there is another emerging complementary strategy that has the capacity to reach scale faster and more effectively, and needs little translation. We can call it the “platform strategy”, as opposed to the sector specific “application strategy” suggested by Hammond. This platform strategy was recently presented by me in a workshop on Utilities and the BoP held at the Ahlers Centers of the University of San Diego Business School.
In this strategy, existing platforms, such as those provided by utilities or logistics companies, and even NGOs, can be used as a launching pad to provide additional goods and services that serve the needs of the BOP. Let me illustrate with a couple of examples.
Ten years ago, the energy company in Bogot?, Colombia was a basket case with 23% distribution losses. After it was restructured and capitalized by the private sector, the resulting energy distribution company, CODENSA, started a new micro credit program called Codensa-hogar. In just ten years, Codensa-Hogar has provided over 600.000 micro-credits averaging USD 370 each, 35 percent of which were previously unbanked poor, Codensa Hogar and has over 180.000 clients with micro-insurance solutions, 12.000 of which are small shop owners. In just ten years, Codensa became on of the largest microfinance institutions in Colombia. This is scale.
The driver behinds this BoP success story is the fact that Codensa leveraged its client distribution platform (over 2.2 million homes), and “added” value to its basic proposition: energy. In addition, it overcame, in one stroke, the principal-agent challenge faced by microfinance institutions just by the fact that it had, in its bill payment histories, detailed individual credit histories for over 2 million customers.
Utilities such as Codensa (Eletropaulo in Brazil is a similar striking example) have leveraged their capillarity by building massive customer loyalty, transforming millions of lives way beyond what they believed was their core business. These utility platforms should be viewed as a multi-layered opportunity, and not only for the provision of financial services.
Not much prevents a BoP health services insurance providers, or education companies from tapping into platform such as these to reach scale. But the platform concept is not limited to utilities. Small businesses represent approximately 95 percent of enterprises in the region. Most need electricity and have a bill to pay, but all are served by complex logistics and distribution networks. These logistics networks also provide a very intriguing platform that could also be tapped in order to reaching that “last mile” customer. If she can buy a coke or a bar of soap in the most remote location, there is no reason why this network cannot be tapped in order to provide more value added for the BoP.
Jan Chipchase has provided amazing insight on how the BoP uses, adapts and transforms mobile phones almost like transformers which transfer energy from one circuit to another. This is what BoP platforms can do for the BoP scale quandary.
Latin America has gone from less than 10 million subscribers to mobile services in 2002, to over 300 million subscribers now. And it has done this by subverting the previous business model by introducing a prepaid, no contract, billable per second, rechargeable via web business model. This explosive growth cannot be explained only by the technology or the business model itself, but by how this device provides access to markets and information. And now this cell phone platform is starting to change the landscape in many other industries. It is becoming the platform of choice to reach the poor for the banking industry, for example. Now we can think of mobile banking as a means to financial inclusion, and to further lower the cost of remittances for migrants and their families.
When a huge multinational corporation such as Danone entered into the Bangladeshi market, it did so by forging a strategic alliance with the “Grameen ladies” network. Grameen-Danone is a joint venture that combines Danone’s deep technical capacities in providing nutritional products, with the community level distribution network and local trust originally developed by Grameen Bank. In this case, Danone, a massive multinational is tapping into Grameen’s distribution platform.
The concept of platforms, with their reach and capillarity, with their scale and ubiquity, is very much a greenfield in the BoP discussion, and combined with the sector approach suggested by Al Hammond can help crack the code to scale.