NexThought Monday: A New Checklist for Developing Markets for Underserved Communities
The significance of incorporating a more ‘bottom-up’ and participatory approach
Editor’s note: This post is part of our tenth anniversary series, NextBillion’s First 10 Years, in which we’ve asked leaders in the base of the pyramid and social enterprise movement to offer their thoughts on the past 10 years, and consider likely trends for the next decade. (The first piece can be found here). This post is based on a recent manuscript, “Articulated embedding in the development of markets for underserved communities: Clean energy provision to off-grid publics,” by Sanjay Jain and James Koch, recipient of the Best Social Entrepreneurship Paper Award in the Entrepreneurship Division at the 2015 Annual Meetings of the Academy of Management.
The composition of markets in contexts of extreme poverty is typically opaque to outsiders. These exchange arrangements are also characterized by a paucity of resources, skills and infrastructure. In India, for example, more than 80 percent of the working population works in the informal market where rule of law and contract enforceability are weak or nonexistent, and transaction costs are high due to this, and to the reality of substantial infrastructure deficits. Economic exchange in these settings is often a precarious proposition. It takes place in the context of trust-based personal relationships among unbanked populations with low literacy levels and low levels of trust in government or outsiders. Given this scenario, how can social ventures craft markets for their products and services in these settings?
Our analysis concludes that a fruitful approach to creating a sustainable enterprise and engendering transformative change is to develop solutions based on a deep appreciation of “native institutions,” or the local customs, socio-political structures and norms which collectively form the basis for resident systems of economic exchange. Building resilient enterprises in these frontier markets requires skill in a practice that we refer to as articulated embedding – i.e., surfacing native institutions, crafting solutions that account for these arrangements, and then weaving these back into the extant institutional fabric. Overall, our research highlights the significance of incorporating a more “bottom-up” and participatory approach to market development in these contexts – a position that contrasts with top-down methods that have dominated academic, policy and practitioner discourse.
Takeaways from this Research
Our study of the initiatives that four social ventures have undertaken to develop markets for their clean energy solutions across three different countries (SELCO and Husk Power in India, Kamworks in Cambodia, and Grameen Shakti in Bangladesh) found that these actors engage in three important processes:
- Incorporating their technologies within local practices and understandings via a process we describe as “indigenizing.”
- Developing “micro-provisioning” transaction systems that align with resident consumption practices, especially severely constrained and uneven cash flows.
- Engaging stakeholders in “co-producing” integrative solutions that deliver products and services literally to the user’s doorsteps.
To ensure their viability, ventures demonstrated a deep appreciation of the resident order as well as considerable ingenuity in operating within the constraints imposed by these arrangements. Our findings highlight the significance of native institutions as well as the need for meshing local context in the market building process. Finally, our insights translate into practical guidelines and tools for practitioners who seek to build ventures for these communities. While weaving solutions to mesh with native institutions is arduous work, it is more likely to create economically viable ventures and sustainable development pathways for these communities.
Implications for Social Ventures
Entrepreneurs seeking to develop BoP markets should see these as spaces where rules of engagement and exchange exist, but can be better understood by taking a micro-analytic or anthropological view. Solutions involve mixing and matching state-of-the-art technologies with indigenous knowledge, as well as an appreciation of resident absorptive capacity – a process we term indigenization. Similarly, customer affordability constraints and economic viability tradeoffs can be addressed through the development of micro-provisioning mechanisms that involve understanding unit economics across improvised value chains; developing efficient micro-payment schemes; and partnering with community finance institutions. Finally, co-producing and embedding solutions within these environments involves designing logistics and incentive plans for last-mile agent-based sales and service. Through these ecosystem-level arrangements, organizations can increase capital efficiency, align solutions with the informal rules of exchange, and tap into extant trust-based social structures, thereby securing legitimacy for their endeavors.
A Market-Building Checklist
The following is a checklist that managers of early stage, bottom-up ventures should consider using to evaluate technologies, business models and ecosystems:
Technology. The material system employed for providing a product or service
- Does the proposed technology solution truly reflect deep empathy with local user needs and awareness of the consumptive practices of these communities?
- Is the solution contextually grounded, i.e., based on locally sourced materials and/or resident know-how?
- Is the solution likely to survive and thrive in the absence of distant support services or external intervention, i.e., can it be made self-sustaining, requiring only local help?
Business Model. The mechanism for providing a product or service in a manner that ensures the ongoing viability of the venture
- Does the business model reflect an in-depth understanding of unit economics across improvised value chains?
- Does the business model effectively negotiate tradeoffs between the social mission objectives of affordability and market penetration (e.g., serving the poorest of the poor), the expectations of local ecosystem partners, and the threshold criteria of investment readiness and economic returns for potential sources of venture financing?
- Can customer value creation be documented as increased incomes and predictable cash flows for the poor that are sufficient to stimulate local access to customer finance?
Ecosystem. Key actors/facets of the community that the venture interacts with (and influences) as part of delivering its products or services
- Is the firm’s value proposition aligned with the norms and practices of extant institutions, including:
- Local business operating customs and routines
- Community-based governance processes
- Market regulatory and incentive schemes
- Payment mechanisms and informal rules of economic exchange?
- Does deployment of the solution bolster local capabilities and provide upskilling opportunities for resident populations?
- Can a development pathway be defined that extends beyond transactional market penetration goals to the objective of locally embedding the solution to a social problem?
A positive answer to each of these checklist factors is likely to contribute to the development of more resilient and sustainable ventures. At the same time, the salience of such local factors suggests the presence of significant speed bumps and the need for greater humility in the “hockey stick” projections of start-up social ventures — at least until the processes for replication are more fully specified.
The authors wish to thank the Miller Center for Social Entrepreneurship for its support of this research.
Sanjay Jain is assistant professor for Management at Santa Clara University, where he teaches the graduate capstone class titled “Business Policy in High Technology Firms.”
James Koch is the Don C. Dodson Distinguished Service Professor of Management and Senior Founding Fellow, Miller Center for Social Entrepreneurship (previously known as the Center for Science, Technology and Society) at Santa Clara University.