NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Editor’s Note: This is the second of a pair of posts that examines the nature of competition at the Base of the Pyramid, some tactics for thinking about and managing it. The first post, Understanding Competition at the BoP can be found here.

The nature of competitors

One specific reason why companies might overlook competition issues could be because the nature of competitors is often distinct from established markets.

First, businesses might underestimate actors in the informal economy. For example, street-side vending may not look like a “serious” business activity – but could be a flexible way of serving local customers. Many informally organized enterprises also fulfill secondary functions – like strengthening local networks – that make it difficult to offer the same product through in a more “formalized” way.

Secondly, there might be public provision or, more problematically, the promise thereof. Existing and functioning public provision is directly visible as a competition to a private-sector model. But often, promises of public service delivery are not meet. For example, suppliers of solar home systems know the challenge of marketing these in regions where grid connections have been promised during an election campaign – sometimes, a promise made repeatedly over the years, sometimes even by the same party or politician. Failed public provision can even harm the product promise as such – people might point to a neglected, non-functioning public solar system as a proof why they don’t trust the technology. Competing against public provision might work in some cases, but it can lead to a regulatory backlash if public agencies feel their position of power is threatened (which seems to be one explanation for the recent happenings in Andrah Pradesh, India, and around the Grameen bank in Bangladesh.

Last, there is an increasingly important “China Factor”. Chinese exports are growing globally – not only to Europe and the U.S., but also to poorer countries in Africa. With low-cost products and high-flexibility distribution, they are likely to grow stronger over the years. This can be especially relevant for projects that start with a social concern, e.g. for marketing solar lamps or improved water products. But once they have invested in education and awareness raising, these investments that can be “hijacked” by later-entrant, commercial, low-cost competitors that enter the market after being attracted by the first successes of the innovation leaders.

5 Ways to React to Competition

The existing competition at the BoP poses different challenges for different actors. Private businesses are normally used to deal with competition – and can draw on these experiences, at least in parts. For social enterprises or NGOs, understanding and making sense of competition can be a great source of learning.

In any case, the following five recommendations can lead the way for getting a better grip on competition:

1. Understand the competitor landscape!

Understanding customers is a first and necessary step in exploring BoP markets – but businesses should extent their analysis to competitors (and probably other factors of the market environment, like regulation). Who is active and successful in the market, and why? Who could get active in the future? How are these competitors positioned compared to your business, regarding the internal resources as well as their networks in BoP markets?

2. Learn about the market, learn what works!

Observing and talking to competitors can help to understand the market – what’s their understanding of customers? Which infrastructure and resources do they draw up? Which market challenges did they run into?

Also, existing solutions and companies targeting the poor might have gotten things right and can be used as an inspiration. Which technologies do they apply? Which business model? How do they communicate with their customers?

Sometimes existing solutions might seem strange, contradictory or overly complex. Why is this so? How is it different to your technology or business model? Does it point to some weakness, or a mismatch of your model with market conditions?

3. Challenge yourself!

Take competition as a continuous challenge that keeps you on track. Your solution may be more environmentally friendly than others – how do you make it cheaper and more convenient for poor households to gain a larger footprint? Remember that competition might be the enemy of financial success of a single company or project – but, from a higher viewpoint, probably what we need to build markets that stronger respond to the needs of the poor. And when being serious about social impact, it may not be so important who serves the poor – as long as someone (you or your competitors) do.

4. Take care of competitors!

Competitors, especially when coming from the informal economy, might be poor themselves – what happens if you are widely successful, will it drive them out of business? Will they find other occupations? Will you create more meaningful employment for low-income customers than you destroy? Systematically measuring the social impact of BoP projects can help to capture the trade-offs existing here.

5. Cooperate with who’s already there!

Last but not least, cooperate! Can you partner with a competitor as a strategic partner? Can you use his network as a distribution channel for your products? Can they provide certain resources you require? Learning not only from, but also with competitors and jointly implementing strategies to reach low-income households, can help to build stable and successful models that actually work in the long-term.

Thanks to Claudia Knobloch for comments and feedback.