I read this pos…

by Gilbert Keith

I read this post from the Sloan Review earlier today, which is a Q&A session with the CEO of Valid Nutrition, a non-profit that’s working to alleviate issues surrounding extreme malnutrition. Some highlights from the article:

Talk a little more about this idea of a different business model, and what partnering companies would have to modify to pursue bigger projects with you.

Ultimately, it does require them to look at a different business model, one that is less beholden to short-term shareholder demands and much more focused on long-term impact. We do believe that the short-term margin sacrifice will be more than offset by the longer term absolute return on the investments for those who are brave enough to move early.

I guess all I really need to say is that I couldn’t agree any more. Looking at this purely from a business-standpoints, the costs to being pioneers in such business models will surely be high. For instance, I’m not sure of the standard metrics available to assess impact. We know short-term ROI is going to be low, but what kind of ROI are we looking at in the long run? But I believe we have the smarts to implement a ‘fire and aim’ strategies to optimize these models.

Another fairly cool idea from the Q&A session:

Let’s start by having you explain what Valid Nutrition’s role is in the Valid Group. You’re the food production arm?

Yes. Once the community based methodology was established and accepted, there was a huge opportunity to produce these ready-to-use foods in developing countries. At the time, all the “ready to use” therapeutic food was coming from offshore, primarily France […] We managed to get a license […]  we set about setting up factories in developing countries so that we could manufacture on the ground, close to where the product was needed.

Equally importantly, we have a multiplier effect on local economies: we both provide employment and source raw materials wherever possible from local, small-holder farmers. It’s a much more sustainable model as opposed to parachuting in product from offshore.

Emphasis mine. Developing production capabilities and supply chains from locally sourced products and commodities – however primitive the complexity of the chain or unsophisticated the supplier – is to me a good idea. In this case, besides creating economies which may not have existed before, I can see it facilitating knowledge transfer to the producers.

Also coming up on my daily reading rounds was this article from the HBR which purports to give ideas on maximizing profits while selling goods/services to the poor who’re (I guess) slightly better off than the customers of the Valid Nutrition.

These are the three keys to maintaining good profits while serving “the bottom of the pyramid” according to the author:

Localize and bundle base products.  – Bundle together products which require reconstitution and have the consumer do it. Bundle “complementary goods” together so that volume of a transaction can be high.

Offer an enabling service
. Offer a services which adds value to the end user’s experience.

Cultivate customer peer groups. Encourage formation of peer-groups to encourage consumers to form a more social network centered on the product/service.

While I’m sure the ideas presented herein will increase profits for the companies involved, I’m not sure I agree with all of them. Some may provide enhanced outcomes to the consumer, while others will like have detrimental consequences for consumer surplus.

Take the bundling, for instance. Isn’t the entirety of the first world, the richest consumer market in the world, decidedly sick of the various kinds of bundling that occurs goods and services exchanged? Don’t we all yearn for days in which things like cable TV channels were sold a la carte? To take an example from the article, how is a “body care pack” going to enhance the utility of a consumer whose use-patterns dictate that they can completely dispose of some materials within the pack? I can foresee secondary markets in which such dispensable goods are traded, but in the end, I’m not sure that the consumer recovers the exact value of the goods he dispensed of. Take another example – the combo radio/solar light product discussed in the article. What happens if one of them breaks? Are they going to be simple enough that they can be repaired in the ubiquitous secondary market for fixing broken electronics items? Or is the consumer always to run with a dysfunctional left knee?

I’m a little torn about the CEMEX/service bundling example provided. On the one hand, it might provide value in eliminating a builder or a contractor who may be scraping some rent off buying cement on behalf of the consumer. In this case, maybe the expertise provided by the architect may indeed enhance the outcome. On the other hand, I see bundles like these needlessly obfuscating prices for consumers for reasons mentioned above.

The third example provided hints at producing and enhancing network externalities for the product, which I can see as being a good thing for the consumer. The more knowledge there is about the different uses and possibilities for a product, the better off the consumer is. The other thing I can see is that target a group of consumers will likely enable them to take newer products on test-drives at a fraction of the cost of individual ownership of the product.

Interestingly, the author also notes that reaching out to peer groups enhances the dollar value of the average transaction – which is, I guess, mathematically true. However, is it also true that this translates into lower average costs for marketing per consumer? I don’t have the data, but I’m not so sure this is the case – I’m willing to bet that there is adequate heterogeneity in the needs and demands of the poor consumer and that any bundling together of consumers is marginal at best when it comes to reducing costs.

That’s all I had to say, really. Please feel free to point out any flaws in my analysis, or points I may have missed. This turned out to be more rambling of a post than I expected. I hope I’ll be able to keep it more concise as I keep writing in the future.