October 2011
For a decade now, advocates for the poor in the world’s emerging economies have been urging companies to seek new markets among the have-nots, the left outs, the far away. The argument runs something like this: Not only would such initiatives bring social and economic benefits to the globe’s lowest-income segments; in addition, large swaths of the poor from today’s emerging markets will form the backbone of tomorrow’s middle class.
According to OECD estimates, the global middle class could increase from 1.8 billion people today to 3.2 billion by 2020 and to 4.9 billion by 2030. Almost all of this growth (85 percent) will be in Asia. Equally striking is the predicted rise in this group’s purchasing power, which is projected to increase from $21 trillion today to $56 trillion by 2030.
An idea whose time has finally come? From the standpoint of creating new sustained sources of business value, it appears to make eminent sense. But consider the results of an Accenture survey of Indian manufacturing executives.
Virtually every respondent—98 percent—said they recognized the benefits of a business model that includes the have-nots. More than two-thirds, moreover, believe that businesses that embrace inclusion will outperform peers that do not.
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But when these executives are asked about what they are actually doing, the numbers dip significantly. Only 30 percent, for example, say that inclusion is currently indispensable to their innovation processes. And more than a third of the executives pointed to other deficits, such as the absence of HR policies designed to help companies hire and retain employees who are willing to experiment with inclusive business models (see chart).
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Still, it’s not surprising that almost all respondents had something positive to say about inclusive growth. After all, when nearly 7 out of 10 of them say they see inclusion as a lever to help them outperform peers, you know this is much more than lip service. However, the fact that most companies have neither the people nor the policies in place to make inclusive growth a reality suggests there are other issues at work as well.
This “commitment deficit”—the gap between the recognized value of an inclusive growth strategy and the actual current activity that would execute such a strategy—indicates that there are barriers preventing executives from acting on their beliefs. What’s holding companies back?
To answer that question, Accenture conducted primary research on inclusive business models in the Indian manufacturing sector. Besides surveying local Indian executives, we also interviewed 55 C-suite executives at multinationals engaged in manufacturing in India.
While our research was focused primarily on India, we believe that the findings are applicable to other emerging countries. A number of the barriers to serving the rural poor are the same regardless of geography and—as we found in a separate research report on consumers in emerging markets—many of the buyer values are the same for this segment throughout the world. Finally, some of the companies we surveyed have experience serving the rural poor not only in India but in other emerging markets as well as in developed markets.
From the research, we found a number of obstacles that can prevent a company from succeeding with an inclusive growth strategy. These barriers are not insurmountable, however: For each challenge, solutions exist that can help companies successfully follow an inclusive growth agenda.
The path to profitability is murky
Can companies really make money serving the poor? In our survey, this was the chief concern of Indian executives, and nearly half expressed doubts about the commercial sustainability of an inclusive growth strategy.
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Several challenges lie at the root of this concern. First, many companies know next to nothing about poor or rural markets. They’ve made little or no investment in learning about customer tastes or preferences; neither do they have a sense of what skills potential employees might possess, or even need.
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In part, they are hindered by the fragmented nature of low-income and remote markets, which makes information gathering difficult. Without information, these companies are unable to develop relevant products or to plan effectively and justify the requisite investments.
Tapping this market won’t be cheap. Significant upfront investment is usually required—even more so, in fact, than for businesses that serve middle- and high-income segments. Businesses with an inclusive strategy must often commit capital to build entirely new capabilities, such as supply chains, that already exist in established markets.
However, companies can overcome this barrier by finding innovative ways to learn what poor and rural customers really need. There are no tried-and-true recipes for doing business in this still-immature market, and these companies will often be real trailblazers. Moreover, they need to be patient and communicate to their boards and shareholders that the path to profitability is going to be bumpy. Meanwhile, they must continue to concentrate on generating key market insights.
Take the case of the Tata Swach, a low-cost water purifier from Mumbai-based Tata Chemicals Limited.
The company found that foot traffic in stores that carried its purifiers in semi-urban and rural areas fell off drastically during the winter, which meant that in these areas, it was able to sell its product for only eight or nine months of the year. Moreover, low-income families were hesitant to buy the purifier because they knew they might have to replace a key part during winter, when it was too difficult to get to the store to buy it. Responding to this challenge, the company created an online function that allowed customers to order replacements through Internet kiosks in their villages. The parts would then be delivered to their doorstep.
Inclusive growth is “a dirty job”—and distant too
What’s good for the country as a whole is not necessarily consistent with the hopes and dreams of individuals looking to move themselves and their families up the ladder of prosperity. Each year, large numbers of India’s most talented rural citizens gravitate to the country’s major cities to work in the booming services industry—and, having made this move, many are unwilling to return to their home villages to work for companies looking to make inclusive growth a reality.
In another survey conducted by Accenture in 2010, 43 percent of Indian executives reported that their staff was “very reluctant” to relocate to rural areas to drive the company’s growth. That’s a serious issue in a country where nearly 70 percent of the population lives in villages.
Companies can address this issue by hiring directly from the places they want to penetrate. Local people often have untapped capabilities, including entrepreneurial skills, and can help businesses get up and running in rural markets.
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One such company is Keggfarms, a large Indian poultry producer. The company developed a poultry stock with higher productivity than typical chickens that could be raised in village households. Every year, Keggfarms distributes more than 19 million birds to households in some of India’s remotest areas. The company delivers day-old chicks to local entrepreneurs—“mother units”—in batches of 700 to 1,000 at a time.
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A few weeks later, the birds are picked up by village vendors, who sell them to local households, door-to-door. These vendors can make up to 5,000 rupees in a month, or about $110. They are the sole agents in the chain with direct contact with farm households, offering advice about caring for the chicks; they also provide valuable feedback to the mother units from their customers. Each year, this business generates more than 4 billion rupees, or some $90 million, for the people who raise the chickens.
Or consider the Mumbai-based consumer goods company Hindustan Unilever, which trains local women who are part of village-based self-help groups to become its sales representatives. Some 45,000 women now cover more than 100,000 villages and serve 3 million households every month.
Organizations aren’t organized to sell to the poor
Inexpensive water purifiers and cheap chickens are not high-margin businesses. So scale is critical to companies seeking to be profitable with an inclusive growth agenda. The investment needed to achieve that scale is yet another obstacle. Indian executives told us that one of their most pressing fears is that ”bleeding” from an inclusive startup business will hamper the company’s core business and dampen its overall results.
Another area where significant investment is needed is organizational capabilities. Most companies have continually honed their operations to serve (and hire from) middle- and high-income segments. They usually lack the architecture they need to quickly add rural and poor markets to the mix.
By drawing on technology, however, and rethinking organizational responsibilities at each level, companies can overcome this obstacle.
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The Kolkata-based Indian conglomerate ITC has figured out how to make up for organizational constraints in rural markets. Beginning in 2000, the company set up Internet kiosks, or “e-Choupals” (choupal is the Hindi word for “village gathering place”), that give farmers access to information in the local language on the weather and current crop prices, offer guidance on agricultural practices and risk management, and make it easier both to buy farm supplies and sell produce.
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Some 6,500 of these kiosks can be accessed by more than 4 million Indian farmers who grow coffee beans, rice, soybeans and wheat. ITC has now also deployed advanced analytics and mobile technologies to track data from individual farms so the farmers can improve their pricing, target the right customer segments and improve their logistics, including crop transport and storage.
In turn, ITC uses the e-Choupals to buy directly from the farmers at hub locations (farmers can also make use of local markets); it also sells them fertilizer and seeds. And it has used the initiative as a springboard to new businesses, opening retail centers at its hubs, for example.
A second key to the initiative was rethinking responsibilities in the organization. To get the project off the ground and eventually successful at scale, ITC added two new layers of responsibility at every level, from junior associates through top management. The first additional layer was necessary in the early stages, so that the company could develop the innovations needed to succeed with inclusion, and then to execute its plans.
In particular, ITC had to address its lack of detailed information about low-income customers’ tastes and preferences. A critical part of this effort was training junior employees to glean insights through conversations at the grassroots level.
As the business expanded in low-income markets across India, ITC added a second layer of new responsibilities at all levels to ensure that the initiative would be efficient at scale. Middle management was tasked with finding efficiencies in the e-Choupal supply chain, while higher-level management took on the challenge of finding connections and benefits between the inclusive business and ITC’s traditional business.
These changes in responsibilities continue to help ITC develop new businesses that can effectively reach large swaths of the rural poor. The e-Choupal has played a key role in making ITC’s agribusiness division the nation’s second-largest exporter of agricultural products, with exports worth more than $200 million per year.
Companies lack the internal capabilities to sell ideas and products to the poor
It’s not enough to have an idea, or even a developed product, that would provide clear benefits to low-income and rural communities. In interviews, some executives told us that they had created such products but had not been able to sell them profitably with their existing capabilities and talent. While they had experimented with various options using internal resources, the end result had been frustration—they were never able to reach the necessary scale.
For companies that find low-income markets hard to penetrate with their internal resources, there is a solution. One is to partner with entrepreneurial firms that have already solved the puzzle. In India there is a vast network of these firms.
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As with any partnership, such connections can complement in-house functional capabilities and make inclusion initiatives viable. The right partnerships can help reduce the costs of entering unknown markets, help companies identify new customer segments and generate valuable insights into what customers really want. And companies should be flexible in their thinking, considering partners in unrelated industries or the nonprofit sector.
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That’s what Mumbai-based Eureka Forbes did when it wanted to reach low-income markets with its water purifiers. At first, the company attempted to reach those consumers through its traditional distributor-dealer channel in rural markets. Sales were disappointing.
Then it teamed up with Basix, a microfinance firm, and sales jumped by 20 percent. The company made use of Basix’s network of loan officers, who meet regularly with self-help groups in Indian villages; the officers both market the company’s products and serve as a source of customer intelligence. The key ingredient here is trust: Rural Indians have limited experience with being consumers, and they rely on the microfinanciers as trusted intermediaries.
By teaming up with microfinance institutions, Eureka Forbes and other consumer products companies are creating more than just a robust new distribution channel. They are also creating a wealth-generating web of micro-entrepreneurs that could pull thousands of rural households out of poverty. For companies with a product to sell but little knowledge of the market, that’s not a bad place to start.
Organizations don’t have an inclusive-growth culture
After concerns about profitability, the most urgent problem identified by executives in our survey—45 percent cited this—was the absence of the right culture for putting inclusive business models into practice. And while it’s clear that India’s executives see inclusive growth as critical to future competitiveness, as many as 80 percent also believe that the talent in their organization is either partly or completely nonaligned with the launch of inclusive models.
There are two main reasons for this. First, human resources policies are not geared to hire and retain employees who are willing to experiment. Second, companies lack mentors, specifically in the area of innovation. As long as those conditions hold, companies won’t be able to shift the culture in the direction of inclusive growth.
But if companies learn to embed a spirit of inclusiveness in their internal practices, it will take them a long way toward mitigating this obstacle.
From senior leaders to new hires, people in the organization must learn to think and breathe inclusion if they are to make it work. We have seen at least three ways that companies are creating the culture they need to succeed in low-income markets.
Motivate devotion
With the right mix of rewards and incentives, employees will dedicate themselves to inclusive growth. New Delhi-based Mankind Pharma, for example, has built a distribution network of committed representatives. The company’s fundamental belief is that medicine should be affordable and accessible to India’s poor and remote populations.
To reach customers in low-income regions such as Uttar Pradesh effectively, Mankind recruits its field staff from low-income semi-urban and rural populations. According to the company’s CEO, these recruits are entrepreneurial, persevering and innovative. Rather than hire these reps as contractors, Mankind keeps them on its payroll to make them feel a part of the business family.
In spite of being very small compared with its global counterparts, Mankind pays its medical representatives some of the best salaries in the industry. It also makes it a point to recognize and reward performance. During the most recent fiscal year, 4,000 of its 6,500 reps were awarded medals for their performance.
Because of this HR strategy, Mankind’s distribution network has become its major strength. The company reaches practically every village in India with more than 1,000 residents, and is now one of the country’s fastest-growing pharmaceutical companies, with compound annual growth of 35 percent over the past four years. Its drugs are among the most widely prescribed in India.
Democratize innovation
To make employees feel involved and motivated to contribute their ideas, companies should foster open environments. The Suggestion Scheme at New Dehli-based joint-venture carmaker Maruti Suzuki India is one example of this at work.
All employees, including shop-floor technicians and associates, have the opportunity to offer suggestions for improving processes. Maruti Suzuki provides middle-management executives in cross-functional teams with physical and virtual space as well as a budget to share innovative ideas. After an idea reaches a threshold level of development, the company allocates a mentor to each of the teams to help the ideas reach fruition. Teams with promising ideas are provided an audience with top management at regular intervals.
Instill fearlessness
For teams embarking on a journey of developing and implementing inclusive business models, this is critical. Fearless teams are not afraid to experiment and fail.
Mumbai-based Marico, a maker of beauty and wellness products, has gone a long way toward pushing employees further than they themselves thought possible. As a result, the company’s best innovations have come during the most critical times in its history. When its leading share in the coconut hair-oil segment was threatened, Marico aggressively fought back. Within a short time, Marico’s team introduced innovations in the areas of pricing, packaging, marketing and supply chain that have made it the No. 1 player in India and Bangladesh in the coconut hair-oil segment.
Going out to work in low-income markets—and staying the course—doesn’t necessarily come naturally. The right mix of approaches can help motivate people and in the process create a culture with staying power.
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It is not difficult to imagine the extent of the opportunity at the bottom of the world’s economic pyramid. In fact, it’s not just an idea for emerging markets anymore.
As The Economist reported in a recent article, that section of the pyramid represents a “huge and growing market,” even in the United States, where nearly 44 million people live below the official poverty line. As the article notes, this is a major opportunity for companies—and has been mastered not only by major US powerhouses like McDonald’s and Walmart but also by companies ranging from German discounter Aldi to online pawnshops and prepaid phone and utilities services.
But the process of reaching low-income consumers in emerging high-growth markets like India is neither easy nor fast. With profits unsure, the most talented employees often look elsewhere. And with organizational constraints—both structural and cultural—in place, companies have been slow to move in the direction of low-income and rural markets.
The list of barriers and solutions we’ve provided here is not meant to be exhaustive. We have also identified other obstacles that aren’t discussed: attitudes of the typical board, the need for the right kind of leadership, and metrics that capture the longer time horizon of the inclusive opportunity. But the ones we’ve highlighted are the most critical. And with the right blend of imagination and perseverance, the barriers can be crossed and the rewards will be there.
For further reading
“Why the West needs to learn about workaround innovation,” Outlook, February 2011
“Game over?” Outlook, June 2010
About the authors
Raghav Narsalay leads the Accenture Institute for High Performance research team in India. He is responsible for creating new reports and points of view on innovation, international macroeconomics, rural markets and business models. Mr. Narsalay is based in Mumbai.
Anish Gupta is the managing partner of Accenture’s Products group in India. With more than 15 years’ experience in business consulting, Mr. Gupta has worked with clients across Asia. Among other projects, he has led the business transformation of an Indian family-owned consumer goods company, developed a pan-Asian business model for a home appliances global leader, and conceptualized a business model for a proposed agribusiness initiative for a leading Indian conglomerate. Mr. Gupta is based in New Delhi.
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