main threats and opportunities

7/29/2019 Main Threats and Opportunities

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I N T E R N A T I O N A L

IMD-2-0122-T

v. 24.04.2006

Teaching Note

by Professor Ulrich Steger, CSM Program Manager Aileen Ionescu-Somers and Research

Fellow Wolfgang Amann

IMD-2-0122 HINDUSTAN LEVER (A): LEAPING A MILLENNIUMIMD-2-0123 HINDUSTAN LEVER (B): THE REALITY CHECKIMD-2-0124 HINDUSTAN LEVER (C): DELIVERING THE DESIRED RESULTS

Copyright 2005 by IMD - International Institute for Management Development, Lausanne, Switzerland. Not

to be used or reproduced without written permission directly fromIMD.


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Case Summary

The case series centers on a new, proactive business model developed byHindustan Lever Ltd (HLL) in order to tap the business and sustainability

potentials hidden in rural India and focuses on a win-win partnership with rural,female self-help groups (SHGs). HLL helps these SHGs access micro credit,which is usually restricted, the SHGs then buy HLL products and sell them intheir villages in a decentralized way, thus creating various opportunities for ruralcommunities: training and income opportunities that are otherwise largelyunavailable to these women, as well as improved living conditions, e.g. throughthe hygiene products on offer.

Case A describes the cornerstones and key decisions in the projects inceptionphase. It details the value chain and expected deliverables for the stakeholdergroups as well as covering the set-up and launch of the entire system. It reveals noinsights regarding the actual results.

Case B illustrates how performance clearly lagged behind expectations--womendropped out of the scheme, sales decreased during the harvest season and thesystem risked losing momentum. HLL needed to decide whether to patiently waitfor the system to take off, or to implement changes to the complex system ofinterdependent variables and players. This case points out that mere innovation, as

presented in Case A, does not in itself create a sustainable model. Learning, notreality avoidance, and a careful evolution of the system over time are key successfactors.

Case C presents the actual changes that were implemented, the impressivesuccesses over time and the vision forward. HLL envisages building a pool of

100,000 self-employed women covering 500,000 villages, and reaching 500 millionpeople within less than a decade. HLL will therefore undoubtedly continue to createopportunities for rural women and thus improve their lives, while changing theirfamilies overall standard of living for the better.

Objectives

The case series has various learning objectives:

1. Changing perceptions: The case series is a vehicle for discussion and insightinto how multinational corporations (MNCs) can radically change their

perception of the poor rural sector as a potential customer base as well as into

their role in developing economies in general. Instead of regarding themselvesas serving only the richer sectors of society that have sufficient purchasingpower, leaving the poor to governments and NGOs, MNCs can also play a rolewithin this sector. Through innovative thinking and creation of partnerships,new dynamics can boost these communities, breaking traditional moulds andimproving growth and development.

2. Innovation in a truly sustainable way: Many cases outline great ideas formarketing (with strong local characteristics) and sustainability. The case seriesat hand moves beyond the mere presentation of a real life innovation with only

potentially enormous effects, while the jury is too often still out. The caseseries emphasizes key aspects hitherto neglected: the crucial role of learningand adaptation over time in order to make the model last and evolve. The


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cases thus fit into the ongoing debate on advances in sustainability, revealinghow to actually make it work. But one controversial question remains: towhat extent is HLLs initiative truly sustainable?

3. Understanding India better: Besides China, India is currently on the radarscreens of many top managers, educators and academics. The case seriessensitizes them in respect of local characteristics and crucial success factors inthis future market (refer to the suggested reading material for an update on

Indias sensational development and potential to gain a better understandingof the local situation).

Audience

The case series has been successfully taught to a variety of audiences rangingfrom undergraduates and MBAs to participants in executive education seminars,

as the discussions level can be easily adjusted to the experience in the classroom.The series of suggested questions is relevant for all groups. The case can thus betaught as part of courses on international management, strategy, ethics, marketing,entrepreneurship or sustainability, as it places the sustainability issue within alarger perspective.

Suggested Teaching Questions for the A-Case

The case comprises several tension fields (opportunities, risks, ethical dilemmasetc.), some of which are quite controversial, which is why it will be easy tostimulate interaction in the classroom. Possible questions that could stimulate

discussion include the following (they are followed by our proposed answers):

1. Should HLL have entered the informal sector in this way? What are the threatsand opportunities associated with such a step?

2. Describe the characteristics of this new business model. How does it differfrom others?

3. Consider the channel conflicts as potential problem issues. How should thecompany deal with these?

4. Should HLL roll out this business model on a large scale?5. If the company were to propagate this model, what do you think is needed in

order to ensure success?

6. Is HLLs initiative truly sustainable? Which aspects of this sustainabilitysolution are decidedly local?


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1. Should HLL have entered the informal sector in this way? What are thethreats and opportunities?

Threats

HLL

Changing traditional roles: The company is essentially moving the poor from abadly organized economic system, sometimes even based on barter, to anorganized sales system involving monetary transactions. This constitutes a majorchange in the roles that companies, communities and governments havetraditionally played within society. The fundamental question is: should an MNCtake on such a prominent role? Globalization has led to governments losing acertain amount of their previous power as the centralized shakers and movers ofsociety. The class could consider whether this is a role that MNCs could partiallyand legitimately take on.

Exposure: HLL tried to keep a low profile, but the innovative nature of theproject attracted attention and was difficult to hide. If the project had failed, thecompanys exposure would have been great.

Creating the infrastructure: This is major challenge, since the market is hard toreach as far as credit, distribution and communications are concerned.

SHG

Lack of purchasing power: The low level of monetary resources andtransactions within the communities is a major concern as it is essential that the

activities provide the SHGs with adequate income in order to motivate them tocontinue operations. Clearly, tier four of the pyramid (refer toFigure 1 on page7) determines that basic needs are looked after first, which leaves very little forthe luxury items that HLL provides.

Logistics and perception: The SHG women find it difficult to travel as theirretail grows. They tend to wait for SHG meetings in order to sell the products.There is also a perceived stigma attached to door-to-door selling--hence thereluctance of the women to travel. There are no small vehicles available for shorttrips and all journeys have to be made on foot.

Cyclical sales: During harvest season, the women have no time to travel, as theyare required to work in the fields. Their customers are also busy in the fields and

do not purchase products. As a result, sales may decline significantly during thisperiod.

Bank

Exposure: The risk that in economically difficult times (such as after a badharvest), the payback rate will decrease considerably. If the initiative expands tosignificantly more groups across states and districts throughout India, as isintended, there could be an element of risk from this point of view.


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Government

Credibility: If the model does not work and HLL withdraws, the governmentwould lose considerable credibility as it has dedicated significant resources to this

project. The partnership implies that the government is not the sole decision-maker and therefore does not have full control over the process. A lot depends onHLL reaping adequate benefits from the alliances to justify the continuation of theoperations to their board.

NGOs

Exploiting the poor? In a situation in which people have barely enough to subsiston, some NGOs may ask whether the promotion of relatively luxury products in

poor communities is ethical. Is it furthermore right to train, or condition newcustomer groups to use the suggested products? There is also the question of therecycling of the wastewater and packaging material produced by the products, a

point absolutely neglected thus far. Another issue is that the social setting in ruralvillages is being fundamentally influenced by women being lured to use theircontacts for sales.

Note: Prahalad and Hart (2002) state: New business models must not disruptlocal cultures and lifestyles. An effective combination of local and globalknowledge is needed, not a Western system. p. 12.

Opportunities

HLL

Market share increase: Better product reach and category penetration in a majormarket segment.

Superior understanding of rural consumers: HLL will have gained this even ifthe project is terminated.

Social fulfillment: HLLs public image and credibility have been greatlyimproved among government officials and the NGO community.

First mover: The initiative profiles HLL as a socially responsible leader, whereasa year ago the company was not known as such.

SHG

Income-generating activities: These create a stronger economic base within acommunity. A community is thus converted from an informal to a formaleconomy, stimulating demand/consumption and enhancing buying power.

Investment opportunities for new enterprises: The provision of ameaningfulincome-generating activity creates a micro-enterprise dynamic within acommunity that also generates new ideas regarding both sales and productionactivities.


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Training/Education: This initiative has the net effect of introducing transferableskills to a community. The entrepreneurial skills acquired could be used foractivities other than HLL product sales. The increased awareness of possibilitiesin the outside world that the initiative brings, makes a positive contribution in theform of ideas that could be developed within the community.

Less dependence on grants from NGOs: Benefiting from the teach a man tofish approach, the local communities become more self-sufficient.

Less vulnerability: The creation of wealth within the community effectivelyeliminates the local peoples vulnerability to exploitation by moneylenders. InIndia, moneylenders traditionally lend at extortionate rates (20% per day in somecases), which has the effect of perpetuating the poverty cycle.

Bank

Faster turnaround of money and better repayment levels: Previousexperiences with payback behavior based on micro credit were quite positive,even if they involved higher interest rates. HLL products may be a safe bet,especially if HLL launches support activities.

Social fulfillment: Banks should also support initiatives with a potential toimprove living conditions among those who need it most.

Government

Improvement of economic base/less poverty: poverty and lack of opportunitiesstill characterize rural areas.

Increased credibility: Actively engages industry in finding a solution to theeconomic concerns of the country.

NGOs

Teaching a man to fish: NGOs can concentrate on capacity building in respectof income-generating activities. Their activities therefore focus on a teaching aman to fish approach, rather than the hand-out approach, which would prolongdependency.

Involvement and empowerment: Local communities become more self-sufficient and have a voice.

Note: We also point out the importance that such a project may have for theproject manager and the individuals within HLL as the project allows for highlevels of visibility. Success and failure will be obvious, representing opportunitiesas well as risks.


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2. Describe the characteristics of this new business model. How does it differfrom others?

Innovation: Working in the informal sector requires imagination and creativity.The initiative described in the case is a radical innovation, combining low cost,good quality, sustainability and profitability.

New delivery format: The SHG direct-to-home approach is a new deliveryformat in a hard to reach market. The aim is to maintain a low-cost, but high-quality distribution system. The SHGs distinguish themselves from traditionalretailers by offering customers the possibility to purchase products directly fromwithin their homes.

Different value proposition: This is not the traditional model that focuses onlyon monetary aspects. The business model is built on a completely different value

proposition, involving partnerships and communities.

Ground-breakers and first movers: HLL dares to take risks and sees itself aswriting the book on micro enterprises.

New kinds of leadership: The new model is based on experimentation,collaboration and empowerment of locals.

Entirely new market: A real opportunity for growth lies in the vast number ofupwardly aspiring poor who are joining the market economy for the first time.Prahalad and Hart (2002, p. 4) described the global market in terms of what theycalled the World Pyramid (refer to Figure 1), which divides the market intofour tiers with 4 billion people in tier 4 living on less than $1,500 per year. The

majority of these people live in rural villages, urban slums and shantytowns. Thishuge number of aspiring poor represents excellent possibilities for futureprofitable growth as yet virtually unexplored by MNCs. The basic idea of thepyramid still holds true today.

Figure 1: The World Pyramid

Community benefits: Creating access to credit for the rural poor, building on thesuccess of the Grameen model, and thus making the poor consumers.

Tier 1

Tiers 2- 3

Tier 4

Purchasing Power

Parity in U.S. dollarsPopulation in millions

>$20,000

$1,500-20,000


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The creation of positive externalities: The company focuses on actions for thecollective good without neglecting its legitimate commercial interests.

Companys public image: It is clear that setting up entrepreneurial systems in theinformal sector will give HLL much leverage in terms of its market share and

public image (and an opportunity, as its mission states, to be in the hearts andminds of people).

Involvement of multiple players: local governmental authorities, non-governmental organizations (NGOs), local communities, financial institutions,infrastructure builders, and others.

New sources of competitive advantage: The discovery that the scale ofopportunities in emerging markets is larger than previously thought.

As Prahalad and Hart state, companies need to re-evaluate their understanding of

scale, and learn how to make the link between highly distributed small-scaleoperations and world scale capabilities.

3. Consider the channel conflicts as problem issues. How should thecompany deal with these?

Some retailers expressed concern at what the SHGs were achieving in thevillages, and also voiced the sentiment that they would be happy to see this

project fail. At the time the case was written, the retailers throughput wascertainly reduced, but only a fraction of overall turnover was affected. Some madethreats--If you continue doing this, you will not get credit!--but the SHGs

showed no signs of succumbing to such pressures. Within HLL there were someconcerns at the prospect of having two channels of the same organizationcompeting on price. The main issue was one of adding value to what theconsumer gets from buying from the SHG rather than from the normal retailer. Atthe time of the case study, the costs of reaching the villages were still higher thanthe profit gained. There was also concern that the individual gain for SHGmembers was not enough to justify the scaling-up of the model. Why should thevillagers buy from an SHG instead of a retailer?

Very rational criteria: It is clear that the SHGs have to compete with theretailer on price-led parameters in order to survive.

Lower price expectations: the invariable response is best deal. Genuine goods--trust--company prices. Peer pressure for social equity for the group, and support mechanisms for

those individuals who are also part of SHGs--HLL could build on this infuture as well.

Fresher stock. In some cases, envy stopped non-SHG village women from purchasing from

the SHG.


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Why buy from a retailer?

Location advantage Wider product portfolio Discounts on products Buyback of goods Credit facilities with flexible limits and payment options Emotional bonding (I have always bought from..).

Note: Using different channels for different types of village is a viable option in acountry like India where the social geography of the village greatly influencesincome, accessibility and selection of socially advanced groups.

4. Should the company roll out this business model on a large scale?Pros

Market share:Consumption of HLL brands increased by 17% in six months inthe Andre district. Example: Without having scaled up completely, personal care

products market share increased from 72% to 79% within just six months in thisarea alone. There was a dramatically improved awareness of several previouslyalmost unknown brands in the area (e.g. Red Label Tea--from 0% to 35%).

First indicators: The first indicators were encouraging enough for HLL to rollout a second phase. The HLL board fully backed this: Dont worry about therisks right now. Learn, explore and push the frontiers. There is a clear focus onexperimentation.

Let the model mature: Any business model must be given enough time to mature--after all, the existing retail model was developed over many years. However, HLLhas to resist the temptation to merely test the model for up to two years, allowinggroups to learn without pressuring them for results. This could have the effect ofhiding flaws in the model. Identifying the cut-off point is key, and being upfrontwith the board is an essential part of the process.

New ways of judging financial success: As long as the company is prepared to re-

examine the traditional price-performance relationships of products, the poorcan be a very profitable market. Providing that it is accepted that traditional highmargins do not work in this market, the markets scale and volume potential willmake the difference in terms of profitability.

Areas of influence: The micro-credit model gives HLL a market advantage interms of access, attitudes, and awareness.

Informal sector vs. formal sector: The informal sector is a much cheaper optionthan the formal sector. It is possible to work with an informal cost structure whilecreating benefits and positive externalities for which no one has to pay. It is also

possible to have a certain degree of cost sharing, for example, the governmentprovides training and infrastructure for the MACTs.


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Cons

Unclaimed costs and value differentiation:Transport is a problem--who picksup this cost? The SHGs are reluctant to travel to the MACTs to buy. Thissubstantial cost will eventually have to be covered by the MACTs.

Exaggerated expectations: Apart from the fact that the SHGs have no time forbrand communication, it is clear that these women are not the best possible choiceas brand communicators--another set of skills is needed. The projects initial

phase rightly concentrated on turning the women into entrepreneurs, but to thedetriment of their development as skilful brand communicators. Although itinitially seemed that the women had to play both roles, it is apparent that this willhave to be taken over by an animator/communicator who can carry outdemonstrations at the haats. The scaleable model may be based on whether theMACTS have the critical mass to support, for example, at least one animator forevery two MACTS. One solution would be for the MACTs to take on the cost of

the animators by increasing the margin on products--a threat to the valuedifferentiation and to this models viability.

Low levels of transaction: A considerable upsurge in transactions is required toensure the models success. There is no guarantee or evidence that this will occur.Given the tiny budgets available for acquiring the kind of merchandise offered byHLL, the level of transactions might not increase substantially enough to make adifference.

5. If the company were to propagate this model, what do you think is neededin order to ensure success?

Make the MACTS the primary route of business: Strengthening the MACTs isa key element to this businesss viability. The MACTs regard the distribution ofHLL goods to SHGs and others in the village as a good prospect and the ventureis attractive as a business proposition. The SHG cooperative could take on the roleof an operating unit.

Internal HLL support: It will take time to develop and mature, and it is onlywith internal support that the patience required for this will be forthcoming.

Outreach: More work needs to be done on propagating the model to other NGOsand other local governments.

Plan and strategy: A carefully construed rollout plan needs to be presented.

Training in enterprise management: The group leader and perhaps one otherkey member are the driving forces in a group. The rest are mere passengers withlittle to no involvement. Consequently, the business tends to evolve into anindividual enterprise. Some SHGs will be more successful than others, and willhave a strong leadership that will help them to perform better--rapid identificationof and support for these success groups is key.

Learn as you go: Learning needs to be carefully distilled and communicated asthe project progresses, both internally and to partners.


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Production capacity: Enrich the model by boosting production capacity in theregions. Combining competitive local production with the SHG model will be anunbeatable solution, as it will lower distribution costs considerably and ensure themaintenance of a price differential.

6. Has HLL already rolled out a truly sustainable business model even if theenvironmental dimension has not been considered? Which aspects of thissustainability solution have a local character and would not workelsewhere?

Multiple dimensions of sustainability: Sustainability is complex and companiesmay decide to cope with this complexity by emphasizing fewer aspects perinitiative. Other projects may emphasize the environmental dimension to achievea broader sustainability success.

Global versus local approaches to sustainability: This discussion can elaborateon the role of women (lack of opportunities, education) in India, and aspects oflogistics found in developing countries. Would the set-up exploit this situation, oractually add value in the sense of sustainability? This is a crucial question oftenraised when referring to sustainability in developing economies. What would bethe projects second phase repercussions, and would they be found elsewhere aswell?

Suggested Teaching Questions for the B-Case

The B-case shows that the original idea clearly did not work out as planned. It

emphasizes that merely innovating a concept does not suffice. Any initial solutionis likely to evolve over the long term. Project managers, such as Sharat Dhall, thehero of the cases, need to closely monitor what is working and what not. Theyhave to adopt an entrepreneurial approach and continuously cope with uncertaintyand a variety of interconnected variables. If HLL had not addressed the followingquestions, Project Shakti would not have had a bright future. Suggested teachingquestions for the B-case include:

1. Would you remove the MACTs from the model?2. What other action steps should HLL take to make the project more successful?1. Would you remove the MACTs from the model?Modifying the supply model with rural distributors (selling directly to the SHGsrather than from the C&FA (cash & forwarding agent) to MACTs and in turn tothe SHGs) indeed improved margins. This also enabled the SHGs to sell to theretail trade as well, which significantly boosted their overall sales, ensured thatretention rates climbed and provided a breathing space to start creating a directcustomer base in the village. No conflict of interest was involved because it meantthat the retailers would not have to travel to purchase stock, and the self-employedwomen were there to service them. Nor did the retailers have to endure cash flow

problems by having to buy in bulk. In addition, many of the retailers were notcovered by other sources of supply. HLL could compensate the loss of local


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philanthropic work due to the abolishment of the MACTs by other means. HLLitself became more involved in order to facilitate the loan process. In order to keep

projects alive or to ensure a projects success, project managers cannot shy awayfrom tough and complex decisions. In this aspect, sustainability projects areclearly no different from others.

2. What other action steps do you recommend HLL should take to make theproject more successful?

Already indicated were:

HLL substituting the MACTs services. HLL ensuring that the level of philanthropic work experienced by local

communities remained unchanged

In addition:

HLL could help improve the home visits: Home-to-home selling posed aserious challenge to the initiative. The women were initially reluctant to dothis as there was a social stigma attached to going from home to homeselling products. This was recognized, and HLL started a very large home-to-home campaign that was anchored by a company representative. He tookthe self-employed women with him and approached the homes. The fact thatthe company representative was doing home-to-home sales was a crucialstep as it ensured the legitimization of the activity in the eyes of both theSEs and the village community. After the first few home visits, the HLL

team was pleased to observe that the SEs participated enthusiastically. Theywere keen to get on with it. The ice had been broken and the SE was on herway to becoming a door-to-door vendor. HLL still makes sure that its repsmake home calls as a part of their daily routine, since it helps the SE to

break through.

The womens level of literacy was never a real barrier as the project is allabout people who are self-driven, people who will invest time and effort--there is no ideal profile. Nonetheless, HLL could enhance its training andexpand the positive impact it has on rural communities beyond its strongfocus on the process of the exchange of goods and info in return for cash.

Several local aspects, such as the dropout during the harvest, need to be atleast partly accepted, but could be addressed by special financial and non-financial incentive programs.

The results of the decisions and an outlook in respect of the C-case can bedistributed at the end of the class.

Timing

The case could be used for a short 90-minute session or a 4-hour session. In orderto save precious time in the classroom, the instructor can distribute the A-case

beforehand. Example of a 90-minute session:


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Minutes ofthe flow

Focus

0-10 min Introduction to the Indian economys development and to

Unilevers strategy

10-20 min Discussion of the opportunities and threats for HLL

20-30 min Discussion of the innovative aspects of the business model

30-40 min Discussion of the channel conflict

40-50 min Discussion of the key success factors

50-60 min Distribution of Case B/Update on recent development andproblems

60-70 min Discussion of what HLL should do now to ensure its success

70-90 min Presentation of actual results as described in the C-case;debriefing: what lessons can be learned from the case, can theseinsights be generalized?

In a half-day session, students could identify answers to case As suggestedteaching questions in teams and break-out sessions. The case could also serve asthe basis of a simulation.

Suggested Reading

For instructors:

Kotler, Philip, and Nancy Lee. Corporate Social Responsibility: Doing the MostGood for Your Company and Your Cause. New Jersey: Wiley, 2005.

Steger, Ulrich. ed. The Business of Sustainability: Building Industry Cases forCorporate Sustainability. Basingstoke: Palgrave MacMillan, 2004.

Galea, Chris. ed. Teaching Business Sustainability: From Theory to Practice.Sheffield: Greenleaf Publishing, 2004.

For course participants:

Prahalad, C.K. and Stuart Hart. The Fortune at the Bottom of the Pyramid.Strategy+Business, Iss. 26, 2002: 114.

Dyllick, T. and Kai N. Hockerts (2002). Beyond the Business Case forSustainability. Business Strategy and the Environment, Vol. 11, Iss. 2, 2002:130141.

A New World Economy The Balance of Power Will Shift to the East as Chinaand India Evolve.BusinessWeekOnline, 2005.http://www.businessweek.com/magazine/content/05_34/b3948401.htm

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