55885 MAY 2010 ABOUT THE AUTHORS Designing Market Transformation Projects for LINDSAY MADEIRA the Base of the Pyramid: The Lighting Africa Program is a sustainable energy consultant in IFC's Climate Change Advisory Services Group, where she has been supporting the Lighting Africa program in various roles over Once pushed to the periphery as an unattractive market segment, the mass of the last three years. Most low-income consumers throughout the developing world--4 billion of them-- recently, she has been providing knowledge are emerging as key players in the global marketplace and climate mitigation management support to the equation. Collectively, these base-of-the-pyramid (BoP) consumers make up global program. the largest and fastest-growing segment of the world's population,1 and the PATRICK AVATO off-grid lighting consumers in Africa are no exception. With an estimated $10- Is a global product specialist, Sustainable Energy, in IFC's 17 billion dollar/year market opportunity, proven demand, and market-ready Climate Change Advisory technology solutions designed to meet consumer need, the essential ingredients Services Group. He manages a portfolio of renewable energy for the development of considerable commercial markets to deliver modern and energy efficiency projects off-grid lighting to the 500 million African off-grid lighting consumers at the in Africa, South Asia, and Eastern Europe, with a BoP have never been more ripe. This SmartLesson illustrates some of the key particular interest in off-grid lessons that the Lighting Africa program has learned in the process of assessing renewables. the potential for and designing of a market transformation program for the ARTHUR ITOTIA NJAGI acceleration of off-grid lighting markets in Africa.2 is the Lighting Africa program manager, based in IFC's Nairobi, Kenya, office, where he manages program operations. APPROVING MANAGER Russell Sturm, Head, Climate Change Advisory Services, CSB Background 1 2 needs, this population relies predominantly on fuel-based lighting (mostly kerosene), which is More than 500 million people in Africa continue an inefficient, costly, and dangerous lighting to lack access to electricity. This is not expected option that presents significant safety and to change in the foreseeable future; over the health risks. This fuel also releases potent next 20 years, Africa is projected to rapidly greenhouse gases, which contribute to climate surpass Asia to become the largest un-electrified change. Opportunely, recent technological market in the world.3 To satisfy its lighting advancements have enabled the development of innovative off-grid lighting solutions with 1 Defined as those who earn $1-2 per day, less than $1,500 per year. 2 While this SmartLesson draws from the Lighting Africa experi- the potential to replace fuel-based lighting and ence related to identifying opportunities for adopting a market that are, by design, tailored to consumer needs. transformation project approach, the next SmartLesson will discuss design and implementation of market transformation 3 Lighting Africa. "Overview of the African Solar Portable programs (see "Implementing Market Transformation Programs Lighting Market for Base of the Pyramid Consumers." Dalberg for the Base of the Pyramid: The Lighting Africa Program"). Development Advisors. Lighting Africa 2010 Business Conference & Trade Fair, May 18-20, 2010; Nairobi, Kenya. SMARTLESSONS -- MAY 2010 1 Despite technological readiness and established market demand, substantial market barriers have prevented the Box 1: About Lighting Africa global lighting industry from penetrating the off-grid lighting sector in Africa and competing with the kerosene Program Objective: Support the international lighting industry to industry for market share. The Lighting Africa program, a develop a commercial market in Sub-Saharan Africa to supply joint IFC­World Bank (WB) initiative, seeks to overcome this modern, off-grid lighting to 2.5 million low-income people by challenge through a host of interventions aimed at 2012. addressing these barriers, leveraging existing market Basic Program Details: strength, and facilitating business model innovation to · Launched in 2007 accelerate new off-grid lighting product markets. The · Successfully convened online industry consortium with Lighting Africa example demonstrates that a market more than 200 actively participating companies and more transformation program is a good project approach when a than 2,450 individuals commercially viable market opportunity is present that will · Established an International Off-Grid Lighting Stakeholder yield a meaningful development impact (e.g. mitigating Association to sustain commercial market development climate change, increasing energy access, improving human · Operating budget of $6.9 million (donor funded) health, etc.) but is constrained by market barriers preventing · Since its launch, the number of off-grid lighting products the private sector from taking hold of the opportunity. A available for retail and specifically targeting low-income market transformation approach enables the Lighting populations in Africa has grown from 10 to more than 70 Africa program to provide an intentional hand in market products, manufactured by nearly 50 companies function, opening the floodgates to markets that are · Products are now retailing between $25-50 dollars versus capable of saturating retail shelves with a collection of before, when they were mostly above $50 and Lighting superior off-grid lighting products aligned with market Africa product awards show that price and quality can be need and, in turn, ameliorating lives and supporting achieved at same time environmental well-being. The following lessons are · Plans to expand to other countries and continents in the intended for individuals across multiple sectors interested coming year in accelerating new commercial markets at the BoP. For more information, visit: www.lightingafrica.org Lessons Learned the international lighting industry. Moreover, the market 1) A market transformation approach makes sense if was heavily dominated by BoP consumers; the hundreds of the following conditions are met: To ensure you have a millions of low-income earners living outside of the reach good case for market transformation, take the following of the utility grid were spending exorbitant sums--as much four steps for evaluating the potential of a market as 10 to 30 percent of annual household income--on fuel- transformation project. based lighting, a $10­17 billion dollar market/year in Sub- Saharan Africa and a $25­38 billion dollar global market/ If the following conditions exist--a sizable commercial year (out of a $185 billion global lighting market including market opportunity; strong investment incentives and on-grid lighting).4 The potential market opportunity was private-sector motivation; a superior technology solution sizable, but the lighting industry was unaware of its vast tailored to market need; and evidence of common market potential. By quantifying the size of the opportunity, we barriers preventing sector-wide penetration across the were able to gain the insight needed to sufficiently validate industry--a market transformation project approach makes the market opportunity and earn industry confidence. sense. It would have been extremely difficult for us to justify the project and the need for a targeted WB/IFC intervention, STEP 2: ASSESS THE LOCAL BUSINESS ENVIRONMENT: Is or to gain critical industry buy-in without the existence of there sufficient investment incentive for the industry to these conditions. gain confidence in the emerging-market opportunity? Assessing the Potential for a Market Transformation Project The root of a successful market transformation approach is based on industry confidence in the market opportunity, STEP 1: ASSESS MARKET POTENTIAL: Is there a sizable which, as with any business venture, is tied to the perceived commercial market opportunity and indication of gains that can be accrued by playing in this marketplace. sufficient demand? However, for the off-grid lighting industry to peddle low- price goods such as small portable lighting technologies to This was one of the initial first questions that the team set the BoP and effectively compete for market share against out to answer. The underlying assumption was that, if the established kerosene industry, positive profit margins provided a superior technology alternative, consumers and a good return on investment will be dependent on would be willing to pay as much or more than they are high volume sales and strong distribution networks that presently paying for illumination and yet receive a can rapidly disseminate product (especially to the informal substantially higher value proposition in return. After a markets of the remote rural populations). Without industry close inspection of the existing off-grid lighting market in confidence in the market's ability to capitalize on a Africa through in-depth industry interviews, field research, commercial opportunity, a market transformation approach and extensive desk review, we found there to be virtually is not likely to succeed. Our review of the current fuel-based no diversification in the marketplace. Ownership of the market characteristics revealed multiple enabling market market was predominantly ceded to the kerosene industry, conditions that we shared with the industry, thus showing with little competition from other industry sectors, including 4 Ibid. 2 SMARTLESSONS -- MAY 2010 the potential for a lucrative business opportunity and Industry confidence in the market opportunity is getting the early-stage buy-in we needed from the industry meaningless if the product the industry wants to push to to justify program development. These conditions included: market is inferior or does not meet a commercial market need. We asked ourselves the following questions: Is the Established Value Chain and Functioning Delivery Models technology solution superior to what is already available on in Competing Markets. The kerosene market is already well the market (i.e., is it more affordable, better designed, established, with functional distribution and sales networks more efficient, and a proposition that adds value)? Why are and value-chain efficiency, reaching even the most remote there no commercial markets already in existence? areas. Similarly, consumer products like mobile phones, Recognizing that even the best market transformation shampoo, food staples, and soft drinks have been marketed interventions will fail if the technology solution is poor, and channeled very successfully to BoP customers in those unvalued, or economically untenable for consumers to markets. This bodes well for the potential for the off-grid acquire (and thus not able to generate sufficient demand in lighting industry to emulate these effective fast-moving the market), it became critical for us to understand why off- goods delivery models. grid lighting solutions introduced in the past have failed to gain significant market entry, and to delineate why the Successful Business Models Tailored to BoP Consumers new technologies aren't likely to follow the same negative Operating in Informal Local Business Environments. BoP trajectory. markets in Africa, particularly in the remote rural areas, largely employ innovative business models that are In the case of modern off-grid lighting devices, one of the customized and adapted directly to the local context and defining factors differentiating the innovations of the past consumer needs (and often are proposed and negotiated and the commercial solutions available today is the market's by the end-users). These unconventional and mostly ability to deliver a range of lighting options at varying price informal low-income rural retail economies support a wide points, tailored to consumer need and purchasing power. range of distribution channels and nontraditional payment The solar home systems introduced in the past, for example, systems that enable consumers to pay for goods as their were never able to earn widespread adoption in BoP budgets allow (e.g., "pay as you go" or "fee-for-service" populations, largely because pricing was misaligned with leasing agreements whereby incremental installments the purchasing power of these segments. However, recent eventually lead to product ownership). advances in lighting technology, such as those related to the improvements of light-emitting diodes (LEDs), have Evidence of Proven Successes in Other Low-Tech BoP lowered power requirements, enabling the development Commodity Sectors. The success of mobile phones and of smaller, less costly, stand-alone portable solar lighting mobile banking in Africa is perhaps the best evidence of a devices that are able to overcome the initial cost barriers. small-scale, fairly low-tech commodity product that has made its way into the hands of millions of low-income STEP 4: IDENTIFY MARKET BARRIERS IN THE CONTEXT OF consumers over an extremely short time horizon. By THE EMERGING MARKETPLACE. Why can't the private researching parallel analogies of successful business models sector develop the market on its own? and marketing strategies used to tap the BoP markets and sharing them with the industry, we were able to help build The basic philosophy of a market transformation approach industry confidence in the potential market opportunity rests on the notion that the market is not delivering up to and, at the local level, in the increased options for building its potential due to a common set of barriers preventing the local capacity around testing, maintenance and repair, industry from taking full advantage of the market distribution, and potential small-scale production; opportunity. The risk and transaction costs of overcoming innovative business models and marketing approaches are these barriers are unattractive for any firm to overcome on key to succeeding in the African marketplace and, thus, its own, and they are further amplified by the fact that the identifying examples of market success in other sectors is a business environment in the developing world has its own good way to develop industry assurance in the opportunity. rules and playing field. Through extensive industry consultation (described in detail below), the project team A Mature Industry Seeking New Growth Opportunities due identified a number of market barriers, based on the to Near Market Saturation. The international off-grid specific conditions of the off-grid lighting market in Africa, lighting industry, like many established industries, is that were preventing the international lighting industry reaching a state of market saturation. We learned that this from gaining sufficient confidence to go after this huge condition supported increased industry interest in moving unmet market opportunity. into new emerging-market areas, even those as precarious as base-of-the-pyramid markets in Africa; Market saturation, 2) Consult extensively with the industry to identify key or near market saturation, was a good indicator of industry market barriers (as identified by the industry) that will confidence and readiness to take on new risk by investing serve as the basis for project design. in new economies and markets--even those that are inherently challenging due to the fact that they are largely From the beginning of the scoping work to the official undeveloped, unknown, unexplored, and unconventional. launch of the Lighting Africa program, more than two years passed. Apart from consultations about market barriers, STEP 3: EVALUATE THE PRODUCT (TECHNOLOGY) we took this time to bring companies on board to gain SOLUTION: Is there potential for technology solutions assurance in the market opportunity, provide them with that meet market needs? market intelligence to substantiate market claims with SMARTLESSONS -- MAY 2010 3 data, and help them start to develop new conditions--under the assumption that products and business models for the BoP market and industry evolution will challenge markets in Africa. Much of this time was spent us to continuously reevalute and, at times, in extensive consultations with the redefine program activities and timelines to international off-grid lighting industry in correspond with budding market need. order to determine what role IFC ought to play--and how--in improving market To enable this nimbleness and follow the latest conditions for private-sector development. happenings of the industry and market, we Consultations involved more than 24 months have established local advisory committees in of discussions with 50 international lighting the pilot implementation countries (Kenya companies, and over 70 meetings with local and Ghana) and a newly established stakeholders in countries where there was a International Off-Grid Lighting Stakeholder potential for implementation. Some 142 Association in order to provide a frequency to private companies and 56 stakeholders channel information between the industry, expressed interest in participating in the the various stakeholders, and the project team program, and the consultations revealed that and build a sustainable commercial platform private-sector interest in market development for market development. In addition, the existed, but perceived risks and costs Lighting Africa Web site (www.lightingafrica. outweighed the desire for market penetration. org), a social media platform, acts as a virtual home for the industry and supports efficient Of the laundry list of barriers identified by the flows of information, including timely industry, the five exhibiting the strongest information about general market potential to bar the industry from market entry developments, trends, and market gaps that and best aligned with IFC's vision and strategic the Lighting Africa program can play a role in objectives became the basis of the program. filling (such as flagging product-quality issues), The program's design was built entirely on leading the program to plant seeds to launch a providing targeted interventions to remove massive consumer education campaign. specific market barriers, as identified by and with the industry. The key take-home lesson: Conclusion "To confirm if there is real market potential and determine how IFC may support its realization, In the process of assessing and designing the If you are not sure how to design a market Lighting Africa program, we can draw a number transformation project, ask the industry." of useful lessons that will have applicability for other teams looking to create market 3) Design your project to identify and transformation programs. Once you have respond to changing market conditions identified a potentially beneficial and and business needs. commercially sustainable market opportunity, extensive consultations with the industry and a One of our earliest indications of program comprehensive barriers analysis can point the success can be measured by the influx of off- way to a market transformation approach that grid lighting products designed specifically for could accelerate market development. Finally, BoP markets in Africa. Since 2008, the number especially in low-income markets, where cash is of products manufactured for the off-grid restrained, it is important to understand why lighting market in Africa has grown from less markets haven't already been developed then eight product types to more than 70, around the technology, and to ensure that the exhibiting a range of quality (some very poor) market solutions will align with consumer DISCLAIMER and manufactured by 49 firms. The rapid demand and BoP economics. The industry will IFC SmartLessons is an awards growth of the market highlights the play a critical role in helping you design your program to share lessons learned in development-oriented advisory importance of establishing the capacity to program around the market barriers they services and investment monitor and manage market transitions and identify, and it will be key to build feedback operations. The findings, design program activities so as to be able to mechanisms into your program to keep close interpretations, and conclusions respond to a high-growth market scenario. partnerships with the industry in order to keep expressed in this paper are those Lighting Africa is designed to be dynamic and in step with changing market dynamics and to of the author(s) and do not necessarily reflect the views of IFC rapidly adaptive to changing market best respond to evolving market needs. or its partner organizations, the Executive Directors of The World Market Barrier Lighting Africa Program Response Bank or the governments they High Transaction Costs to Understand the Market; Lack of Market Intelligence represent. IFC does not assume Understanding of Consumer Needs/Preferences any responsibility for the Inability to Make Informed Purchasing Decisions and Decipher completeness or accuracy of the Product Quality Assurance Quality in the Market information contained in this Lack of Access to Available Consumer, Trade, Working, and Access to Finance document. Please see the terms Growth Capital and conditions at www.ifc.org/ Lack of Access to Partners, Business Networks, Business Business Support Services smartlessons or contact the Models, Business Plan Support Policy and Regulatory Impediments (e.g. Import Duties, program at smartlessons@ifc.org. Policy and Public Sector Operations Customs Issues, Subsidies) SMARTLESSONS -- MAY 2010 4