Business model design at the base of the pyramid. Commercialization of renewable energy: rural electricity markets in developing countries

Transcription

1 1 Business model design at the base of the pyramid Commercialization of renewable energy: rural electricity markets in developing countries December 8, 2017 Vivek Sinha

2 2 Agenda Background Paper Title: Business model design at the base of the pyramid Authors: Vegar Lein Ausrød, Vivek Sinha, Øystein Widding Journal: Journal of Cleaner Production, June 2017 Conceptual foundations Method Results Implications

3 3 Background Access to Energy Over 3 billion people lack access to modern energy 1.3 billion people do not have access to electricity 2.7 billion rely on traditional biomass for cooking and heating Over 80% of the energy poor live in rural areas and roughly two thirds in sub-saharan Africa and India here the population growth rate exceeds the electrification rate Close link between access to reliable energy and development Large parts of Indian population still without access to electricity One-third of rural population without access Unreliable power, even where there is access High transmission and distribution losses (32%)

4 4 Background - The Role of Entrepreneurship Rural electrification and universal energy access is a priority 2030, the target year for universal access to energy Estimated need for investment (48 billion USD per annum) far outstrips current investment by governments and development agencies Entrepreneurs have a significant role to play in meeting the goal of universal access How can entrepreneurs achieve sustainability and scale?

5 5 Business model design at the BoP Key contributions Business model design Refining native capability construct Strategies for developing absorptive capacity Why business model design? Business models Key to competitive advantage and scale Dynamic constructs Adapt to context (customers, institutions, competitors) Can shape context BoP business models: conflicting demands Adapt and become native Radically change the context Research Question: How is a business model designed when it is expected to simultaneously adapt to and shape the context?

6 6 Conceptual foundations Native capability In order to succeed at the BoP, firms must become socially embedded and develop native capabilities (Hart and London, 2005) become indigenous and show respect to the local culture prioritizes the existing local over the new and foreign native capabilities implicitly favor adaptation to compared to the shaping of the local context In order to fully exploit the business opportunity, the BoP context must be challenged (Simanis, 2011) very often, market does not exist at the BoP must be created introduce a new value proposition, challenge supply and customer relations, introduce new financial models need to shape the context

7 7 Conceptual foundations Absorptive capacity Absorptive capacity is a venture's ability to assimilate and take advantage of external knowledge (Cohen and Levinthal, 1990), which depends upon its prior knowledge Zahra and George (2002) re-conceptualized absorptive capacity (ACAP), into Potential absorptive capacity (PACAP), which consists of acquiring and assimilating knowledge; and Realized absorptive capacity (RACAP), which consists of transforming and exploiting knowledge. Linked to the routines and processes in the firm and changes made to them in order to better assimilate and exploit developing knowledge Native capability, absorptive capacity and the BoP Both refer to the capacity to absorb and build upon knowledge external to the venture, however At the BoP, limited or no prior knowledge Current BoP literature focuses more on the need for absorbing knowledge on local conditions and less on how to profit from it

8 8 Conceptual foundations Table 1. Business model elements and their relation to adaptation to and shaping of. BM Element Adapt to Shape Value proposition Supply chain Customer interface Financial model Broad Accept existing supply chains Learn from customers Accept low purchasing levels Narrow Generate new or cultivate existing supply chains Educate customers Inject working capital Fig. 1. Conceptual model: extant literature's focus on business models' need to adapt to the context at the BoP. How is a business model designed when it is expected to simultaneously adapt to and shape the context?

9 9 Method Focus on mini-utility type electricity providers in rural decentralized renewable electricity market in India Electricity Act of 2003 opened up this market for private players As opposed to solar lamps or solar home systems, mini-utilities provide a local power plant based grid supply to households and businesses Case study design with single exemplary case Data collection over two field visits in 2012 Semi-structured interviews management, field staff and customers (21 hours) Archival data Analysis Two cycle process of coding

10 10 Husk Power Systems Key facts Started power plants serving over 250 villages Rice husk based (single fuel) biomass gasification technology Located in Bihar (east India) least developed and rice growing area 30 to 100 kw, each plant can supply between HHs Top among firms that are commercially driven and fully or nearly financially viable in the mini-utility sector (IFC, 2012) Won numerous business plan competitions 10 million US dollars raised through grants, investments and debt. Shell Foundation Acumen Fund

11 11 Husk Power Systems

12 12 Husk Power Systems

13 13 Husk Power Systems business models 3 Business models: BM1, BM2, BM3 launched sequentially Key features BM1: build, own, operate and maintain BM2: lease - franchise system for local entrepreneur BM3: outright sale of power plant to local entrepreneur TOTAL BM BM BM3 3* TOTAL Table 2: Sequential deployment of power plants using the different business models

14 14 Husk Power Systems business models BM Element Value proposition Supply chain Adapt to Broad Accept existing supply chains Customer interface Financial model Learn from customers Accept low purchasing levels Fig. 2. Business model 1 facilitates adaptation to the context. [BM1] is not a scalable model at all, so we put out 50 just to understand everything it is the only way to learn. Until you do it yourself, how would you know? You can't teach others before you know yourself. (CEO)

15 15 Husk Power Systems business models BM Element Value proposition Supply chain Customer interface Financial model Shape Narrow Generate new or cultivate existing supply chains Educate customers Inject working capital Fig. 3. Business model 2 facilitates shaping of the context. [BM2] was a very point-in-time period kind of model. It was never meant to be a long-term model. The idea was to demonstrate, especially to banks if you are going to start offering plants in [BM3], where are people going to get that money from? Villagers don't have that kind of money. (CEO)

16 16 Discussion BM Element Adapt to Shape Value proposition Supply chain Customer interface Financial model Broad Accept existing supply chains Learn from customers Accept low purchasing levels Narrow Generate new or cultivate existing supply chains Educate customers Inject working capital Fig. 4. A firm's business model may adapt to or shape the context through interim specifically designed business models.

17 17 Conclusion and Implications Three contributions Specifically designed interim business models facilitate an adaptation to or a shaping of the context; Native capability is split into native pull capability and native push capability. Specifically designed interim business models can serve as vehicles for exercising and developing native pull/push capabilities Native pull/push capabilities are linked to a firm's absorptive capacity. Specifically designed interim business models that facilitate native pull capabilities can enhance a firm's PACAP. Similarly, specifically designed interim business models that facilitate a firm's native push capabilities can enhance a firm's RACAP.

18 18 Conclusion and Implications Business model design can be viewed as a tool for entrepreneurs interim business models may be deployed to prime both the firm and the ecosystem. entrepreneurs must concern themselves with consequences of business model design beyond just defining the traditional business model elements Entrepreneurs and investors may want to consider a business model trajectory that entails setting up interim models in certain contexts Such business model trajectories are expected to require more time and capital But may lead to better future revenue generation and more impact on the context Native push capability is necessary to drive changes and create markets at the BoP Cannot assume responsive adaptation as the only means of success at the BoP, some pushing back may be necessary to change the conditions But can only follow a process of becoming local first Viewing the native capability pull/push construct as a means of enhancing absorptive capacity can provide insight into firm performance at the BoP.

19 19 Thank You! PhD Candidate: Vivek Sinha, Supervisor: Øystein Widding, Professor: