Difficulty of getting products in country

This is another story from VisionSpring. I realize I just made a reference to them in my last post but they are simply the most active participant online in this space and they provide a level of transparency that I cannot access from other initiatives. I hope to continue to provide variety in the examples but in the end we're looking for principles--

VisionSpring has been piloting with BRAC in Bangeldesh and are now about to "spring" into a full implementation of their program but they are struggling with meeting the inventory demands of BRAC, particularly in terms of getting product into the country from their factory in China.

This is a very common problem, I was just on a call with an organization that ships high-nourishment food packets across borders and getting through customs is one of their biggest challenges. I see the Grameen-Danone model of mini-plants as an innovation that will help to overcome these challenges in the short term and I think the model should be attempted by more but not all products can be streamlined into mini-manufacturing. The challenge of low prices and high volume for the bottom of the pyramid may ultimately be best served by large plants with great distribution systems.

Are mini-plants the engineering innovation needed for bottom of the pyramid products?

Popular countries for operations

Ryan Gunderson over at Riches for Good had an interesting post the other day analyzing the country site of operation of the organizations on Fast Company's Social Capitalist Award list compared to World Bank numbers of # of individuals living on less than $1 a day. Although the data is not academic by any means it is illustrative:

A couple things I noticed:

1. Obviously India is a popular country for social capitalists. Demographically it makes sense: population density allows for certain efficiencies/cost per client etc., the large numbers are appealing to the donors backing the social capitalists, operation is relatively cheap in India, and there is also great need according to sheer numbers. Additionally, there is also a very vibrant citizen sector in India allowing for partnerships and synergy. Finally, I think English language is a big factor.

2. China is lagging. Is this due to language and culture? Is the government not conducive to allowing social capitalists to operate? Are the funders of social capitalists not as aware of the image of the poor Chinese farmer as they are of the poor Indian farmer?

3. It would be interesting to see this data according to % of the country living under $1 a day as opposed to overall population numbers. I think some of the more needy countries are not being served in proportion to their desperate circumstances.

My conclusion: there is enough need out there that you can make a difference anywhere. We should not punish small countries with high poverty rates simply because the numbers to show our donors are not as impressive. Some of our efforts should go towards the areas of greatest need not only the areas of greatest ease of operation.

Kiva should co-brand with microfranchises

I have been a fan of Kiva from their early days. They had another recent surge of success when they introduced Group Lending and Partial Loan Repayments, both brilliant moves in my opinion on multiple fronts: driving consistent traffic to their site, engaging their citizen base in a frequent and meaningful way, and leveraging natural networks.

However, I am still anxiously awaiting the day when Kiva moves into the next realm of innovation, when they are using their platform to strategically inspire change in the market. Right now they are focused exclusively on microcredit and simply support the normal activities of their partners and the microcredit borrowers. It could be argued that that is their expertise and value-add, however, I do not see the innovation nor the value of Kiva as a funder of microcredit, which is partly why I agree with people who say that Kiva should not be focused on providing a financial ROI for lenders. Even if Kiva continues on their projected growth their financing of microcredit will be minuscule compared to the capital being raised for microcredit through integration in the financial markets and through microcredit accelerator's such as Unitus.

The innovation of Kiva is that they have created a platform that allows a broad base of average citizens to become miniature philanthropists. Kiva has never had to spend a dollar on marketing, people find Kiva and become inspired: bloggers picked it up early, when people find Kiva they blog about it, they showcase their loans, Kiva even had to create an entire site, KivaFriends, to handle all the interest of their constituents to discuss the issues.

Therefore, as a platform and in the position of inspiring and shaping grassroot philanthropy I think Kiva is extremely well-positioned to strategically shape the local marketplace of their borrowers. One way they could shape the marketplace would be to partner with microfranchise operations. Kiva could be the platform, the broker, that connects microcredit organizations with the best microfranchise solutions, and then together they offer a financing mechanism for the expansion of new business and innovatin in the marketplace.

This would provide value to the microcredit borrower, providing them a new business model, a great potential source of income as opposed to simply increasing their inventory in the same business as their neighbor. It would provide value to the community in which the microcredit borrower lives, bringing a service such as VisionSpring eyeglasses or HealthKeepers pharmaceutical products or a technological product such as Kickstart's waterpump. It could probably be structured so that the MFI gets a cut as a distributor of products. Kiva could provide value to these fantastic innovations by being a catalyst for the best models. It would provide value to the Kiva Lender because they would feel they are being innovative in their lending and philanthropy.

Kiva needs to think beyond scaling up microcredit and more about being a platform for change.

Kickstart and donor money to build markets

Britt Bravo over at Have Fun Do Good recently posted a great interview with Martin Fisher, CEO and co-founder of Kickstart. For me, the most interesting part of the interview was the discussion regarding the challenges faced by Kickstart, interesting because 1) I believe Kickstart has molded and adjusted to those challenges extremely well and 2) the issue of having to create entire new markets when introducing new products or services will be a similar challenge faced by most of the microfranchises discussed on this site.

It can be easy to talk about social enterprises as if launching a business were easy and success were automatic. Here we are reminded of the reality by one of the most successful organizations at introducing a new technological product at the bottom of the pyramid saying they expect it to take ten years of heavy promotion and reliance on donor funds to tip the market. That strikes me as a much longer time frame than is commonly presented in the industry. We like to talk about sustainability and revenue streams from social enterprises but we must not forget that there is still an incredible market failure in the funding for this market-creation stage. Even the most hard-nosed revenue stream proponents will need to understand the world of philanthropy and fundraising.

Microfranchising in a Community Setting in the U.S.?

Recently I was invited to speak to a group of community leaders in a neighboring county in Virginia. I should mention I was providing backup for Jason Fairbourne, whom I had the privilege of working alongside as I finished my masters degree, who inspired the invite with his article in the Marriott School of Management magazine.

All of my experiences with microfranchising have been in the context of international settings. This audience, however, was concerned with the health of their local community which although being a rather affluent area overall, has large pockets of recent immigrants or otherwise low-income families. The question in essence was: Does microfranchising have any relevancy to community development in the United States?

My answer: As I put myself in the shoes of these community leaders of business, government and nonprofits who are dealing with issues of employment, housing, education and at-risk youth and ask the "so what?" question, I think there are a few lessons they can learn from microfranchising:

Replication of models. There is a changing tide in the nonprofit/community development sector and it is the rise of social entrepreneurs: innovative ideas combined with business-like practices and the passion of an entrepreneur. However, the ultimate goal is a social return on investment as opposed to profit-maximization. Prior to designing a new community project leaders could search best practices of Ashoka Fellows, Fast Company’s Social Capitalist Awards, and other star models. Why reinvent the wheel? The social entrepreneur could be recruited to bring the model to their area or train them to implement the model.

Application of Principles. Some principles of microfranchising that can be applied in a domestic community development setting:

• Think about incentives at each level of participation. In microfranchising it involves a financial incentive for customer, franchisee, franchisor, distributor, investor. In community projects it would be end-users, government bodies, local businesses, funders.

• Empower the community to be participants. Microfranchising looks to bring essential goods and services to the poor, provide employment, and stimulate the economy but they do so by involving the poor as a key actor, the franchisees. The group of people who the project was designed to help did so by making them actors in the operations and implementation of the project.

• Have an eye towards replication when starting projects. In the business setting this is the principle taught in the E-Myth. In microfranchising you build your first operations with an eye towards replication, you are thinking about streamlining operations, standardizing actions, creating systems and manuals of operation. In microfranchising this must be modified at times to match the education levels of the poor, for example manuals may need to be picture based and not text based.

• Business for Good. The business sector has raced ahead of the citizen sector in productivity and impact over the last century. Now the citizen sector can use the tools developed by business to achieve their social missions.

ESR Conference Common Themes

Shortly after the ESR Conference (Nov. 8-9) I moved cross country and in the mayhem left a number of posts covering the conference unfinished. So, these next couple posts are no longer 'late-breaking' stories but the principles and reports are still valid and, practically speaking, up-to-date. Quick refresh: there were five organizations that presented: Scojo (eyeglasses), Academy Creating Enterprise-ACE (business training school franchising graduates' businesses), Freedom from Hunger-FFH-Healthkeepers (preventative health), ONEroof (telecommunications), and Community Enterprise Solutions-CES (have a handful of microenterprises they help replicate). Taking that step back and looking at the picture as a whole I noticed a few common themes among the practitioners:

1. Experimentation

There was a common sense of humility, an acknowledgment of not knowing all the answers. They did not come in with a model and try to impose it, they put something out there and allowed it to evolve according to the needs of the people. In the process OneRoof's pilot programs in Mexico and India turned out a bit different from one another. ACE has experimentation built into their system, they allow their graduates to go out and experiment and wait for that business to surface that lends itself for franchise replication. FFH is experimenting with different products and allowing their pilot testers a lot of flexibility viewing them as collaborators in refining the business model.

2. Use of Technology

Mobile phones and the internet are facilitating communication to help practitioners overcome the distance and isolation challenges of working in rural areas. ACE requires their franchisees to send in simple sales reports via text message every day. OneRoof “relies heavily on Skype,” their representative said, to stay in contact with their stores.

3. Willingness to Partner

Each of the organizations had an eye towards partnership. They were not possessively protective of their idea or model; they were willing to collaborate and partner. Even within the group Scojo has trained FFH and CES and allows them to implement the program on the ground. ACE wants to start a fleet of bicycle vendors selling baked goods but instead of launching their own bakery they are trying to partner with a larger retail bakery, Julie's Bakeshops.

4. Company Ownership in early stages

All the practioners started in a phase in which they shouldered the financial risk and operation of the franchise. ACE has formulated this into a model they call the BOOT Model (Build Own Operate Transfer) in which they as the franchisor build and own the first couple stores which they essentially run as training centers for future franchisee operators. At the time of the conference OneRoof owned all of their stores. CES uses a Microconsignment model in which they gradually transfer ownership to the franchisee.

"Young Men at Risk" and the children of microcredit borrowers

The latest competition at Changemakers is entitled Young Men at Risk. At the ESR Conference John Hatch brought up this issue in the context of his microcredit experience multiple times. FINCA finds that their clients' strategy for escaping poverty is to see that their kids get an education. Now those children of microcredit borrowers are graduating from high school but there are no jobs in their local communities. John Hatch sees disaster written all over if these young people cannot be channeled into productive employment. He therefore sees the children of microcredit borrowers as ideal candidates to be microfranchise operators. I liked his recommendation that the mother co-sign on the contract to become a microfranchisee.

It is hard to argue against him. My field experience indicated that the typical microcredit borrower is not a good candidate to operate a franchised unit. A large part of it has to do with simple life-cycles: the typical microcredit borrower is a bit older, they have little desire or confidence to change businesses, or to start something from scratch. They are often illiterate and have no experience keeping business records. The children of microcredit borrowers on the other hand are better educated than their predecessors, they can read and write, are anxious for employment, and have the vitality and youthful optimism and drive to start a new business.

Young Men at Risk --- An army of microfranchisees

Build upon Existing or Start Anew?

Stephen Gibson, founder of A.C.E., writes in Microfranchising: Creating Wealth at the Bottom of the Pyramid,

“In order for microfranchising to be successful, the business that is to be replicated must have established itself as a profitable model that is worthy of replication.”

This statement grows out of Gibson's personal model of selecting 'worthy' businesses from his graduates at his Academy and helping them to replicate. I do think the strategy has particular merit but it is not mandatory. Selecting an existing profitable model in the marketplace helps to ensure that the model is culturally appropriate, that it has been incubated by local entrepreneurs, and passed a first survivability test in the market. However, I think the power of branding and franchising is understood well enough now that one can design a business as a franchise from the very beginning of operations. In line with the vision espoused in the famous E-Myth, an eye to systems, manuals, and replication from the beginning can lead to quicker growth and ultimate success.

My question for the readership is, how long is ideal to allow a pilot to prove itself worthy? What would be particular signs that the model is ready to be replicated and scaled up?

Financing through Remittances

An interesting article on NextBillion the other day about CEMEX's Construmex program which puts remittance money directly into production in the form of housing.

I don't know the exact method Construmex uses to wire the money for purchases but one popular trend is through the mobile phone. Aryty is the first company that comes to mind.

Both of these ideas are suitable for financing microfranchise startups. It is another service that the franchisor could supply.

Definition Clarification

I have recently had the opportunity to get a sneak peek at the first major publication on microfranchising that is coming out in July. I thought I would pass on the authors' definition of microfranchising as the definition page is one of the most frequented on this site. Some quotes:

“The underlying intent of a microfranchise is to alleviate poverty through the creation and provision of sound, proven businesses that will in turn increase the earning potential of the microfranchisee. Microfranchises are independently owned and operated; thus,they create income for the individual owner and the owner’s employees, while simultaneously providing needed goods and services at an
aordable price.”

“the “micro”in microfranchising stands for more than mini or small.“Micro”is essential to microfranchising and in this sense has a social connotation that refers to grassroots bottom-up
initiatives, poverty alleviation, benevolence, base ofthe pyramid,and the like. “micro”also represents
sustainability. Thus, microfranchising can be thought of as poverty alleviating, social, grassroots, BOP, benevolent,and barefoot franchising.”

“The franchise in microfranchise represents replication to scale. This involves systematizing an operation, paying close attention to each and every aspect of a business until it is a turn-key operation, then replicating it to scale. Franchising embodies the concept of granting the right, privilege, or access to a proven business system.”

“The marriage of the two terms makes up microfranchising, which is indeed very different from franchising. For example,in traditional franchising, the purpose for establishing a franchise is to grow one’s business quickly in order to increase profits. In microfranchising, the focus is more on the microfranchisee and how he/she benefits from buying into a proven systematized business. A microfranchise is established to assist the poor in creating a sustainable income through owning
and operating their own business. The reduction of risk, provision of specific training, ongoing mentoring, and reduction of creative burden are all benefits to the microfranchisee.”

The book goes on to discuss the theory of microfranchising, potential business models, case studies, financing tools, and a concluding outlook to the future. I look forward to discussing the ideas in the book after its release.

Who should be interested in Microfranchising?

This post also comes from my conversation with Steve Gibson. He thinks microfinance institutions are in a perfect position to expand to microfranchising. The loan officers would be their eyes on the ground to report the most successful or innovative businesses from their borrowers. The MFI could then approach such individuals and see if they are interested in franchising their business model and then the MFI would act as a business incubator to refine the systems of the business and then in a venture capital role to loan larger sums that would be neccesariy to take an informal market business and brand it, steamline it, and replicate it.

The other party that should be particularly interested is an multinational corporation interested in moving a product at the bottom of the pyramid.

I think social venture firms such as The Acumen Fund or Good Capital have already demonstrated that they like the idea of microfranchising by supporting such groups as Scojo.

I think individual donors would also like the idea of microfranchising. Both Kiva and recently acquired by Google, Microplace have indicated that they hoped to eventually offer small returns for lenders. Would a lender be more confident in lending to a woman starting a business herself or a woman who wants to purchase a franchise? The branding and knowing there is training and systems behind a microfranchise I think lenders would feel more confident lending to a microfranchisee.

Remittances as Microfranchise start-up capital

People often ask Steve if the Academy also provides loans. They do not for various reasons including the conflict of interests between a business mentor and a creditor. Perhaps most interesting is the Academy finds that graduates who really want to start a microfranchise, despite their poverty, are able to secure money themselves, even up to USD $8000, with many of them securing funding through remittances. This idea reminded me of a recent business I heard about on NextBillion called Aryty.

I personally feel that remittances can be an unhealthy sign, possibly indicating a 'brain-drain' of the country's best and brightest going overseas, as well as creating a culture of dependency among the populace. However, I also see the large sums of money flowing as remittances and see potential for financing business instead of buying large screen televisions. I think therefore that directing remittances effectively can be a powerful financing tool for microfranchisees.

Keep it Simple

Conversation with Steve Gibson continued: One fundamental lesson learned is to keep a microfranchise business as simple as possible. As a comparison consider two of the Academy's ventures: an ink-refilling business and baked goods distributors. An inkjet cartridge refilling business seems simple enough but technology is constantly changing meaning your business must be constantly changing, even radically, which does not play to the strengths of franchising. It is also a highly cut-throat industry with large players even giving away printers free if ink-refilling is contracted through them. The Academy's bake goods distributors consist of a man on a bicycle with a display case on front with five items to sell. Such a business has high potential for replication, for training of often poorly educated franchisee, and for continued demand in the market.

Throughout this blog I have tried to highlight such simple models as I agree with this fundamental philosophy. Over time more complicated microfranchisees will be necessary but the current status in the world tells us that there are enough problems that can be solved cheaply and effectively if only systems were in place to distribute the solution. I think the first wave of microfranchises should be as simple as possible than can be replicated quickly and widely.

The BOOT Model of growth

At the Academy for Creating Enterprise in Cebu, Philippines they are experimenting with a model of franchise growth that they are calling BOOT (Build, Operate, Own, Transfer). The first player in the equation is the Academy itself. The Academy assumes full responsibility and builds a business with a specific vision for replication, developing systems and operating manuals. The chosen business could be selected from models the Academy has seen elsewhere, come up with themselves, or identified as a successful idea from one of their graduates. Graduates are given jobs as operators with the intent that these early operators will subsequently become owners of that current business and future franchisees in independent operations.

It is too early to give a definitive critique of the model, but I do think it has a number of strengths: early business risk being assumed by the sponsoring organization, a time of training before a transfer of ownership, and a built in mechanism for development of middle management.

FAQs

These come from BYU's Center for Economic Self Reliance composed by Stephen Gibson:

Q. What evidence do you have that MicroFranchising is an effective tool?

A. Vol. 4 of the book series, “Where There Are No Jobs: The MicroFranchise Handbook” lists dozens of companies and NGOs that are using one or more of the many variations of the microfranchise model to move products through various sales channels. This book is available at the online shop of the BYU Center for Economic Self-Reliance.

Q. How does MicroFranchising work?

A. Microfranchising works like any commercial or social franchise. What makes it unique is that the primary objective of microfranchising is to help microenterprise owners grow either their businesses or their assets. In the franchising world there are two players that have a symbiotic relationship: the franchisor who is trying to increase market share and spread their brand and increase income, and the franchisee who is trying to earn a profit by running a proven business in his location. These same two players exist in the MicroFranchise world. However, often the franchisor could also be an NGO which is primarily interested in lifting up the owners, who are the potential franchisees, into the profit-making world. This is accomplished by replicating a good business opportunity to other small microenterprise operators.

Q. What are some of the advantages to a microentrepreneur of either being the microfranchisor or microfranchisee?

A. Here is a list of ten advantages to all parties involved in MicroFranchising:

--Replicates the performer’s winning business
--Removes the creative burden from the potential franchisee
--Provides a superior method of transferring technology
--Reinforces vital business skills and practices necessary for greater financial growth.
--Forces a mentor relationship
--Reduces the odds of failure during the start up process
--Speeds the exit out of poverty and to economic self-reliance
--Enables more small business owners to take advantage of market opportunities.
--Allows for economies of scale in purchasing and advertising.
--Eases the challenges of a fresh start-up because systems are in place.

Book: The Elusive Quest for Growth

I might be a little behind as this book was published in 2001 but I found it while searching for his more recent work and found it extremely insightful. It is macro-level, economist view but the principles have applications at all levels.

Easterly's predominant theorem is that "people respond to incentives", whether those people are the poor, government officials in a poor country or rich donors in developed countries. I think the strength of the idea of private enterprise, be it microfranchising or other ventures, at the bottom of the pyramid is built upon the idea of incentives, namely profit incentives.

The other element of Easterly's work that really stuck out to me was the need to say no to corruption and poor government by voting with our aid dollars. When considering where to set up shop I think we all need to consider the International Country Risk Guide and reward those countries that are making policy and judicial decisions that show that the leaders are dedicated to the plight of the poor and the growth of the entire country and not just their own pocketbook.

And of course his emphasis on technology that improves productivity is particularly in line with the kind of businesses I propose on this blog. I would add an emphasis on technology that is tailored to the conditions of the poor.

Good read, I'll report on his latest book when my hold comes through from the library.

Microfinance using franchising

The Acumen Fund highlighted one of their investments, The Kashf Foundation, that uses franchising as a method of expanding their microfinance services. I highlight this company only to provide another example of the appropriateness of franchising as a tool to reach the poor and not proposing it as a microfranchise in the sense I have used it thoughout this blog.

John Hatch on Microfranchising

I am currently attending a two day training seminar by John Hatch the "father of village banking". He has mentioned microfranchising a number of times in his first session. One particular insight that I think is quite valuable is his vision that microfranchising will not be for the same target audience as microcredit, but the children of the borrowers.

I think this is true for a number of reasons: the average microcredit borrower is a middle-aged woman, often illiterate. They are closer to 'retirement' than the beginning of their working life and are therefore looking for stability and not higher risk activities such as launching a startup. Data from microcredit institutions shows after a few cycles of loans the business income of these owner operated businesses plateaus. They are satisfied with increasing their inventory and sales in their owner operated business but generally they do not hire employees and seek for expansion of their business. Data from FINCA shows that as the size of the loan increases less of the percentage of the loan goes directly into the business. One expense that they are paying is schooling for their children. The problem will be that they will be educated but will find a lack of jobs in the marketplace. Microfranchising is a perfect fit for such a group. They will be able to do bookkeeping, open for new education and training, and have the youthful zeal to see a startup get off the ground.

Social Franchise: Pros and Cons

This article comes from SocialEdge with good followup discussion:

Choosing a Social Franchise: Pros and Cons

By Benjamin Litalien, President & CEO of Social Franchise Ventures

The well documented success of franchising is a strong attraction for would-be business owners. As the International Franchise Association touts, you are "in business for yourself but not by yourself".

And though not as publicized as the 'rags to riches' stories of many franchisees, there are real risks associated with choosing the franchise route. So, as the social benefit community begins to engage the franchise sector it is critical to go in with eyes wide open, realizing that a disciplined approach is vital to tapping into the value that seems so apparent.

Here are a few of the pros and cons that must be evaluated to determine if a social franchise strategy is right for your social benefit organization:

Read more at: http://www.socialedge.org/Events/ThoughtLeaders/48