Challenges Investors Encounters In Social Business (Case Study: Grameen Danone)
Building a sustainable social business is not different from building the normal profit-maximizing organizations, some of the challenges faced in building social business are just the same as the ones faced in building any other profit-maximizing organizations, while others are peculiar to the social business model. It is very important for anybody who intends to invest in social business to do a little study of the business model, rather than investing with the hope that …’since the business is intended to help the poor it will be exempted from the usual challenges investors go through’. Anyone who intends to invest in social business must do so with determination and also possess the qualities of a great business person, some of which are:
- Leadership skills
- Unafraid to take risk
- Competitive spirit
- A good intellect
- Ability to take initiative
- Solid communication skills
- A reliable nature
- Personal and professional integrity
The story of Grameen Danone, shared by Yunus is one that intending investors in social business should learn from .
Grameen Danone, is a social business organization. A nutritional company that produces yogurt fortified with vitamins and other nutrients, appealing to the poor Bangladeshi children at an affordable price. It was established to help Bangladeshi children who suffers from malnutrition, to help reduce rates of illness among them, increase their energy level and also increase their rates of participation in school and other worthwhile activities. Although a great idea, developing the business was quite challenging. According to Yunus “Danone executive vice president for Asia Pacific operations, Emmanuel Faber now co- CEO of Danone groups brought a team of nutritionist, business planners, production specialists, and other experts to meet and work with us in Bangladesh throughout 2006”. The company started with a small factory, not like the usual big facility that a global company like Danone typically constructs. Some of the reasons for this decision were: to minimize the investment risk to Danone, by reducing the upfront cost; which will limit the distribution area to a small one, eliminate the need for costly refrigerated trucks and warehouses; and simplify the problem of staffing the plant, since a small factory will require only a few workers rather than scores of hundreds. The major advantage was to make the small factory become part of the local community and economy, which will draw its supply of raw material especially milk from local suppliers, and local consumers would be its chief customers. The hope was that people around the Grameen Danone plant will come to think of it as ‘their factory and would support the business accordingly
While the plant was on the building stage, other business decisions were taken. Nutritionists, food production expert, and marketing specialist were also working closely with local people of Bangladesh to test varying recipes for the yogurt. Eventually a formula was developed that contained an array of nutrients Bangladeshi children desperately needed for good health, including vitamin A, calcium, iron, zinc and iodine; date molasses (a Bangladesh product) was used as sweetener. The community children loved the yogurt samples given to them, and asked for more. A friendly-looking cartoon lion was designed to adorn the lid of the Grameen Danone container. This lion quickly became the favorite among the local kids, as it also was the chosen mascot to symbolize the product.
Finally the Bogra plant was in full operations, everything was the way they ought to be, except sales volume! The equipment was in good shape, the yogurt was creamy and delicious, and most people liked it, but the sales refused to grow as fast as it ought to. This is expected at the initial stage of most businesses, but if it is not well handled it can completely shut down any business. This was the time when the production and management team had done everything they knew to do; right structures were in place, samples had been sent out to targeted consumers whose feedback was quite positive and encouraging but sales volume was below expectation. The situation was such that either the team will search out a way to achieve their goal or allow the challenge to overthrow them; this certainly was not pleasant for Grameen Danone. The management had to go back and check what they were not doing right in order to find the right solution.
The challenges Grameen Danone faced in the sales of its yogurt at the initial stage of their operations, was the same faced by other businesses, especially at the initial stage of operations. Investors in social business must keep in mind that although their mission is a good one, they will not be exempted from the usual trials business owners go through, but like every successful business owner, they too have to be able to persevere through that period while at the same searching for solutions to overcome the hurdle before them.
Grameen Danone original yogurt sales strategy was to rely on “a two legged stool” . The company was located in Bogra, a fairly large city, with a population of over 100,000, and a couple of 100,000 more in neigbouring areas. One of the two legs, Grameen Danone relied on was a number of small retail stores located in and around Bogra. The stores were not many, they were between three hundred and four hundred. The reason they opted for stores was because yogurt requires refrigeration and district towns in Bangladesh, even in the city of Bogra do not enjoy reliable electrical service. However, the company did its best to promote the product to shop owners, and within a few month, it was widely available in small stores in and around Bogra.
“Grameen Ladies” was the second leg of the stool which Grameen Danone sales operation stood upon. These were ladies who had borrowed money from Grameen bank to start various kinds of small businesses. Grameen Danone believed “Grameen Ladies” would formed an important sales network for the sales of their product, hence they recruited a number of their borrowers from and around Bogra, trained them on the nutritional benefits of Shokti Doi, provided an insulator bag with which they can carry the yogurt containers from door to door. These ladies would be paid sales commission of one- half taka per cup. The company line of thought was that an effective saleswoman might be able to sell enough yogurt to earn up to a few hundred taka per month, a significant extra income for a rural Bangladeshi family, but things did not go as they thought it would. Their recruitment effort failed to gain transactions, some of the women who signed up for the yogurt sales program quit without explanation, which left the company with about thirty women visiting the neighbors with yogurt. Total sales between the shop owners and Grameen Ladies was only about 3,000 cups per day. With this kind of sales Grameen Danone could not end the malnutrition among Bangladeshi children, which was the primary aim of establishing the business, the factory too was not going to be able sustain itself if the sales continued at the pace it was going.
When they came to the realization that their sales strategy was not capable of getting them the volume of sales they had projected they will make, they had to go back to the drawing table,and find out where they failed, what the company did not do right, so as to rectify whatever mistakes they made.
How Grameen Danone Overcame Its Obstacle
After thorough investigation, Grameen Danone discovered where and why they failed; cultural barrier! This was the obstacle that hindered the company’s sales from going beyond 3,000 cups per day. One would have thought that Grameen Danone being an indigenous company, will recognize how strong the Bangladeshi rural culture is and avoid any kind of clash with their culture. The fact that most of the women will not be permitted to do door to door marketing by their husbands, even when that company was Grameen Danone, whose bank had loaned out money to the individuals in that community when other banks considered them unfit for loans and shut their doors against them; an organization who empowered so many parents financially, thereby making it possible for them to provide basic needs for their families. This community completely refused to sacrifice their cultural belief for the same organization who had come once again to help their children. Their husbands ignored whatever extra income their wives were going to bring home through sales of yogurt, they forgot the ‘good’ Grameen Bank had once done for them, saving them from loan sharks. They were more mindful of their culture than the nutritional benefits their children will gain from drinking Shokti Doi. Their action certainly proved how a belief system of a person can confine a person to the walls of poverty.
Grameen Danone was not discouraged, they were determined to stop the malnutrition among Bangladeshi children. They rectified their mistakes by doing what every successful investor is known for “admit your mistake…..then don’t make it again” . Yunus, explained that the company had to hire a managing Director, one who was steeped in the culture of the community, this step was taken towards making Grameen Danone into a company the village people could understand and support. According to Yunus, “Under the new leadership, the process of recruiting, selecting, and training saleswomen was completely revamped. Grameen Danone took care to involve the women’s family especially their husbands and to make sure that each saleswoman had her community behind her. As a result, the number of saleswomen grew rapidly from just 29 in September, 2007 to 270 by the following March”. This wasn’t the only thing Grameen Danone corrected. They adjusted the yogurt recipe by adding a little more molasses flavoring, since their customers had complain that the yogurt was not sweet enough . The result of the changes effected by the company in order to achieve greater sales was very impressive. The sales of Shokti Doi increased from October,2007, a month after these changes were made, and kept increasing every month till March, 2008.
The company was able to achieve her major aim as a result of the changes they effected; the nutritional benefits It had hoped to provide the children was being realized. They discovered that in villages where sales network was most fully developed, 40-50% of the children were eating Shokti Doi.
Grameen Danone’s Determination To Achieve Its Goal
One would think that Grameen Danone’s breakthrough in sales meant the company’s problem was over, but that is not how the business world works, for even the global crisis of 2006 and 2007 found its way to Bogra and disturbed the smooth operation of the company. The prices of grains and other food products which rose in the developed world during 2006 and 2007, also occurred in developing nations, including Bangladesh” (Yunus 2010). Along with the global crisis came a terrible flood which swept away the farms and villages causing homelessness, terrible hardships and even deaths. All these crisis created a huge problem for the kind of business model Grameen Danone was operating; the cost of raw materials was increased, which ate up the small profit margin Grameen Danone had established. Yunus explained that as at March 2008, when the company’s sales had reached its then peak, it was actually loosing money on every cup of yogurt. If the company was a profit-maximizing business organization, this would have meant increase in the price of Shokti Doi, but that wasn’t the kind of business model Grameen Danone Operated. Theirs was a “social business model- therefore price could not be increased anyhow. All the storm that rose against Grameen Danone could have made some investors (even in profit maximizing organizations) to ‘throw in the towel’, but Grameen Danone persisted. The company was determined to save Bangladeshi’s children from malnutrition.
While trying to search for a solution from their present predicament, the two school of thoughts on the board of the organization came up with two different views as to how this crisis could be resolved. One school of thoughts insisted that Grameen Danone had to increase the price of the yogurt to cover the new higher costs, their reason was that Grameen Danone is a social business and not a charity organization, therefore it was right for the company to provide nutritional benefits to its poor customers in the form they could afford, that eventually the losses the company was mounting was going to force the company to shut its door to the very poor who were the primary beneficiaries of its product. So maintaining the low prices that was artificial and unsustainable wasn’t going to help the poor in the long run. The second school of thoughts said keeping the price of the yogurt at its already established price of 5 taka for an eighty-gram cup was necessary to maintain the growth of its still new business. They insisted that rather than increase the cost of the yogurt , Grameen Danone needed to find a way to reduce its expenses, otherwise Grameen Danone may drive away the customers perhaps permanently. Yunus was among those who wanted the cost price of Shokti Doi to be increased, he argued that establishing price, procedures or business methods that was not realistic meant courting disaster because your customers, suppliers, employees will get accustomed to an economic structure that isn’t realistic, when situations arises that will force you to change direction, you run the risk of alienating everyone whose goodwill you depend on.
The second proposal was rejected by the company, the reason was that it altered the method by which the saleswomen were paid, the second school of thoughts at the board of Grameen Danone had suggested that the commissions paid to the sales women be discontinued and the company should instead offer a fixed salary irrespective of the sales volume. The reason for this suggestion was that, should the yogurt sales fall dramatically as a result of price increase, the sales women will be shielded from the impact. This they said was the most humane thing to do under the circumstance, and the company could also keep their sales network intact even in the face of falling sales volume. The board disagreed with this suggestion, they argued that should the company pay the saleswomen salary on product they did not sell, Grameen Danone would be turned into a charity organization, the board was determined to run the company on a sustainable basis, Hence the price was increased by sixty percent .
As expected the company sales volume dropped drastically in the rural areas, with it went the sales women as those in the rural area could no longer afford Shokti Doi, whose cost price jumped from 5 taka to 8 taka per cup. There was 40% drop in the urban sales, the drop in urban sales was not as bad as the rural areas, which completely disappeared. Once again, Grameen Danone was forced to go back and look for a solution through which they could penetrate the rural areas.
The yogurt was repackaged with the same nutrients representing 30% of a child’s daily requirement into a sixty gram container and sold for 6 taka. After this the company advanced on two fronts. “First, it expanded the retail store program to include two smaller cities, Rajshahi and Pabni, each about fifty kilometers (around thirty miles) outside Bogra. Second, it worked to accelerate plans for strategic move that had always been contemplated- namely, to make the yogurt available in Bangladesh largest city, Dhaka”.
As a result of the experiments and the changes Grameen Danone made, its business model started working. The company serves a two- part market, urban and rural, using systems and even products that are distinctly different. They have also diversified their products offerings to appeal to adults too, in addition to this, they introduced a new flavored mango yogurt as well as affordably priced yogurt drink.
The progress of Grameen Danone is a good case study for anyone planning to invest in social business, because it shows clearly that the way this business model in transacted is not different from profit-maximizing organizations. In Yunus own word “A social business must be at-least as well managed as any profit-maximizing business. Our experience with Grameen Danone has certainly demonstrated the truth of that statement”. There is no way Grameen Danone wouldn’t have shut down its business, if the board of management did not have the ability to take initiative, take risks with all the different strategies they experimented and changes they made which eventually increased their volume of sales to such an extent that the yogurts were sold even in the biggest cities of Bangladesh. The acceptance of this product by the public enabled Grameen Danone to go as far as dropping the word ‘yogurt’ from their brand name, and introducing Shoki+ ( energy plus) in its place. This was a great achievement for a social business. Designing a business that generates strong and growing sales of a useful product so that a business can sustain itself is a difficult task. It is very difficult to design an organization that provides a clear measurable benefit to the society or to a significant segment of society.
Although Grameen Danone had achieved quite a lot, the company still had a lot more to accomplish. They were yet to hit their break-even point, at which the company’s revenues will cover its expenses, after which it will begin to generate a surplus, which will be invested in expanding the business.
For all those who are interested or intend to launch a social business of their own social business, here are some lessons they should take note of:
Be flexible yet never loose sight of your central goal. Although Grameen Danone spent months in thoughtful analysis and planning before it ever broke ground for the factory or produced a single cup of yogurt. It was still very necessary to make changes in the business design. Life is a bit too complicated for anyone, no matter how far sighted to predict any contingency.
Do not be afraid to readjust your business plan when circumstances makes it necessary, but to avoid becoming purely reactive, flitting from one program to the next, always keep in mind the central goal for which you established the social business. In the case of Grameen Danone, the goal was to bring nutrition to the people of Bangladesh, any change in its business plan that will make that goal easily achievable will be a good one, and any change in its business plan that will distract it from its central goal will be considered ‘bad’.
Immerse yourself in the culture of the people you intend to serve; “as every business person knows, understanding your customer is one of the indispensable keys to success” . This includes understanding and empathizing with the culture of the people you serve: their values, dreams, aversions, likes and dislikes. It is even more Important when you are in social business, humility is one of the keys you will need to be able to succeed in the community you are trying to serve. Most people who intend to offer social benefits to their communities are often very arrogant as a result they get impatient with the blind spots; weaknesses, failings or flaws of their clients and even of their cultural differences. If you are in this category, it’s a sign you are wandering down the wrong path. Stop and rethink!
Use help from Allies wherever you may find them. Grameen Danone owes its existence to a partnership with Grameen bank, a unique rural institution for the poor and Groupe Danaone, a wealthy consumer company from France.
Question your own assumptions. Ideas you have developed though long experience and have studied carefully may need to be challenged from time to time. In Grameen Danone’s case, Yunus stated this “when formulating the product Danone’s world class team of nutritional experts concluded that a serving of eighty grams was needed to serve a carrier for the high dose of micro nutrients we wanted to deliver, anything else they feared will be nutritional supplements which will give they yogurt an ”off” taste that will make children reject it. Not until the price crisis forced the company to reexamine this assumption did it discover that it was wrong, and that a smaller, less expensive serving of yogurt could pack the same nutritional punch”. It is very important to periodically reexamine the assumptions you make, the alternatives you ruled out or the choices you felt you had to make and consider whether they are still valid. You may find out that circumstances may have changed, or that your initial belief were wrong and this may open you up to new opportunities you did not know existed.
Social business will indeed make a world a better place, if everyone who can own a social business starts one, be it in their neighborhood, community, town, city or even a country. Children who are suppose to be in the classroom, will not be hawking on the street because someone in their community will establish a school where their parents can afford to pay the fees; there will be affordable health care for the poor in their different communities, they will not have to die from diseases which ordinarily would not have killed them; the poor will have clean water, there will be affordable homes for the poor etc.
Establishing social business to help the poor and the less privileged in the society means security for those in the upper and middle class in the society, in their homes, on the road, in their offices. Failure to do it means; lack of security for them as well, because some poor people who will ordinarily not see crime as the only way of escape from poverty will disturb their safety. Kidnapping, arm robbery and other criminal activities will be on the rise, since they are unable to take care of their basic needs through legitimate means.
Instead of the rich in countries like Nigeria to continue to build prisons for themselves and their families in the form of high fence and gates so as to be safe from the poor, pay huge amount to kidnappers who kidnap their relatives, lock up by their children and prevent them from playing outside for fear of being kidnapped. The money could be used in establishing social business throughout different communities. Failure to do this means the poor will continue to see the rich as their enemy, because they have refused to lend them a helping hand.
Written by Vera Aigbonoga