Operational Strategies for Distributing Durable Goods in the Base of the Pyramid

42 Pages Posted: 8 Dec 2016 Last revised: 30 Oct 2019

See all articles by Andre Calmon

Andre Calmon

INSEAD - Technology and Operations Management

Diana Jue-Rajasingh

University of Michigan, Stephen M. Ross School of Business

Gonzalo Romero

University of Toronto - Rotman School of Management

Jackie Stenson

Independent

Date Written: October 29, 2019

Abstract

Problem definition: Novel life-improving durable products such as solar lanterns, energy-efficient cook stoves, and water purifiers address essential needs of consumers in the Base of the Pyramid (BOP). How ever, many of these products are not adopted by BOP consumers due to the many operational challenges related to their profitable distribution. Motivated by a social enterprise in India, we examine the tactical and strategic value of three operational improvements commonly used by distributors of durable goods for BOP consumers: (i) improve consumer education, (ii) improve customers’ ability to pay, and (iii) improve after-sales service.

Academic/Practical Relevance: We introduce and analyze a game-theoretic model that describes the unique challenges related to distributing innovative durable goods in the BOP and that captures different operational improvements commonly used by BOP distributors. Our results and insights can help organizations identify and manage BOP-specific trade-offs when designing their operations strategy.

Methodology: We model a supply chain composed of a distributor, a retailer, and BOP consumers who face financial distress and product value uncertainty, and characterize their equilibrium behavior in a tactical pricing problem with refunds. We then build a strategic model where the distributor chooses how to allocate an investment budget between strategies (i), (ii), and (iii).

Results: (a) In BOP markets, strategies (ii) and (iii) can only benefit the distributor, while strategy (i) may be detrimental. (b) It is optimal for BOP distributors to invest in either a mix of strategies (i) and (ii) or to allocate most of their investment to strategy (iii). (c) As consumer financial distress increases or as the distributor places increasing value on product adoptions, investing in strategy (iii) becomes more likely to be optimal. (d) The consumer surplus can be highest when investing in the right mix of strategies (i) and (ii). We verify the robustness of our results by examining a more general model through numerical simulations.

Implications: Our model and results formalize the fact that best operations strategy practices in BOP contexts may differ from those in developed markets. In particular, when consumers are under financial distress, investing in strategies that reduce purchasing risks faced by consumers (such as refunds) can be more effective in profitably increasing product adoptions than investing in marketing or consumer financing.

Keywords: Social Entrepreneurship, Base of the Pyramid, After-sales Service, Sustainability

Suggested Citation

Calmon, Andre and Rajasingh, Diana and Romero, Gonzalo and Stenson, Jackie, Operational Strategies for Distributing Durable Goods in the Base of the Pyramid (October 29, 2019). Rotman School of Management Working Paper No. 2882402; INSEAD Working Paper No. 2019/49/TOM. Available at SSRN: https://ssrn.com/abstract=2882402 or http://dx.doi.org/10.2139/ssrn.2882402

Andre Calmon (Contact Author)

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

Diana Rajasingh

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Gonzalo Romero

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Jackie Stenson

Independent ( email )

No Address Available

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