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

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