Kenya’s Solar Lamp Market: Illuminating and Overcoming Institutional Voids
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|BY CLAIRE REMINGTON | MAY 10, 2013|
Starting and running a solar lamp retail business in a developing country like Kenya is no small feat. Kenya lacks strong transportation infrastructure for product distribution, and the bureaucratic red tape is not only tedious but can be opaque to foreigners. Meanwhile, the customers who need and want solar portable lamps most are those who can least afford it.
But although Kenya’s economy lacks many of the market and political institutions that facilitate business operations in the industrialized world, there is significant potential for businesses to support rapid economic growth and generate social impact. A variety of successful solar portable lamp businesses have reframed Kenya’s lack of institutions (let’s call them institutional voids) as opportunities for economic growth.
Solar portable lamp companies, such as Little Sun, must navigate informal economies and limited distribution infrastructure to market and sell their products to customers who benefit from the environmental, social, and health improvements that these lamps can provide. (Source: Little Sun)
In 2010, two Harvard Business School professors published the book Winning in Emerging Markets: A Roadmap for Strategy and Execution, highlighting the opportunities and challenges of operating a business in a developing country. They also released a toolkit for identifying and dealing with a country’s institutional voids, raising the following questions that are pertinent to running a solar portable lamp company in Kenya:
1. Do large retail chains exist in the country? Do they reach all consumers or only wealthy/urban ones?
2. Do consumers use credit cards, or does cash dominate transactions? Can consumers get credit to make purchases?
3. Is there a deep network of suppliers? How strong are the logistics and transportation infrastructures?
Successful solar portable lamp companies in Kenya are using a variety of strategies to address these challenges and to mitigate, avoid, and leverage the institutional voids that would otherwise deter or limit business operations.
Overcoming retail barriers
In Kenya, as in most developing countries, the customers who most demand solar portable lamps are rural residents who are underserved by the traditional power grid. Because transporting and distributing products in rural areas is more costly and rural consumers have limited access to urban retail outlets, there is a general lack of formal retail products in these areas. Consequently, rural customers’ demands are predominantly met by independent sellers operating through channels in the informal retail sector.
To reach a rural customer base, a solar portable lamp company must learn to navigate Kenya’s informal retail channels. One company, Greenlight Planet, does this by outsourcing its physical logistics chain. The company relies on partnerships with social enterprises, standard retail companies, nongovernmental groups, and government institutions to distribute products to users through already existing informal channels.
“The physical logistics chain in Africa is more like one with the sales chain, where our partners buy our products in bulk and then also deliver them to local retailers, [microfinance institution] branches, etc,” says Laurens Friso, Global Partnership Advisor for Greenlight Planet in East Africa. “It’s not organized from our perspective.”
The outsourcing of the physical logistics chain allows Greenlight Planet to avoid the institutional void created by a lack of a formal retail market for solar lamps in rural Kenya.
Overcoming credit barriers
Credit is limited in rural areas of Kenya, and solar lamp customers do not have access to the traditional financing available to wealthier, urban customers and enterprises. In 2009, only 6.2 percent of rural Kenyans purchased goods on credit, but the volume of transaction services over the past three years has increased dramatically because of M-Pesa. M-Pesa is an informal and revolutionary mobile banking system that allows users to pay bills, transfer money, and purchase air time using mobile phones.
Because credit is limited in rural areas and mobile phone use and banking is accessible, a successful solar company must either develop a) a product that is affordable without credit, or b) an M-PESA-type financing scheme that improves the customer base’s willingness to pay for the product.
Little Sun, a solar company that sells a small solar task lamp of the same name, has succeeded on the affordability front. With a wholesale price of 790 Kenyan shillings (US$9) and a retail price of 990 Kenyan shillings ($12), the Little Sun is one of the simpler and cheaper products on the market. It has a light output of 25 lumens (equivalent to about a $7 flashlight) and is used primarily to light small areas for studying or eating, although it has no mobile phone charging compatibility.
By designing a low-cost but efficient product, Little Sun has overcome the institutional void repreented by the lack of credit by creating an affordable product for rural consumers.
Overcoming infrastructure barriers
In 2010, the World Bank Development Research Group compared the infrastructure levels of different developing countries using a set of four aggregate indicators and ranking them on a scale from 0 to 1. In terms of hard infrastructure, Kenya ranked 0.35 for Physical Infrastructure and 0.43 for Information and Communications Technology (ICT). In terms of soft infrastructure, it ranked a very low 0.18 for its Business Environment and 0.55 for its Border and Transport Efficiency.
According to these indicators, Kenya’s lack of trade infrastructure severely hampers supply chains. Successful solar lamp companies can navigate this challenge by developing partnerships with local organizations and companies that have a clearer sense of the barriers and how to negotiate them, thereby minimizing cost and time inefficiencies.
One Degree Solar has done exactly that. By developing a customer service practice based on short message service (SMS) with an in-country partner, the company has improved the accountability of the customer service product market. Customers are able to text One Degree Solar headquarters when they need help with their products. Through an in-country partnership, One Degree Solar was able to leverage the rural penetration of ICT in Kenya to mitigate the lack of trade infrastructure and its impact on the solar lamp supply chain.
The above examples of ways to overcome common institutional voids create a clear picture of the business potential in Kenya and other emerging markets. Through innovative customer service practices, cost-effective product designs, and partnership with local companies and organizations, solar portable lamp companies are not only navigating institutional voids, but using them to create discrete market niches for and brand trust in their products. Given the status of energy access in Kenya and other developing countries, there is incredible opportunity for generating both revenue and social impact.
Claire Remington is an intern with the Climate & Energy program at Worldwatch Institute.