The design of a marketing channel for small photovoltaic
products for the rural market in Kenya
By Frank van Driel
Final Version October 2009
University of Groningen
Faculty of Management and Organisation Landleven 8, P.O. Box 800
9700 AV Groningen (050) 363 7529
Executive Summary
The solar industry is growing incredibly fast and technology is developing at high speed. Solar energy has a massive role to play in developing countries: it can give rural households their first access to modern energy. This research examines how to involve ‘poor’
entrepreneurs in managing a business when designing a marketing channel for small photovoltaic products intended for the Kenyan rural market.
The conceptual model is based on three different subjects from the existing literature: marketing channels in developing countries in Africa, poor entrepreneurs, and the design of marketing channels. During a stay of two months in Kenya data and information have been collected by means of in-depth interviews, fieldwork, questionnaires, and secondary literature.
The results of this research are various. First, the analysis of the current solar market in Kenya shows that the rural target market, Malindi and surroundings, is unserved. A demand for small photovoltaic products has been found, however, no marketing channel exists to serve these potential end-users. Second, the involvement of ‘poor’ entrepreneurs in the marketing channel should not be supported with subsidies, contrarily; market development must be the target. The ‘helper’ should improve the knowledge and business skills of the potential entrepreneurs, for example with an education programme. Moreover, the help should be focused on building and strengthening the distribution network. Third, a marketing channel is designed intended for the rural market. This design must be interpreted as a blueprint or template. It must stimulate solar businesses to think about important distribution issues. During the design, several issues are discussed: the demanded service outputs of potential end-users, targeting end-users, the wished degree of coverage in the target market, the calculation of costs per channel member, the performance of channel flows, and the degree of commitment to the marketing channel. The research ends with a discussion about the benefits of franchising when setting-up a marketing channel.
Keywords: Kenya, rural market, (small) photovoltaics, ‘poor’ entrepreneurs, marketing channel
Research theme: The design of a marketing channel for small photovoltaic products for the rural market in Kenya
Preface
The sponsor of the thesis is Blessed Generation (BG), an organisation which is located in Malindi, a coastal area in the East of Kenya. Blessed Generation is managed by a Dutch couple who live in Malindi: Fester Medendorp, former an employee of the University of Groningen and a former entrepreneur in The Netherlands, and Ria Fennema, formerly a teacher in Friesland, The Netherlands. Blessed Generation has been charged with the management of three orphanages located in Malindi, Ruiru, and Nyamira. Moreover, the organisation runs an Outreach Food Programme in Malindi. One part of this programme consists of helping people to start their own businesses. A key requirement is sustainability; after a while, people must be able to look after themselves and generate their own income.
At the end of 2008, a new idea arose for the business support aspect of the Outreach
Programme. Instead of giving people money to start a business, Blessed Generation wanted to provide a number of pre-selected products to potential starters, and they wished to run a pilot with small-scale solar products. This idea is further developed and explained in this report.
Systems in Context Ltd., a company located in the United Kingdom owned by G. Elliott and A. Pascal, has sponsored this research. In the future, this company will help to extend and improve the business support of Blessed Generation. Their goal is to create a sustainable business model that helps potential African entrepreneurs to set-up and manage a small (micro) business.
I would like to thank a number of people for their contribution to the research.
First, I would like to thank Astrid Pascal for contacting me with Greg Elliott. Second, I would like to thank Greg Elliott for his tremendous input and feedback during the research. Moreover, without the sponsorship of Systems in Context this research has not been possible. Third, I would like to thank every member of Blessed Generation who has helped with
Table of Contents
EXECUTIVE SUMMARY... 1
PREFACE... 2
1.0. INTRODUCTION... 5
2.0. REVIEW OF LITERATURE ... 11
2.1.THE SOLAR ENERGY MARKET... 11
2.1.1. The Worldwide Solar Market... 11
2.1.2. The Solar Market in Kenya... 12
2.1.3. Photovoltaic Delivery Mechanisms in Kenya ... 15
2.2.THE BOTTOM OF THE PYRAMID... 18
2.2.1. Introduction to the BOP ... 18
2.2.2. Solar Entrepreneurship ... 19
2.2.3. Summary and Conclusions ... 21
2.3.POLICIES WITHIN THE KENYAN SOLAR MARKET... 22
2.3.1 Perspective 1: Financial Policies and Support for SMEs... 22
2.3.2. Perspective 2: Education Policies ... 27
2.3.3. Perspective 3: Governmental Solar Energy Policies... 29
2.3.5. Summary and Conclusions ... 31
2.4.MARKETING CHANNEL DESIGN... 33
2.4.1. Marketing Channel Design... 33
2.4.2. Summary and Conclusions ... 36
3.0 THE CONCEPTUAL MODEL & METHODOLOGY ... 37
3.1.THE CONCEPTUAL MODEL... 37
3.2.CONCEPTS OF THE MODEL... 40
3.3.CAPTURING DATA AND INFORMATION... 41
3.3.1. Sub Question 1... 42
3.3.2. Sub Question 2... 43
3.3.3. Sub Question 3... 43
3.3.4. Sub Question 4... 45
3.3.5. Summary ... 46
4.0. ANALYSIS OF THE PRESENT SOLAR MARKET IN KENYA ... 47
4.1.THE PRESENT SOLAR MARKET... 47
4.1.1. Market Development in Kenya ... 47
4.1.2. Players in the Kenyan Solar Industry ... 50
4.1.3. Players in the Malindian Solar Industry... 51
4.2.HELPING POTENTIAL BUSINESS STARTERS IN RURAL AREAS... 54
4.2.1. The Help to Entrepreneurs ... 54
4.2.2. The Blessed Generation Business Education Programme... 55
4.2.3. Influences on Existing Marketing Channels ... 60
4.3.POTENTIAL END-USERS OF SMALL PHOTOVOLTAICS... 62
4.3.1. Consumer Profile – Rural and Urban people... 62
4.3.2. Business Profile ... 66
5.0. THE DESIGN OF A MARKETING CHANNEL ... 71
5.1.THE DEMANDED SERVICE OUTPUTS OF END-USERS... 71
5.1.1. Bulk Breaking ... 71
5.1.2. Spatial Convenience ... 71
5.1.3. Waiting Time ... 72
5.1.4. Assortment and Variety ... 73
5.1.5. Customer Service... 74
5.1.6. Information Provision... 75
5.1.7. Assessing segment attractiveness ... 76
5.2.THE MARKETING CHANNEL DESIGN... 80
5.2.1. Channel Structure Decisions ... 80
5.2.4. Degree of Commitment ... 101
6.0. CONCLUSIONS ... 105
REFERENCES... 109
APPENDIX A: MARKET RESEARCH QUESTIONNAIRE ... 113
APPENDIX B: THE POTENTIAL CUSTOMER LISTS ... 115
APPENDIX C: PICTURE ‘HOW SOLAR CHARGING SERVICE WORKS’ ... 116
APPENDIX D: PICTURE ‘THE SOLAR LAMP’ ... 117
APPENDIX E: EXAMPLE OF CONTRACT FOR SOLAR LAMP ... 118
APPENDIX F: EXAMPLE OF CONTRACT FOR SOLAR CHARGING SERVICE ... 119
APPENDIX G: RETURN & WARRANTY POLICIES... 120
APPENDIX H: EXPERT INTERVIEW... 122
1.0. Introduction
According to Prahalad (2006), families in rural areas of developing countries spend
approximately $10 per month on energy, which can represent between 10 and 40 percent of a family’s income. Rural customers around the world are estimated to spend $8 and $12 per month for lighting services, including candles, kerosene, dry cells, or battery charging, (Prahalad 2006, p. 139). Most of these energy sources are dirty, expensive, and unreliable. According to Greenpeace (2001), these energy sources damage people’s health, reinforce the cycle of poverty, and contribute to environmental destruction. Prahalad (2006) claims that on a per-kilowatt basis they cost anywhere from five to 100 times more than modern fuels and electricity. In the world, two billion people are living without basic energy such as electricity, (Greenpeace, 2001). According to the World Bank (2009), nearly 75 percent of Sub-Saharan Africans, or 550 million people, do not have access to electricity. Recently, electricity access has become a top priority for governments, donors and development organisations.
Different options exist for giving people access to electricity. One of the technologies is solar photovoltaics (PV), which converts sunlight into electricity by means of a solar panel. A panel consists of multiple solar cells connected to each other and mounted on a support structure. The level of electric output strongly depends on the level of sunlight that falls on the panel, (Prahalad 2006, p.140).
In 2001, Greenpeace pointed out that Kenya had nurtured a healthy solar PV market since 1985. Today, equipment worth between $2 million and $4 million is sold each year. The market is driven by strong rural demand and has grown exponentially. A rural middle class group which contains a very varied group of customers creates this demand. Jacobsen (2007) found that people within this social group are not only middle class professionals, for example teachers, but also small business owners and small family farmers. Two studies (Jacobsen 2007; Greenpeace 2001) concluded that the growth of the commercial PV market in Kenya is directly due to the purchasing power of, and straight cash sales to, rural customers.
Jacobsen (2007) says that “solar PV, a small-scale technology that can be used to provide decentralized electrical service to individual homes or businesses, is particularly compatible with market-based distribution”. The Kenya solar market is also notable, because it developed with a minimal direct government support and only very moderate inputs from international donor aid groups, (Jacobsen 2007, p. 146). With this information, we can assume that most of the market channels used in the Kenyan solar market are not financial supported by external organisations. Nevertheless, given the extremely low incomes of rural Kenyans, the continued deepening of solar access through unsubsidized cash sales is likely to occur slowly (Jacobsen 2007, p.152)
Solar energy is mainly developed in Kenya on a commercial basis. There is 1.2 Megawatt (MW) energy available, this is only 0.10 percent of the total available effective capacity of 1.176 MW in 2007 (EVD 2008). According to Jacobsen (2007), approximately 200.000 solar energy systems have been installed since the mid-1980s. At this moment, the cost of a solar energy system varies between 200 euro’s for a 10 W one light-system, up to 1.700 euro for a 100 W five or six light-system with radio and television connection. The current prices for small solar lighting solutions vary between 5 euro for a 3 LED solar lantern, up to 100 euro for a high performance solar lantern with a radio and mobile charger, (Alibaba.com, 2009).
Data from a 2000 survey conducted by the Tegemeo Institute indicated that 4.2% of rural households own a solar module, while 12.4% own a battery which is not solar charged (Jacobsen 2007, p. 146). In other words, battery-based systems without a solar module are even more common in rural Kenya than solar systems. According to Hankins (2004), a
common purchasing pattern for rural Kenyans is to first buy a battery and a television set. The battery is typically used to power the TV, and it is carried to a “battery charging shop” every 7–10 days where people pay approximately $0.50 for a charge. “After some time (e.g., a year or more), many rural households then purchase a small solar module in order to avoid the time and expense of charging the battery at a shop” (Jacobsen 2007, p.148).
electricity to power three lights, a television set, and other electronic devices, such as small radios and sewing machines. This is supported by several studies (Jacobsen 2007, Green 2001, Acker & Kammen 1996).
The second category concerns small solar PV solutions. These solutions are stand-alone solar devices, or very small pocketsize panels, which can charge different devices. These end-devices can be cell phones, lights, batteries, and other (USB) end-devices. Different stand-alone solar devices exist. In this report, we have selected portable solar lights with a fluorescent lamp. A photovoltaic-powered solar lantern or light (PVSL) is a small integrated, portable solar power lighting device that is widely used in many developing countries. It comprises a solar PV module, a fluorescent lamp, battery, and electronics, all packaged in a suitable housing, (Varadi et al. 2005). Solar lanterns could be regarded as the first step up the modern ladder: even the simplest units will provide superior lighting compared with those offered by candles, kerosene lamps, and electric lamps operated by car batteries. According to SolarAid (2009), the average African household uses 55 or so litres of kerosene per year, at an
approximate cost of US $158. Kerosene is far more expensive and far less efficient than electric lighting: the cost of useful light energy ($/lumen hour of light) for kerosene is 325 times higher than the (inefficient) incandescent bulb and 1,625 times higher than compact fluorescent light bulbs (SolarAid, 2009)
This report is focused on the second category, the small solar solutions. Not only is the rural middle class addressed, but also people with a still lower income. Products from the second category are much cheaper than the SHS mentioned in the first category. According to Prahalad (2006), the demand for electricity in rural areas is largely driven by the need for basic lighting. Instead of providing people with large and relative expensive solar PV
systems, a start is made with the “first step up the modern ladder” small solar devices. Blessed Generation selected three (test) products which are shown in table 1.
TABLE 1 The selected products
Product name Sort of product Made in Prices
Solar Powered Emergency Multitool Lighting China € 7.42
Small LED Desk Lamp Lighting China € 9.39
As one can see in Table 1 all products are produced outside Kenya. Therefore, the products from China must be transported and subsequently be distributed over the aimed market in Kenya. How can this be organised? At this moment, only a few articles exist about the distribution of solar products. Blakely & Smith (1981) examined the customer acceptance of solar products from a distribution channel perspective. However, the technology used in 1981 has become obsolete due to several innovations within the solar industry. Van der Vleuten et al. (2007) focus mainly on the delivery mechanisms in the provision of access to electricity services in rural Africa. The authors make a distinction between self-organised delivery in the framework of a commercial market and external delivery organised in the framework of a project. Moreover, Davis (1995) found that rural electrification is especially difficult owing to logistical problems. Banks (2004) explores the delivery mechanisms used in various PV projects. He focuses on models that result in large-scale delivery to households, but also institutional delivery is discussed. Today, in the field of distribution of solar products
relatively scarce literature has been published, especially when one considers the popularity of solar energy.
The main objective of this report is to provide Blessed Generation with advice on how to involve poor people in managing a business when designing a suitable marketing channel for small solar-powered lighting and pocketsize solar photovoltaic products intended for the Malindi market. Blessed Generation selected three solar products to penetrate the market in Malindi and its rural surroundings. Therefore, it is necessary to organise a suitable marketing channel. Coughlan et al. (2006) provide a definition of a marketing channel: “A marketing channel is a set of interdependent organisations involved in the process of making a product or service available for the use of consumption.” Moreover, Blessed Generation wants to integrate new businesses, which are managed by poor people from Malindi, into the marketing channel. The main research question of this report is strongly related to these issues. The research objective reads as follows:
“Design a competitive marketing channel for the small solar market in Malindi that involves ‘poor’ entrepreneurs.”
obtain the solar products. Therefore, examination of the impact of this sponsoring is very important. Blessed Generation wants to prevent commercial marketing channels being driven out of the market, or inconvenienced, by the new channel.
I. What marketing channels, both commercial and subsidized, already exist in the target market and how do the channels perform and relate to each other?
When the existing market is analysed, and Blessed Generation can ascertain whether it is necessary to start a new marketing channel. Coughlan et al. (2006) provide a gap analysis, which can determine the performance of existing channels and identify differences between the optimal and actual channels. If a new channel is not needed, it is better that BG
reconsiders its plans.
Prahalad (2006) shows how to fight poverty by involving poor people in doing business. Blessed Generation has the objective to help poor people with starting their own business. The question is how Blessed Generation wants to involve these potential poor entrepreneurs. Blessed Generation has to identify an available niche in the current Malindi market. This result in next question:
II. How can the help to (poor) potential business starters be organised while avoiding negative influences that affect existing marketing channels?
The third sub question is crucial to the development of a marketing channel. Blessed
Generation has to understand the central role that is played by end-users and their demands in the design of marketing channel. Service outputs must be identified and analysed;
subsequently the market will be divided into market segments. These objectives result in the following question:
III. Who are the targeted end-users and what are the most important demanded service outputs?
Finally, it must become clear what kinds of intermediaries have to be chosen to achieve an efficient marketing channel. In addition, Blessed Generation has to know how many
remedy shortcomings in the provision of service outputs. Furthermore, the concept of channel flows can be used to design a new channel to minimize the cost of providing the desired service outputs (Coughlan et al. 2006, p. 73). This gives rise to the last question:
IV. Which kinds and how many different intermediaries are necessary to serve the demands of targeted end-users and minimize the cost of providing these service outputs?
Summarising, centrally to this report stands the design of a marketing channel for small solar products for the rural market in Kenya. During the marketing channel design, existing
2.0. Review of Literature
The theoretical context is based on three different subjects from the existing literature. First, attention is paid to the role of (subsidized) marketing channels in the developing countries in Africa. Various literature sources are used to understand how subsidised marketing channels may affect unsubsidised channels. Secondly, the literature concerning how poor people can become self-employed and play a role in the distribution channel is examined. The underlying idea of this subject is that Blessed Generation wants to help people with starting their own business, so that they can support themselves. Finally, this report deals with the theory concerning the design of an appropriate marketing channel. The conceptual model that links and integrates the literature is presented in the next chapter.
2.1. The Solar Energy Market
2.1.1. The Worldwide Solar Market
The solar market is still uncapped in large parts of the world. Some critics note that the solar market currently contributes only 0.1 percent to worldwide energy consumption, but the potential is enormous. According to Lammers (2009a), the worldwide volume of solar energy, the fastest-growing power generation technology, rose at an average annual rate of 56 percent over the last 5 years. In addition, its potential has scarcely been tapped. In many African countries, like Kenya, the commercial markets for photovoltaic systems are fast growing.
Solar Expert C1 confirms that the worldwide solar industry is floated by subsidies. Countries like China and the US have a thriving solar energy market due to enormous subsidies. Nearly 10 years of subsidised prices made Germany among the largest markets for photovoltaic panels. In Africa, large funds are not available. Solar Expert C finds that ‘intelligent’ subsidies are necessary to develop the African market. Europe and the USA already use the `feed-in tariff' subsidies and one expects that China will align its solar energy policy with Europe and the US. China is expected to announce a subsidised price for solar power of 1.09 Yuan per kW-hour (kwh), or $16 cents, which is over three times the rate paid for coalfed electricity in China, but far below the established solar tariffs of about 45 cents in Europe and 30 cents in the United States (Daily Nation, 22nd June 2009).
2.1.2. The Solar Market in Kenya
According to Lammers (2009b), a local solar market has developed in Kenya over the past 10-15 years. Up to 30.000 solar systems are sold each year, and some 5000 Kenyans earn an income from them. According to Hankins (2000), the photovoltaic market has grown in stages as technological and commercial innovations have brought it within the reach of
lower-income users. Photovoltaic units have gradually become smaller and cheaper. However, according to a solar expert, the worldwide subsidy trend also applies for Kenya.
Unfortunately, in Africa, the subsidies are not as large as in the rest of the world. According to Hankins (2000), this situation must change rapidly. “At this moment, most of the solar projects in Africa are isolated from each other. When the solar industry really wants to grow, strengths must be bundled. A large international subsidy fund and a number control bodies are necessary, only then the level of Western countries can be gained.”
An estimated one-third of the world’s population, nearly 1.6 billion people, lack access to modern energy services, including electricity for lighting, numbers that are only expected to decrease slightly to 1.4 billion by 2030 under business-as-usual scenarios. Moreover,
according to Hande (2009), 2.5 billions are still dependent on firewood, dung and charcoal for their daily energy needs. In Africa, the high costs associated with grid expansion, especially
in the rural areas where rugged terrain and disparate populations of low densities are often the norm, make it both physically difficult and astronomically expensive to extend the grid. Furthermore, often times, the poor lack the means to pay for these long-term costs at the initiation of the service or over a short-term period. Consequently, the national energy supplier has no incentive to market energy services to poorer segments of the population, (Barnes & Halpern, 2000). However, due to recent technological advances that have enabled the development of smaller, more affordable, and reliable products, in combination with an international lighting industry looking for new growth opportunities, the prospect for the development of a market for off-grid lighting products in Africa has never been more
promising, affording millions the chance to attain affordable modern lighting for the first time (Lighting Africa 2009).
In Kenya, before the emergence of the PV market, there was an enormous demand for electricity from the rural sector not being met by the national electricity company: the Kenya Power and Light Company (KPLC). As the sole provider of electricity, only 3.4% of the power KPLC supplied was for rural consumers while Kenya's rural sector constituted 75% of the total population. KPLC's effective monopoly on electricity made the supply inefficient and unresponsive to demand. NGO funded projects had introduced photovoltaic technology to rural Kenya and provided empirical evidence of its legitimacy. This became the
“technological seed" that generated the demand for photovoltaic technology.
Today, this market constitutes a US$ 10 - 15 million industry, approximately 6 million dollar of the total sales are caused by the rural sector (Lighting Africa 2009). Large systems cover approximately 30 - 40% of the total sales; the remaining part is small SHSs which are
generally subsidised. The number of subsidies supplied by NGOs and donor organisations are relatively large, however, most have failed. According to Solar Expert C, donor organisations use ‘bilateral’ models which are focused on capacity building, or the extension of the total number of installed SHSs. The problem is that donors frequently disappear after a number of years, when their funds dry up. Generally, when the donor organisation leaves the SHSs have been doomed to fail. Approximately 60 - 70 per cent of the smaller SHSs have been
2006). Moreover, most of the time, the top layer of the poor are the better off when a donor is subsidising a specific project, (Barnes & Halpern 2000).
According to Solar Expert C, subsidies must be available for as many players as players in the market and should be focused on the development of the private solar sector. The private sector should acquire the necessary raw resources, finance, equipment and engineering by themselves, and not via the NGOs and donors. Moreover, Solar Experts A, B, and C said that the subsidy should be focused on the total solar industry, instead of subsidies focused on capacity building and specific targets. “The private sector needs to be expanded, not the market which is driven by bilateral models”
The demand for electricity in Kenya is growing by about 6 percent a year (Hankins 2000). According to Hankins (2000), energy policies are primarily targeted to meet the electric power industry and commercial fuel supplier needs, which have a direct bearing on Kenya’s urban infrastructure. Since 2007, the Kenyan Ministry of Energy has established a fund known as the Rural Electrification Programme (REP) Fund to support the electrification of rural areas and other areas, considered economically non-viable for electrification by
licensees. Solar energy is not a part of the REP. “In fact, when grid-extension is possible, it is often the preferred option among consumers”, (Lighting Africa 2009). Grid connections work on-demand and the average costs per KW hour are lower compared to the average costs of a SHS. Most of SHSs are not designed to meet the demands of end-consumers. According to solar expert C, consumers see a SHS as an incremental improvement, whereas an on-grid connection is considered superior, and representing greater progress compared to the old situation.
Besides the Rural Electrification Programme, the Kenyan government promotes use of renewable energy sources including, but not limited to, small hydros, wind, solar, biomass, geothermal, hybrid systems and oil fired components. The Ministry of Energy reserved a budget worth 4 million dollars for solar energy, but this is not spent on rural electrification. According to Solar Expert C, the government uses the so-called ‘procurement’ model. This means that the budget is allocated to the larger public institutions, such as hospitals and schools. Because these locations are publicly accessible, more people can enjoy the benefits of solar energy.
The World Bank also supports developing countries' efforts to provide cleaner, stable electricity services to households and businesses through its financing instruments, policy advice, partnerships, and knowledge transfer. Moreover, many NGOs and donor organisations want to allow rural people access to energy. According to an ESMAP study (2000), in
unelectrified areas, people use substitutes for electricity- candles, kerosene, batteries - for lighting and communication purposes. Many people pay considerably more for these inferior sources of energy than they would pay for modern sources.
2.1.3. Photovoltaic Delivery Mechanisms in Kenya
When looking at photovoltaic delivery mechanism, a distinction can be made between (a) self-organised delivery by the commercial market, and (b) project organised delivery (Van der Vleuten et al. 2007, p. 1440). Banks (2004) described four delivery mechanisms for PV dissemination: (1) commercial led approaches in which suppliers and dealers develop the market, (2) the multi-stakeholder programmatic model which is typically relying on consumer credit, (3) utility models, often with fee-for-service payment, and (4) grant-based models which are typically used for institutions. The first delivery mechanism examined by Banks (2004) is comparable with the self-organised delivery model of Van Vleuten et al. (2007). The remaining three models correspond with project organised delivery models.
Model 1: The commercial led / self-organised delivery model
According to Bank (2004), the commercial models are driven by suppliers and dealers who compete in the development of a market that responds to customer purchasing capability. End-users buy their solar equipment from an outlet of a local commercial distribution
(installation service, maintenance service, repairs, etc.) from technicians or the dealer (Van Vleuten et al 2007). Purchases are usually for cash. Moreover, dealers or vendors may operate a consumer finance scheme, sometimes in partnership with a consumer goods retail chain (Bank 2004) or a leasing company or bank (Van Vleuten et al. 2007).
FIGURE 1
The Self-organised Delivery Model
Source: Van der Vleuten et al. (2007)
A strong point of this market-based dissemination model is its sustainability from the fact that the supply chain with its wide reach also plays the key role in operation and maintenance. Van der Vleuten et al. (2007) say that SME distributors do have a vested interest in
maintenance and customer satisfaction as they know they will depend on favourable feedback from customers since much of the promotion mainly goes from mouth to mouth.
Model 2: The Project Organisation Model
In this case, the dissemination of solar energy is a planned effort. According to Van Vleuten et al. (2007), solar equipment is typically sponsored by a donor organization or through a cross-subsidy provided by the utility company. The project developer with support of consultants can spend several years to develop the complex delivery mechanism and
way. Whereas many projects have disseminated SHS through this model, few programmes were sustainable and effective. O&M funds suffer the risks of payment defaults from end-users, fading interest of operators, currency devaluation, and therefore eventually lack continuity (Van der Vleuten et al, 2007).
FIGURE 2
The Project Organisation Model
2.2. The Bottom of the Pyramid
2.2.1. Introduction to the BOP
The term the Bottom of the Pyramid (BOP) is frequently used when bringing together business opportunities in the poorest tiers of the worldwide population with the aim of reducing poverty (Hahn 2009, p. 313). These poorest tiers amount to approximately 4 billion people worldwide (Hammond et al. 2007, Prahalad 2006).
Prahalad (2004) thinks that an approach is needed that involves collaborating with the poor to innovate and achieve sustainable win-win scenarios, where the poor are actively engaged and, at the same time, the companies providing products and services to them are profitable. Furthermore, Prahalad thinks that we have to stop thinking of the poor as victims or as a burden. In addition, the world has to start recognizing the poor as resilient and creative entrepreneurs and value-conscious consumers. According to Karnani (2007), BOP
entrepreneurship is entrepreneurship in his simplest form; the entrepreneur is a person who raises the capital, manages the business, and is the residual claimant of the earnings (Karnani 2007, p. 30).
Prahalad (2004) argues that we have to recognize the poor as entrepreneurs who can boost the local economy and eradicate poverty. Martinez & Carbonell (2007) mention another benefit. The authors say that the poor can manage BOP businesses have restored many a person’s self-respect by considering him not as a passive and dependent subject but rather as the
protagonist of his own development, able to resolve his own saving and consumer needs if given the opportunity.
According to Karnani (2007), the cost of serving a BOP market can be very high. The poor are often geographically dispersed and culturally heterogeneous. This dispersion of the rural poor increases distribution and marketing costs and makes it difficult to exploit economies of scale. Moreover, the cost of doing BOP business increases as a consequence of weak
infrastructure and the small size of each transaction. The poor obviously consume most of what they earn, and as a consequence have a low savings rate (Karnani 2007, p. 22). “Contrary to the BOP argument, getting the poor to consume more will not solve their problem. Their problem is that they cannot afford to consume more.” Karnani (2007) states that rather than viewing the poor primarily as consumers, an alternative approach is to focus on the poor as producers and to emphasize buying from the poor. “Certainly the best way for private firms to help eradicate poverty is to invest in upgrading the skills and productivity of the poor and to help create more employment opportunities for them” (Karnani 2007, p. 109).
2.2.2. Solar Entrepreneurship
Upgrading the skills of the poor and creating employment opportunities is exactly what many donor organisations within the solar sector are trying to do. “The photovoltaic industry is the perfect market which stimulates educational and employment opportunities”, said Solar Expert B. For example, SolarAid and Lighting Africa are bringing together entrepreneurial approaches with solar energy, promoting both micro and macro solar applications.
According to SolarAid (2009), their organisation identifies entrepreneurs in developing countries, who are then trained in business planning, market research and solar skills. SolarAid helps them set up their solar micro businesses so that they can build and sell solar lanterns and solar chargers for radios and mobile phones. Moreover, Solar Expert B thinks that involving local entrepreneurs in a marketing channel for personal photovoltaic products is strongly related with education and on-the-job training about how to manage a business and solar energy. Summarising, Solar Aid recruit and train franchisees who can market and sell alternative energy solutions to their fellow citizens.
Building a franchise network is connected to Prahalad's idea of recognizing the poor as entrepreneurs, and that small and medium-sized businesses are the most appropriate way to serve poor people. Moreover, a number of innovative, low-cost renewable energy
demonstrate encouraging levels of success (Karekezi 2002, p. 917). Prahalad (2004) says that the poor often buy luxury items and desire quality products. “Innovation allows BOP
consumers to access these products”. However, with an income of $1-2 a day, most of the poor cannot afford such products. Karnani (2007) and an interviewee said that the poor spend about 80% of their meager income on food, clothing and fuel alone. In other words,
innovation is only feasible on a small scale. However, the price of small solar solutions becomes lower and lower every year, and as a consequence more affordable for poor people. The lower the price, the greater the take up – but prices have to be sustainable. According to Solar Expert B, at a price of 10 – 20 USD, there will be plenty of early adopters in rural areas.
However, Solar Expert C thinks that the chance of success becomes much higher when the entrepreneur does not focus on the BOP segment. “The solar energy market is too much focused on poverty alleviation and should focus on the medium and high income segments, like (sub-) urban people, and other viable markets, like the telecom and tourism sector. For example, small solar solutions can profit from the enormous growth of the telecom sector.” Many people in Kenya, even poor and rural people, own a mobile phone but do not have electricity to charge their mobiles; small businesses may service these people with small solar chargers.
2.2.3. Summary and Conclusions
The analysis shows that several aspects of the BOP proposition are appropriate for helping the ‘poor’. Firstly, ‘poor’ entrepreneurs should be involved in the local economy. This can create opportunities for poor or unemployed people and boost local economies. Of course,
entrepreneurs cannot eradicate poverty, only a very small contribution can be made. Therefore, the creation of business opportunities should focus on the improvement of the economy and not especially on poverty alleviation. Some or many people may associate poverty alleviation with negative aspects.
Second, according to Prahalad and Hart (2000), MNCs should take the lead role in selling to the poor, but within the Kenyan solar sector this could only partly work. Most of the solar products sold in Kenya are imported from foreign countries. These foreign companies are not directly serving the poor, but just supplying solar companies in Kenya. Instead of selling to the poor by multinational corporations, the poor should buy from each other. Again, this can actually boost the national or local economy, because money is not going to the multinational corporations, which are mostly based in ‘Western’ countries. In other words, the money ‘stays’ within the country, and does not flow to other countries.
Third, the relevant government should support and stimulate entrepreneurship in several ways. For example, educational policies, databases, favourable laws and rules, etc.
2.3. Policies within the Kenyan solar market
Blessed Generation considers providing an initial subsidy to potential starters within their Outreach Programme. The underlying thought of this subsidy is that poor entrepreneurs will get the chance to start a small business and a position in the solar energy market. Thus, the desirability of subsidies is determined. Supplying a subsidy means that problems may arise. A new group of subsidised businesses will become active on the market. They may be
competing against the already existing companies that receive no subsidies. Market forces may be disturbed, although this depends on the type of subsidy.
Within this paragraph, policies within the Kenyan solar market are discussed. The objective is to analyse if subsidies have been needed in the past or will be needed in the future. By
discussing out of three different perspectives, we try to complete a broad and complete view about how the solar market is organised. First, business start-ups and the solar market are discussed from a financial view. Secondly, education policies within Kenya and the solar industry are examined, and thirdly, government policies for the development of the solar market are viewed. The reason for choosing the financial perspectives is because of the lack of appropriate credit and financing mechanism and the financial constraints for business start-ups (Disenyana 2009, Okpara & Wynn 2007). The education policies have been chosen because of the importance education and skills are needed to run micro and small enterprises and to develop ‘solar skills’ (Wanjohi 2009, SolarAid 2009). Finally, the government energy policies have been discussed due to the ‘hand-off’ approach of the Kenyan government which helped the private solar market to flourish (Hankins 2000).
2.3.1 Perspective 1: Financial Policies and Support for SMEs
Okpara & Wynn (2007) conducted an exploratory study that investigated the growth constraints on small businesses in Nigeria. They found that financial support is a major problem in managing and sustaining a small business. Some of the owners stated that it is difficult to borrow money from banks because they lack collaterals. On the other hand, the loans provided by micro-finance institutions are small, with short repayment periods and high interest rates. Entrepreneurs also complain that government funds designated for small
business and entrepreneurial developments are allocated to other projects. When given, funds are not based on any formula or merit, but rather on nepotism or favouritism (Okpara & Wynn, 2007).
Okpara & Wynn (2007) recommend that business owners should source cheap, low-interest loans from banks and other financial institutions, borrow from friends and relatives with the intent to repay the money, negotiate advance payments from customers, and seek loans from micro-financing organizations. Moreover, Praladi & Thawala (2008) say that business owners should take into consideration a merge with others that have similar businesses. In Kenya, there are various other financial challenges that face small enterprises, including the high cost of credit, high bank charges and fees. According to Wanjohi & Mugure (2008) financial constraint remains a major challenge facing SMEs.
A potential solution for the limited financial access for this problem could be trade credit. According to Hankins (2004) trade credit between international suppliers and importers can help large players purchase container loads of equipment. Credit can also facilitate
transactions between importers and distributors or dealers who work further downstream in the supply chain. Finally, consumer credit2 can assist customers to buy systems outright.
According to Huyghebaert et al. (2007), business starters primarily rely on debt when raising external funds. Two major sources of debt financing accessible to business start-ups are bank loans and trade credit. According to Huyghebaert (2006), trade credit arises whenever a buyer defers payments to his suppliers. Several studies have examined the determinants of firm reliance on commercial debt. It turns out that a major reason for using trade credit is to overcome financial constraints (Huyghebaert 2006). However, trade credit is considered an expensive financing source (Huyghebaert et al. 2007). Based on the explicit cost alone,
entrepreneurs should therefore prefer bank loans. Yet, most firms use both forms of debt financing, and young, small firms use even more trade credit than established firms use.
FIGURE 3
Trade Credit to Build the Market
Source: Hankins (2004)
Trade credit can reduce the problems of the high transaction costs, moral hazard during the loan, and screening before acquiring the credit. Firstly, financing choices may be affected by the transaction costs associated with financing. According to Wilson & Summers (2002) the existence of trade credit is often explained as resulting from asymmetric and imperfect information in product and capital markets. The supplier of trade credit often has a
comparative advantage over third party suppliers of finance such as banks and other financial institutions in trade financing, particularly with regular customers, because of their reduced information and monitoring costs (Wilson and Summers 2002). Moreover, Huyghebaert (2006) find that firms lengthen the credit period when customers order more frequently, verifying the idea that trade credit can be used to reduce the transaction costs of paying bills. Instead of paying bills every time goods are delivered, firms may centralize payments at the end of each month or quarter and use trade credit to bridge the period between purchase and payment.
collect accurate data and information about sales and revenue. According to Huyghebaert (2006), suppliers may have an advantage in information acquisition: they can observe the size and timing of orders, the ability of firms to take advantage of early payment discounts, etc. Even though banks can collect similar information via transactions accounts, Huyghebaert (2006) argues that suppliers are likely to obtain the information in a faster and cheaper way. In addition, we argue that, because of the very short-term nature of trade credit, suppliers have the ability to react faster when adverse information emerges whereas banks may have to await actual default. In general, a supplier receives much more information from their dealer, then a bank in the same situation.
Thirdly, according to Bergeman & Hege (1997) moral hazard problems arises between financier and entrepreneur when the (correct) allocation of the funds to the project is
unobservable to the financier. When trade credit is used, the supplier can watch carefully what is happening with his products and credit. Wilson & Summers (2002) say the fact that the buyer has a demand for the seller's products can provide a bargaining point in negotiations for payment, giving the buyer an additional incentive to repay the finance and the supplier the ultimate penalty of stopping supply (or supply on credit). So, if trade credit is not refunded then the supplier the can easily end the relation.
From a supplier perspective, repeated ordering allows them to collect more timely
information on customer creditworthiness, whereas slowly processed inventories increase the collateral value of supplies. On the contrary, banks normally provide loans at once, and as a result, take much more risk. Indeed, the entrepreneur can “shirk” and decide to (partially) withhold the investment and divert the capital flow to her private ends (Bergeman & Hege 1997). With trade credit, the chance for moral hazard might decrease, depending on the agreed term of payment and the value of the order.
develops, firms may rely more on supplier reputation and no longer need to verify the quality of supplied goods, thereby reducing trade credit use.
However, not only for small businesses the limited access to financial resources is a problem, also for off-grid people. According to Prahalad (2006), the poor often must resort to the informal sector, which is characterized by monopolistic practices and exorbitant interest rates. Trade credit can also contribute to the purchase of a SHS; mostly this form called consumer credit instead of trade credit. Wilson & Summers (2002) supports this thought; an important benefit of trade credit is the two-way nature of the transaction. Many companies, particularly those at intermediate points in the value chain, both use trade credit as customers and provide it as suppliers. According to Hankins (2004), consumer credit is to improve affordability of solar equipment. Many rural PV projects rely heavily on credit financing for consumers so that payments can be made as low as possible and more people can be served. Not only
consumer credit helped off-grid people, Lammers (2009b) & Malaviya (2009) found that rural banks in India, by means of microfinance and customized loans focused on the need of
individual clients and not on standardized loans products, have enable tens of thousands of people to enjoy the benefits of solar electricity.
Is a subsidy necessary when trade credit can be used? According to Hankins (2004) the answer may be yes. When a potential business starter is constrained to acquire the needed financial resources, a subsidy might be necessary to complete ventures that they otherwise might not be able to afford. For example, in the Uganda ERT project, companies are provided with cost-sharing grants to cover 50 percent of the costs of developing business plans, training staff, or developing and executing marketing plans. The project asks for an application from the company before it undertakes an activity. In addition, Barnes & Halpern (2000) examined two interesting models utilised to deliver rural electricity services, the dealer model and the retailer model. The terms used for these models are confusing, therefore it is better to change their names. The dealer model must be changed into retailer model because it builds on existing retailer networks, and the retailer model must be changed into new venture model, because it emphasis on business start-ups.
the product and increase consumer demand. Various ways have been attempted to strengthen the retailer networks, mainly for the delivery and servicing of photovoltaic systems. For example, in Indonesia credits were offered to dealers to on-lend customers. Mostly, the main goal was to expand the market by making credit and partial subsidies available for the purchase of photovoltaic systems from "qualified" dealers.
The new venture model initially involves a decentralized approach to providing electricity for households that do not have access to grid service (Barnes & Halpern 2000, p. 8). Under this model a community, organization, or entrepreneur develops a business plan to serve local demand for electricity. If a plan gains approval, a loan or a subsidy is supplied for the development of a new venture. The retailer deploys the system through a fee-based service arrangement to recover the costs, repay the loan, and earn a profit. This approach ensures significant local involvement and consumer choice (Barnes & Halpern, 2000). Therefore, the electricity new venture model fits with the trend towards private sector participation in the electricity sector.
If a subsidy is supplied, then subsidy policies should be carefully assessed by their relative efficacy, efficiency, and cost-effectiveness (Barnes & Halpern 2000, p. 3). Efficacy means that the subsidy will reach the targeted group of people. Efficiency means that the subsidy is structured in such a way that it encourages provision of energy services, at least cost. Cost-effectiveness means that the subsidy achieves social goals at the lowest program cost while providing incentives to businesses to serve rural populations. Central stand that subsidies should be applied to access costs (connections), not to operating costs (ongoing consumption).
Barnes & Halpern (2000) conclude that irrespective of which manner of subsidy is selected, it is very important that it does not distort the existing energy market and delivery models needs to be oriented toward providing business incentives to serve consumers who would not otherwise be served.
2.3.2. Perspective 2: Education Policies
According to Wanjohi (2009), education and skills are needed to run micro and small
Ninety-six percent of entrepreneurs in Nigeria report to be inexperienced in the field of management (Okpara & Wynn, 2007). This is a major contributor to small business failure. The respondents feel that once they raise the funds they can start any business without training or experience. Most appear impatient and do not see any need to go through the process of an apprenticeship to learn and gain experience under an experienced entrepreneur (Okpara & Wynn, 2007). Moreover, business owners tend to manage businesses themselves as a way of reducing operational costs. According to Okpara & Wynn (2007), lack of management training and experience has led to the collapse of many businesses. Moreover, the solar industry suffers a lack of trained technicians (Hankins 2000). Without systematic technician training, installation and hence system quality will remain poor.
The solution for the above-mentioned problems is well organising educational programmes on both macro and micro level. First, the Kenyan government should take care for accessible educational, so that children learn how to read, count and write. Second, the Kenyan
government must stimulate entrepreneurship through special entrepreneurial programmes. For example, with respect to management problems, workshops and seminars can be organised by local chambers of commerce, non-government organizations (NGOs), universities, and other non-profit organizations. In that way, small business owners can be educated about personal and financial management, basic accounting, marketing strategies, and recordkeeping (Okpara & Wynn, 2007) In 2008, Kenya launched an ambitious licensing reform program. So far, the program has eliminated 110 business licenses and simplified eight others. The changes have streamlined business start-up and cut both the time and cost of getting building permits. The program will eventually eliminate or simplify at least 900 more of the country’s 1,300 licenses. Today, property registration is also faster, thanks to the introduction of competition among land valuers. Consequently, it is much easier to start a business now. Lastly, the government should stimulate universities to educate people as solar technicians.
On micro level, donor organisations can play a large role in identifying potential
sufficient. The contents should be focused on the specific problems experienced by SMEs, and allow for the practical application of concepts and procedures (Brink et al. 2003). This is the most important challenge for management and entrepreneurship training. Those with more education and training are more likely to be successful in the SME sector (King and McGrath 2002).
Are subsidies necessary in the field of education? The answer seems no. The training of entrepreneurs is not dependent on gigantic investments. In many countries, the entrepreneurs themselves pay money for education and the improvements of skills and knowledge. The trade and industry can organise high-quality education and support the development of knowledge through regional centres. Therefore, no specific subsidies are required.
2.3.3. Perspective 3: Governmental Solar Energy Policies
According to Hankins (2000), government energy policies are primarily targeted to meet the electric power industry and commercial fuel supplier needs, which have a direct bearing on Kenya’s urban infrastructure. Moreover, according to Disenyana (2009) no specific law exists to regulate the management of renewable energy sub sectors. Through the 1997 Electric Power Act, Kenya liberalized the power sector and privatized the main power company, Kenya Power and Light—though the government still owns a controlling share. According to Hankins (2000) privatization has forced the utility to carefully scrutinize programs that are not cost-effective, including its rural program. It has limited generation capacity and has made urban and industrial customers a priority. Rural electrification usually meant no more than extending the grid to peri-urban zones around large cities and creating isolated grids in remote towns (van der Vleuten et al. 2007, p. 1444). Hankins (2000) said that between 1995 and 1999 the rural electrification program connected fewer than 21,000 households; during the same period more than 80,000 households bought solar modules.
However, the government’s hands-off approach to the off-grid private sector has helped the photovoltaic industry flourish (Hankins 2000). The expectation is that competition will aggrandize the next years. This is helped by progressive government policies, such as exempting photovoltaic products from VAT and import taxes, which Mali and Kenya have done (Lammers 2009b, p. 17). Furthermore, a thriving secondary capital market has
East African market—modules come to Kenyan vendors from Australia, Croatia, France, India, Japan, Russia, Spain, the United Kingdom, and the United States (Hankins 2000).
The final benefit of the government’s hands-off policy is that there have been no large projects or government tenders to distort the industry. According to Hankins (2000) in other countries, like South Africa and India, large projects and unsustainable subsidies for
photovoltaic equipment have undermined private sector activity, because big players move in and out of the market at will to take advantage of the handouts.
Still, the government can adopt a more active attitude to develop the Kenyan solar industry. According to Disenyana (2009), there is a lack of legal and regulatory framework and institutional support to promote widespread use and investment in solar energy. Solar Expert C agrees with this opinion: “Large-scale investments are necessary to develop the solar industry further. This might be possible with government investments of which the complete private market benefits, not donor projects. Moreover, the government should help with the development of an appropriate quality system standard to protect end-user against faulty installations and poor after sales service. Hankins (2000) confirms this situation: the industry suffers from erratic equipment and installation standards. Dealers undersize or leave out vital components to win contracts, and there is little incentive for proper engineering.
Further development of the market would mean an increase in the number of companies, and therefore an increase in competition. In addition, an ESMAP study (2000a) found that
competition among dealers for serving the same area would promote efficiency, thereby reducing costs and expanding consumer choice. Hankins (2000) found that competition has led to more competitive pricing and a wide range of product selection. This advantage is realized, however, only if the market is sufficiently lucrative to attract multiple competitors. Still, photovoltaic prices are more competitive in Asian countries such as China and
Indonesia (Hankins 2000).
this group is matched by the market of individual household systems where even local minigrids are not (yet) justified and where individual households develop their own solutions that range from dry-cell batteries, car batteries, to SHS and small diesel or petrol generator sets. According to Jacobsen (2007), photovoltaic products would not be payable for people with lower incomes. However, a significant price drop has made of solar products and
services affordable for persons with low incomes. At this moment, only 5 percent of the rural population in Kenya is served by the commercial market (Van der Vleuten et al. 2007). Still, there is a large untapped (rural) market for solar equipment, especially small solar solutions.
Donors have long subsidised this market, particularly with projects to promote SHS systems (Van der Vleuten et al. 2007, p. 1445). However, instead of contributing to their activities to develop the market, the instruments often confuse, or even compete, with the entrepreneurs by imposing certain products or certain delivery models, irrespective of their sustainability, suitability, or appropriateness in the local situation. According to van der Vleuten et al. (2007), donors must change their modus operandi and develop the internal institutional structure and culture needed to work in partnership with small- and medium scale local entrepreneurs in developing countries who know and try to serve the demands of their rural customers for energy products. This opinion connects to the thoughts of Solar Expert C: “More business should become active between Nairobi and rural areas, to increase the number of sold solar products and expand the market.” Unfortunately, solar companies prefer to be sitting in the capital city, waiting for the next tender rather than developing the networks to serve the needy clients in the distant rural areas (Van de Vleuten et al. 2007, p. 1446).
Are subsidies necessary to develop the Kenyan solar market? The answer is again no. The government must be detached in the field of subsidies. In the past, the solar industry has proved that private development is very successful which resulted in a flourish solar industry. The government’s hands-off policy is that there have been no large projects or government tenders to distort the industry and made Kenya the most successful solar market in Africa.
2.3.5. Summary and Conclusions
From a financial perspective, it seems justified to intervene in the Kenyan solar market, because a lack of financial resources is a major issue in managing and sustaining a small business. The lack of access to long-term credit for small enterprises forces business owners to rely on high cost short term finance. Especially, in the start-up phase new businesses have a high need for capital, for example to buy stocks of solar equipment. A (single) subsidy may offer outcome. However, trade credit might be the best financial tool to build the market (Hankins 2004).
Barnes & Halpern (2000) examined two models used to deliver rural electricity services; (a) the retailer model which emphasizes the development of an existing dealer network that can sell equipment, to people living in rural areas; and (b) the new venture model which accents the development of a business plan and a business start-up which must serve local demand energy. Both models work with the private market and therefore are appropriate to start-up a solar venture in a rural market.
From educational perspective, it seems not desired to intervene in the market. Research shows that majority of the lot carrying out micro and small enterprises in Kenya are not quite well equipped in terms of education and skills. However, the government should adjust their policies to stimulate entrepreneurship. Business starters with more education and training are more likely to be successful in the SME sector. Therefore, a subsidy may be necessary to encourage education and managerial training for small businesses entrepreneurs.
Subsidies that might help to build the (rural) solar market are not desired. However, only 5 percent of the rural population is served, so there is a very large untapped market.
Nevertheless, in the past the solar industry has proved that private development of the market (without subsidies and government intervention) works fine.
2.4. Marketing Channel Design
2.4.1. Marketing Channel Design
“Producing products that customers want, pricing them correctly and developing well-designed promotional plans are necessary but not sufficient conditions for customer
satisfaction. The final part of the jigsaw is distribution” (Jobber 2004, p. 634). Distribution is the place element of the well-known marketing mix, which can be found in practically every marketing book. According to Jobber (2004), establishing a supply chain that is efficient and meets customers’ needs is vital to marketing success. Not only customers' needs have to be met, but also the requirements of channel intermediaries, “those organisations that facilitate the distribution of products to customers” (Jobber 2004, p. 634). Jobber (2004) describes four functions of channel intermediaries. First, the function of reconciling the needs of producers and customers. Manufactures typically produce a large quantity of a limited range of goods, whereas consumers usually want only a limited quantity of a wide range of goods. Second, channel intermediaries can improve distribution efficiency by reducing the number of transactions and creating bulk for transportation. Third, intermediaries need to improve accessibility by bridging location and time gaps. “The location gap accrues from geographic separation of producers from the customers they serve The time gap results from
discrepancies between when a manufacturer wants to produce goods and when consumers wish to buy it”, (Jobber 2004, p. 637). Fourth, channel intermediaries can provide specialist services that manufacturers may feel ill equipped to offer.
The model used for designing marketing channels is based on the framework for channel analysis defined by Coughlan et al. (2006). According to Coughlan et al. (2006), a framework for analysis of channel design and channel implementation is crucial to create effective (i.e., demand-satisfying) and efficient (i.e., cost-effective) routes to the market, whose members perform the channel flows designed for them. These channels flows are psychical possession, promotion, negotiation, financing, risking, ordering, payment, and information. The
framework can be split into two parts: design and implementation. This article concentrates on the first part of the framework: the design of the marketing channel (Figure 4).
kinds of intermediaries to include in the channel, their specific identities, and their number, and split the workload of the channel optimally among them. This can be named as the supply-side.
FIGURE 4
Design of Marketing Channel according to Coughlan et al. (2006)
In this respect, a number of questions must be answered systematically. Firstly, a start will be made with segmenting the market. Segments are best based on demands for the service outputs of the marketing channel (Coughlan et al. 2006). These service outputs are not the actual product but comprise accessory service that determines how the products are sold.
Once the demanded service outputs are known, we have to start segmenting the market. According to Coughlan et al. (2006), this means “segmenting the market into groups of end-users who differ not only in the products they want to buy but also in how they want to buy them.
After segmenting the market and identifying each channel’s necessary service outputs, the next step is to target (i.e., focus on) one or more segments. If multiple segments are targeted there is a chance that different marketing channels have to be built, so a main objective is to choose which segments should not be targeted. Therefore, the attractiveness of the various segments must be identified. It is clear that many factors have to be considered in evaluating segment attractiveness. According to Graham et al. (2008) and Jobber (2004), there are many check-lists of such factors. One way of grouping the issues is as follows:
• Market factors;
o Size of the segment o Segment growth rate o Segment profitability o Stage of industry evolution o Predictability
o Price elasticity and sensitivity o Bargaining power of end-consumers o Seasonality and cyclicality of demand • Economical and technological factors;
o Barriers to entry o Barriers to exit
o Bargaining power of suppliers o Level of technology utilisation o Margins available
o Investment required • Competitive factors;
o Nature of competition o Threat of new entrants o Competitive differentiation
• Political, social and environmental factors; o Political issues
o Social issues
o Environmental issues
channel partner to use at each channel level must be decided”. Thirdly, the designer has to decide how many of each type of channel member to include in the marketing channel design. In other words, the channel structure decisions are about how to cover the selected segments.
After the channel structure decisions, one can start with the last part of the channel design. This deals with splitting the workload among the different channel members. When the
channels structure decisions are made the goal of minimizing the channel flow costs should be keep in mind (Coughlan et al 2006, p.22). Each channel member will be assigned a set of channel flows. This assignment will result in a reliable performance of all necessary channel flows at minimum costs.
Finally, the degree of commitment of the channel members must be examined. The question remains how deeply committed the channel members should be to the designed marketing channel? Important is to built a strong underlying commitment between the parties, instead of a transactional relation without any commitment. A high degree of commitment means that channel members will continue to do business with other channel members in the future. A short plan will be presented of how to strengthen the relationship between the several channel members.
2.4.2. Summary and Conclusions
3.0 The Conceptual Model & Methodology
3.1. The Conceptual Model
The main goal of this report is to design a suitable marketing channel, involving poor entrepreneurs, for the small solar product market in Malindi, which meets the target end-users’ demands. Therefore, the conceptual model is focused on the design of a marketing channel, not on the implementation of the channel.
The conceptual model starts with an analysis of the current solar market in Kenya. Two places are included in the analysis, namely Malindi, a small town at the coast and Nairobi, the capital city. This research is specifically focused on small solar applications, but also other solar technologies are treated. The market research emphasises the consumer demands,
segmentation, (current) marketing channels, subsidies within the sector, and the involvement of rural entrepreneurs. As shown in the conceptual model, data and information of the current market function as an input to the marketing channel design process.
Central to the conceptual model is the channel design process, which consists of five
consecutive steps: segmentation, targeting, channel structure decisions, splitting the workload, and the degree of commitment. The model is mainly based on the marketing channel design model of Coughlan et al. (2006), however, the model is extended with two elements to meet the main goal of this research.
The first step of the marketing channel design process is the segmentation of the market by means of demanded service outputs of (potential) end-users. A marketing channel is more than just a conduit for products; it is also a means of adding value to the product marketed through it. In this sense, the marketing channel must be evaluated how the product is sold. This can be done by defining segments on the basis of demands for the outputs of the
marketing channel. The output of this step is an analysis of demanded service outputs of each identified segment.
to determine if a new (or independent) channel is needed. The output of this step is one or more target segments which will be served by the channel members.
The third step contains channel structure decisions. Three sub-steps must be determined: (1) the involvement of types of members, (2) the intensity of each type that coexist in the market, (3) the number of distinct channels. One new element is added to the channel structure
decisions. A decision must be made concerning the involvement of ‘poor’ entrepreneurs in the marketing channel. A requirement is that a support programme is designed which describes how the local entrepreneurs are involved in the channel. Moreover, it is necessary to define the capabilities of each member. The outputs of this step are a designed marketing channel, an appropriate financing mechanism, and a support programme for the local entrepreneurs.
The fourth step, spitting the workload, is to determine the responsibilities of each type of channel member. Channels members must have the necessary knowledge to add value to the end-user, or to carry out all of the activities within the channel which create the demanded service outputs. The output of this step is a channel flow template which described the flows generated by each channel member. A new decision within this step is the determination which financing mechanism will be used within the channel. Within the literature, several financing mechanism are found that can be useful for the channel members. The financial mechanisms are trade –and consumer credit, small loans, and start-up subsidies. When a channel member chooses to subsidy another party, then the organisation must give a clarification why the subsidy is necessary.
