KELLOGG CORPS PROPOSAL DEVELOPED FOR MAP INTERNATIONAL - ECUADOR
Analyzing Business Opportunities of Indigenous Agrarian Communities in Ecuador Eric Bates, Jehann Biggs, Jenna Carls, Elton Cheung, Bryan Lee, Jose Ramos Lobo, Yevgeniy Yaroslavskiy 9/9/2011
Abstract: The villagers of Apatug and Tambayacu appear to have the greatest potential to sustainably increase their income and standard of living by improving their farming techniques and thereby their yields. If MAP International trains farming promoters as they do health promoters then Kellogg Corps expects immediate shortand long-term benefits will be achieved. If, however, MAP and the communities would like to move beyond simple farming and begin producing refined goods for sale then they should leverage the detailed steps outlined in the proposal to identify, qualify, assess, and execute the new business.
Contents Introduction .................................................................................................................................................. 3 Purpose of this document......................................................................................................................... 3 How to use this document ........................................................................................................................ 3 Stage 1: Identify Opportunities ..................................................................................................................... 4 STEP 1: List Key Products of the Community ............................................................................................ 4 STEP 2: Find Accessible Buyers ................................................................................................................. 6 STEP 3: Understand Buyers’/Consumers’ Requirements ......................................................................... 7 Stage 2: Prioritize Opportunities................................................................................................................... 9 STEP 1. Assess Feasibility .......................................................................................................................... 9 STEP 2: Assess Financial Attractiveness .................................................................................................. 10 STEP 3: Assess Your Competitiveness ..................................................................................................... 10 STEP 4: Choose 1-3 business opportunities to analyze further .............................................................. 11 Stage 3: Plan further in-depth analysis ....................................................................................................... 12 Stage 4: Process mapping and gap analysis ................................................................................................ 13 STEP 1: Specify Inputs/Outputs .............................................................................................................. 13 STEP 2: Map Value-Added Process ......................................................................................................... 14 STEP 3: Perform Gap Analysis ................................................................................................................. 17 Stage 5: Marketing ...................................................................................................................................... 18 STEP 1: Define the Competitive Market ................................................................................................. 18 STEP 2: Identify Customers ..................................................................................................................... 19 STEP 3: Choose one or two customers to target .................................................................................... 19 STEP 4: Write a positioning statement ................................................................................................... 20 STEP 5: Product Strategy......................................................................................................................... 20 STEP 6: Pricing Strategy .......................................................................................................................... 21 STEP 7: Channel and Selling Strategy ...................................................................................................... 22 STEP 8: Promotion Strategy .................................................................................................................... 23 Stage 6: Profitability Assessment................................................................................................................ 23 Key Questions ......................................................................................................................................... 23 Performing a profitability assessment .................................................................................................... 24 Stage 7: Social Impact Assessment ............................................................................................................. 25 Environmental impact analysis ............................................................................................................... 25 Health impact analysis ............................................................................................................................ 25
Education impact analysis....................................................................................................................... 26 Stage 8: Additional considerations ............................................................................................................. 26 Examples of additional cultural considerations ...................................................................................... 26 Examples of additional economic considerations .................................................................................. 26 Stage 9: Make a decision ............................................................................................................................ 27
Introduction Purpose of this document This document is designed to help MAP International – Ecuador more effectively partner with indigenous communities in order to identify new and existing opportunities for economic development. It is positioned to help: 1) Develop business plans for new or existing sources of revenue for indigenous communities; 2) Prepare loan or grant proposals in pursuit of funding and partnerships; and, 3) Become familiar with business and market analysis as well business planning and project execution.
How to use this document 1) To become familiar with business analysis and business planning: a) Read the entire document and focus on the goals detailed in each stage. b) Collect and organize data for key themes as they are introduced. c) Start with Stage 1 and follow the steps as directed. 2) To prepare a loan or grant proposal: a) First, understand the mission and vision, as well as the specific requirements or analysis required by the sponsoring organization; b) Use the tools provided in the document to structure your analysis and to organize your message.
Stage 1: Identify Opportunities Purpose of the stage 1. To identify opportunities that the community has for capturing more value from their products or to begin evaluating adjacent activities/products that complement existing capabilities/outputs, such as: a. Join an existing business that is performing value-added activities (such as a co-operative or another local manufacturer); b. Conduct, within the village, additional steps in the value chain (that is, doing some or all of the work of current buyers/manufacturers/middlemen that purchase and process the raw output of the community); c. Develop new processed products (i.e. something other than the raw output) for existing markets; 2. To gain a high-level understanding of the resources and processes required in order to effectively and efficiently pursue these opportunities. Definitions 1. Value Chain – A sequence of production activities that transform raw inputs into final products while moving them from the point of original production to the point of final purchase by the consumer. 2. Value-Added Segment – An operation that takes raw inputs traded in one market and turns them into refined/manufactured outputs that can be sold for a greater price. 3. Value-Added Segments can be classified as: a. Production – The process of taking a raw input and transforming it into a refined product (for example, transforming processed cocoa beans into chocolate). b. Logistics – The process of aggregating, storing, transporting, and/or bringing products to market. c. Marketing and Selling - Supplying, displaying, advertising, and selling products to the final consumer.
STEP 1: List Key Products of the Community 1. Goal a. Narrow down the scope of analysis to those opportunities/products that will have the greatest impact for the community (those that can be easily initiated, activities that already take place in some manner, or has the greatest potential for profit) and that the community is best positioned to take advantage of (low investment costs, small changes in existing practice, which result in greater crop yield/profitability, etc…) Note: Starting a new business is always risky. Kellogg Corps recommends avoiding significant additional risks that may arise from substituting existing activities or products that the community currently relies upon with new and unfamiliar ones. We recommend that MAP International start by focusing on the community’s core
capabilities and ways to improve existing production or expand existing activities. It is also assumed that MAP International will work with a small subgroup of the larger community as part of its initial step to refine and expand production techniques and processes. This small subgroup will allow MAP to work with those farmers who are most dedicated to change while providing more hands-on support. Furthermore, MAP will be positioned to engage in some technique testing to determine what works best. Favorable results from these enhanced practices will help create buy-in from other villagers.
2. How to start listing key products of the community a. MAP should meet with a diverse group of residents who have agreed to work with MAP to implement enhanced techniques. i. MAP should have a working plan developed in advance of a meeting with villagers, which identifies crops or activities to focus on while providing structure and next steps. b. MAP should work with villages to understand the plan and to buy into it. c. MAP should conduct analysis in advance to determine those crops which are most profitable, sustainable, or able to be improved upon. Consider: i. Crops/products that comprise a significant portion of the community’s income; ii. Crops/products to which a significant portion of community’s land/resources are dedicated; iii. Crops/products that are grown by a large number of households; iv. Crops/products that the community knows most about; v. Crops/products that can be produced more efficiently and in greater quantity with more refined production techniques. Note: The 10-seed technique may be helpful in gathering this information if a more representative group of villages participate, but MAP should use this exercise to guide the villagers to MAP’s desired outcome. 3. Examples a. In Apatug, the most important product identified by the community was carrots. Many villagers, however, did not believe they were very knowledgeable about the crop. As a result, land was used inefficiently, yield was lower, crops were more susceptible to plagues, and profitability was reduced. Carrots represent a prime opportunity to help farmers increase their yield and profitability. Farmers have also
expressed substantial interest in farming cuy and growing cuy feed, however, their knowledge of these activities may not be refined enough to make this a viable activity at this point. Proper training may be a simple way to increase yield of carrots or to expand into the cuy market. b. In Tambayacu, the main product identified by the community is cocoa. Yet, farmers suffered much more devastation from plagues than we saw at organic farms supported by Kallari. Enhanced practices may help the villagers grow healthier trees, which should result in greater and most consistent production of cacao. This is a requirement for increasing revenue, joining a co-operative, or thinking about initiating other value-added production steps (such as manufacturing chocolate).
STEP 2: Find Accessible Buyers 1. Goal a. Find potential new buyers for both raw and value-added products within the community's reach. If the community decides to adopt a value-added activity (ex. making handicrafts or chocolate) then MAP will need to understand who will buy these goods, what market they will need to enter, and what competition already exists. 2. How to find Accessible buyers a. Gather market information through: i. the government ii. groups like Kallari iii. exploring the market with products in small volume b. Look for existing value-add businesses that the villagers can join: i. Cooperatives; ii. Other community-oriented businesses or organizations; c. Understand which additional segments of the existing value chains are accessible to the community: i. Who are the villagers currently selling to? What value does their current buyer (middleman) add (e.g. processing steps, storage and local distribution, etc.)? Can the villagers remove the middleman and do it themselves? ii. Look for local businesses (grocery stores, tourist stores) that might buy the villager’s products (consider researching in the local chambers of commerce, business registries, etc‌) iii. Meet with those who are producing further in the value chain (e.g. exporter or retail distributor-a group such as Kallari). Determine where they get their input products from, what value-added steps they conduct to increase the
cost of the good. How resource intensive are these value-added steps? What resources are needed (machinery, expertise, etc…)? d. Look into possible new products for the local market: i. What other raw products can you sell on the local market? ii. Other value-add products that the community can sell on the local market (eg. handicrafts, food products (recipes that use their crops))? Is there anything that the community produces for internal consumption that may be of interest to other local consumers? e. Develop a map of accessible value-added segments, starting with the community's products and finishing with the final buyer within the community's reach. 3. Example:
STEP 3: Understand Buyers’/Consumers’ Requirements 1. Goal a. Understand what exactly each of the identified potential buyers/consumers wants to buy and what does it take to satisfy their requirements.
2. How to Understand Buyers’/Consumers’ Requirements a. Most buyers have specific requirements that must be met in order for them to purchase any products. These requirements are more well-defined when selling to another business versus an individual consumer (eg. Kallari versus a tourist). Such requirements may include: i. Minimum product volume (larger wholesalers deal with large batches of the product) ii. Product quality (e.g., water content in the cocoa beans, disease free, hygiene) iii. Place, method, and timing of deliveries (a retailer may need a guarantee that their chocolate is delivered every Monday) iv. Processing steps that the product must go through prior to delivery v. Other specifications that MAP and the community must identify b. Contact the identified buyers directly and inquire what their requirements are and whether they are willing to deal with the community. Be prepared to answer why they should buy from the community. 3. Examples a. The Kallari cooperative requires seeds from healthy cocoa fruits (10cm in diameter x 30cm long, 35-40 seeds per cob), to be extracted from the fruits but not dried or fermented. b. Handicraft consumers buy local handicrafts that are authentic to the culture and handmade by the local community.
Stage 2: Prioritize Opportunities Purpose of the stage To select the most promising projects out of those identified in Stage 1 for further in-depth research and testing. Summary of key steps
Associated materials A prioritization worksheet (Prioritization_Worksheet.xlsx)
STEP 1. Assess Feasibility 1. Goal a. Understand how easy it is for the community to perform the necessary processing, distribution, and marketing steps in order to satisfy the buyer's requirements or reach the final consumer (does the community have the skills, the raw input supplies, the machinery, storage capability, transportation necessary to engage in the activity?) 2. Is the project feasible? a. Fill out the first 3 columns of the worksheet with the business opportunities, corresponding products and buyers as discovered in Stage 1. b. Do the villagers currently do business with the buyer? – If they do, it will be much easier for them to work with the buyer in order to satisfy its requirements for valueadded products. c. Rate difficulty of meeting buyer's requirements – Assess the level of difficulty for the community to meet the expectation and requirements of the potential buyers. Rate
it at 1 if the requirements are impossible to meet at this point. Rate it at 10 if all the requirements can be met already. 3. Examples a. See worksheet
STEP 2: Assess Financial Attractiveness 1. Goal a. Estimate how much more revenue can be earned from selling to different buyers along the value chain (is it economically sensible to engage in additional production steps?) Note: The actual cost to meet the service/product requirement is difficult to estimate without extensive research and should correlate with level of difficulty meeting the requirements that is captured in the previous column's rating. Therefore, only overall revenue is considered at this stage. Beware of underestimating the cost of additional steps as it is likely they will be higher than expected rather than lower.
2. Is the project financially attractive? a. What is the price that the buyer is willing to pay? - Estimate the expected price while selling to the potential buyers. Use comparable products in the market as an estimation. If the product is new, test the market and price by creating a small quantity of the product and sell them in local markets. b. What is the current price of this product? - Estimate the revenue the community members currently get from selling the product (or the raw inputs into the valueadded product) to their current buyers. c. Value added - Percentage of incremental revenue generated by selling to the potential buyers (i.e. [Price to new buyer - Price of current buyer] / Price of current buyer) 3. Examples a. See worksheet
STEP 3: Assess Your Competitiveness 1. Goal a. Determine if the villagers can win the buyer's business from the competitors. Why would consumers buy from the villagers versus other competitors? If the community can meet the buyer's requirements as good as or better than the competitors (eg.
reasons can be cheaper, higher quality, more reliable, more consistent supply, etc), it's more likely that the potential buyer will choose to buy from them. 2. Can we compete with existing players? a. Are the villagers able to better meet the buyer's requirements compared to their competitor(s)? i. Understand why the buyers would buy from the community instead of other competitors. The reasons can be cheaper, higher quality, more reliable, more consistent supply, etc. If the community can meet the buyer's requirements as good as or better than the competitors, it's more likely that the potential buyer will choose to buy from them. ii. Rate the ability to meet the buyer's requirements on a scale of 1 to 10. If you can meet the requirement at about the same level of your competitors, rate it at 5. If you can meet the requirements a lot better, rate it at 10. If you cannot meet the requirements at all, rate it at 1. 3. Examples a. Tambayacu's cacao farmers should be able to open the cacao fruit and deliver the raw seeds to the Kallari co-operative or another group as well as any other farmers on the market, so their competitiveness when selling to Kallari is about 5. In contrast, if they were to produce and market their own chocolate, they will lose significantly to Kallari in technical and business expertise, will have significantly fewer connections and relationships, and lack the necessary certifications. Their competitiveness against Kallari in high-end organic exported chocolate is a 1.
STEP 4: Choose 1-3 business opportunities to analyze further 1. Goal a. Narrow down the in-depth analysis to a manageable scope by selecting only the most promising opportunities from steps 1 to 3. 2. How to choose feasible projects a. Select only feasible projects based on the feasibility assessment; b. Out of the feasible projects, select a few that have the greatest value added based on the financial attractiveness assessment; c. Out of these projects, select at most 3 business opportunities based on the competitiveness assessment. 3. Examples a. See worksheet.
Stage 3: Plan further in-depth analysis Stages 4, 5, and 6 in this document describe specific tools that may be useful in the further analysis based on the types of opportunities that have been prioritized. For example, if the only feasible option for a community is to join a co-operative and if this option does not require implementing any additional value-added processes, there is no need to perform the process mapping exercise. The following table suggests when to use the tools provided in this document: Tool Stage 4: Process Mapping
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Stage 4: Gap Analysis
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Stage 5: Marketing Analysis
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Stage 6: Profitability Framework
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When to use it There is a new manufacturing or processing step Significant increase in coordination among the community members is necessary Gap analysis is necessary to be performed (process mapping is an input of gap analysis) It is helpful to do process mapping for any increase in complexity compared to what the community does now The community lacks or possibly lacks capabilities to meet buyer’s requirements The community is entering new market or introducing a new product The product is not a commodity product and the community can set its own prices The community is planning to cooperate in selling the product The market is complex, with different types of buyers and sellers Additional costs have to be incurred Change in community’s income needs to be quantified
Stage 4: Process mapping and gap analysis Purpose of the stage 1. To gain an in-depth understanding of the process needed to meet the buyer’s requirements (therefore, what would be required of the villagers). 2. To determine the costs associated with the new value-added process. The resulting figures for incremental costs will be used in the profitability analysis in Stage 6 to determine whether it is financially sensible to have the community undertake this project. Definitions 1. Value-Added Process – Several activities that take inputs traded in a market and turn them into outputs that can be sold at a market for a greater price (in other words, a process of moving the product up a value-added segment). Just as value-added segments, value-added processes can be classified as production processes, logistics processes, and marketing and selling processes. 2. Process Inputs - The products/raw materials entering the value-added process. 3. Process Outputs - The products/raw materials exiting the value-added process.
STEP 1: Specify Inputs/Outputs 1. Goal a. Catalog the Input(s) and Output(s) of the proposed value-added process. 2. Steps a. Define Input i. Refer to the raw products identified in Stage 1. b. Define Output i. Refer to the specifications of the product the prospective buyer provided. 3. Examples of inputs and outputs of manufacturing processes: a. For the cacao fruit gathering and processing process: i. Input: healthy cocoa fruits (ᶲ10cm x 30cm, 35-40 seeds per cob) ii. Output: Wet Cocoa Beans (‘baba’) b. For the cocoa bean fermenting and drying process: i. Input: Wet Cocoa Beans (‘baba’) ii. Output: dry cocoa beans ("almonds") c. For cocoa powder and oil extraction process: i. Input: dry cocoa beans ("almonds") ii. Intermediate output: Cocoa Nibs (after breaking beans and separating the shells – not a final output since cannot be sold) iii. Final outputs: Chocolate Butter / Chocolate Powder (after pressing the nibs and separating butter from powder) d. For chocolate manufacturing process:
i. Inputs: Chocolate Butter / Chocolate Powder, other additives such as milk, almonds, etc. ii. Outputs: Chocolate bars 4. Examples of inputs and outputs of logistics processes: a. A small batch of dried cocoa beans is an output of a farming community and an input for a small wholesaler. A large batch of dried cocoa beans that a small wholesaler delivers to an export company is the output for the small wholesaler and an input for an export company.
STEP 2: Map Value-Added Process 1. Goal a. Gain a detailed understanding of the value-added process and determine the resources necessary to perform the process. 2. Key Question(s) a. What are the detailed steps necessary to go from input to output (as defined above)? b. In what order are these steps performed? 3. Steps a. Understand value-added process i. What are the steps necessary to go from input to output? ii. Sample Methods 1. Study the buyer’s requirements 2. Tour a factory 3. Internet or literature search 4. Consult experts such as process engineers b. Break production process into discrete steps i. What are details behind the above steps? ii. Break the value-added process into the smallest possible steps iii. List all steps 1. Actions a. Denote actions as squares in flow chart 2. Waiting Points a. Waiting points are periods of time in which there is potential that the production process must wait before going to the next step. For example, if there is an action in which only 10 seeds at a time can be processed and you know that there is the possibility of 20 seeds being present during that step, then
only 10 seeds would be processed while 10 would have to wait. b. Denote waiting points as Triangles in flow chart 3. List decisions a. Decisions occur when there are more than one possible steps at a given point in the production process and which step is taken depends on a certain decision that the community must make. For example, your production process may have multiple outputs (cocoa butter and cocoa) and what you do after a certain step depends on which of those outputs you want to manufacture. b. Denote decisions as Diamonds in the flow chart 4. List all uncertainties. a. Uncertainties are outcomes of particular steps that can vary. For example, after a certain step in the production process, the seed could be either dry or not dry. If it is dry, you would go on to the next step, if it were not dry, you would send it to a special extra-drying step. b. Denote uncertainties as Circles in the flow chart iv. Connect and order steps 1. Connect steps in the order that they must take place. 2. If there are steps that can be skipped or need to be repeated depending on uncertainties or decisions, indicate this as well v. Include all potential final states even if they are not the desired Output 1. In some cases there may be results of the value-added process that are not the desired output(s). For example, there could be nonsellable by-products that need to be disposed of. It is important to list these outputs because they may have costs associated with them such as disposal costs. c. Decide which steps should be grouped (optional) d. Double-check that all potential scenarios are covered i. Question - Have you covered all potential things that could happen during value-added process (e.g. bad output)? ii. Be sure to include both ideal and non-ideal situations (best and worst case) 4. Example
Chocolate Production Processes Map
STEP 3: Perform Gap Analysis 1. Goal a. Identify the gap between existing capabilities/resources of the community and those required to perform desired steps in the value-added process. 2. Key Question(s) a. What are the resources necessary to complete each step? b. Which of these resources does the community already have and which would need to be obtained through purchase, rental, partnership, or other means? c. What is the cost associated with obtained resources that community does not currently own? 3. Steps a. List Resources needed for each step (even optional steps) i. Question – What are the resources necessary to complete desired steps? ii. Include: 1. Raw material(s) 2. Equipment 3. Facilities 4. Personnel 5. Time – how long does it take to complete the given step (under normal circumstances) b. Identify existing resources i. Question - How much of the required resources do you already have? ii. List existing resources that either partially or fully can be utilized in completing desired steps. c. Determine gap between existing resources and needed resources i. Identify what additional resources would be needed to sufficiently perform desired steps. ii. If there is a situation where existing resources only partially fulfill requirements for desired steps (e.g. you have capability to only dry half of the seeds, but would need to purchase more dryers to fully dry all seeds), then list this gap as well. d. Calculate costs of needed resources i. Question – What is the cost of obtaining the necessary resources to fill the gap between existing resources and those required to complete desired steps? ii. Consider the different sourcing options for each resource, such as partnering, outsourcing, purchasing, joining a co-op, etc. If there are multiple potential costs, make note of all of them for later consideration.
iii. Types of costs 1. Equipment and facilities – Equipment and facilities costs should be considered from different perspectives such as rental, purchase, timeshare, etc. 2. Personnel – A personnel gap should be translated to a monetary cost by determining the amount of money that would be required to either train existing personnel or hire additional labor 3. Time - Time gap should be translated to a monetary cost in the case when the time that would be required to complete a step would require the community to hire additional labor beyond what they could complete themselves or divert their own time from some other activity (for example, the daily laborers may not be able to earn their income from construction jobs if they have to work in the chocolate factory). iv. Note: For all costs, consider the benefits of economies of scale and increased efficiencies. For example, a particular value-add product might not seem economically viable at existing capabilities, however, if it is known that the farmers can increase their yield by 50% using simple farming techniques and this would make the product economically viable, then this should be taken into account.
Stage 5: Marketing Purpose of the stage To identify market conditions, evaluate and choose an appropriate customer target, and create a sustainable marketing plan that will give the community’s product a meaningful identity and longterm competitive advantage.
STEP 1: Define the Competitive Market 1. Key Questions • • • •
Who are the current buyers of the new product? Who is the current competition in the new product space and what are their advantages? What substitute products are available on the market and how much of a threat are they? Are there any trends that will affect the market in the future?
2. How to define the competitive market? 1. Identify buyers and their needs. How many buyers are there? What is the size of the local market in terms of quantity sold? What is the size of the regional market? Do most sellers sell only to one buyer or to many buyers? If the buyers are wholesalers, find out how they process the product and who they sell to. Identify opportunities for the community to reach these next-stage buyers directly. Look for other local markets where the community is not currently selling. Speak with several buyers to find out if they have needs that are not currently being met by the process (ie. Wholesaler A would prefer to buy 100 quintals the first day of the month so he can meet his shipping deadline.) Identify product types or services they would be willing to pay more for. 2. Identify and analyze the current competition in the new market. Evaluate the competitors’ product quality, packaging, price, method of sale, and marketing methods. Meet with other producers if possible to learn more about their processes. Identify competitors who might enter the market in the future and evaluate their potential tactics and strengths. (ie. If a community begins selling canned carrot in a local tourist market, which other communities or even larger players might copy them?) 3. Identify substitute products and evaluate the threat. (ex. Greens are the preferred cuy food, but at a certain price or lack of availability, buyers will switch to grains.) If the target customer is a tourist, a community’s cacao product may be competing not just against other cacao nibs, but also against other food souvenirs in the shop or market. 4. Identify trends that might affect the market in the future. Research government regulations that might affect the market. Find out what business practices will be necessary as the operations grow and the costs to implement. Research market trends of prices for the new product vs. the old commodity product. Is there a growing demand for organic products?
STEP 2: Identify Customers 1. Key Questions Who are all possible groups of customers for the new product and what does each type of customer value most?
STEP 3: Choose one or two customers to target 1. Key Questions
• • • •
Which customer segment will value the community’s product the most? Which customer segments are easiest to access? Which customer segments have the least competition? Which customer segments have the best long-term potential?
STEP 4: Write a positioning statement Writing a value proposition statement with the community and distribute to all producers. This will help to solidify the mission and vision of the operation and drive future decision making. Everyone working in the operation will begin to use similar language to describe the product. The value proposition statement will serve as a platform for developing a strong brand which will not only empower community producers, but also serve as a defense against new competition. The value proposition statement should be built around the primary customer (identified above). The statement should include the qualities that the customer values and the community is best able to deliver. The “Reason to Believe” will identify the unique resources the community possesses that will allow it to best deliver on the promise to the customer, including physical capabilities as well as cultural heritage. For [Primary Customer Name], [Community Product Name] is the best [Type of Product] because of its superior [Quality 1], [Quality 2], and [Quality 3]. Business-to-Business Example For Kallari Chocolate Company, Tambayacu Cacao is the best Cacao fruit because of its superior availability, quality, and commitment to preserving the kichwa lifestyle.
STEP 5: Product Strategy 1. Key Questions 1. 2. 3. 4. 5.
What is the optimal quantity to produce? Should we produce 2-3 varieties? Should we produce an organic product? What is the optimal batch size? How should the product be packaged (if direct to consumer?) Packing reinforces the brand and is used to build value in the mind of the consumer. An example is a locally made craft that has a tag explaining who made it and how the profit will support the community. Or, how the cacao co-op explicitly states that all of its cacao comes from single source, small, rain forest, organic farmers. This helps create a reason for the consumer to buy the product and to do so at a higher price.
2. How to formulate a product strategy? 1. Ask the customer what they would prefer and what variations they might be willing to pay more for. Either via interview or survey. 2. Observe competitors success and failure. 3. Do a small test of new ideas in the market if possible.
STEP 6: Pricing Strategy 1. Key Questions 1. 2. 3. 4.
How can farmers get better prices for current products? New products? How do farmers stay up-to-date on the market price? How can communities organize collectively to negotiate price? What is the best way to set price for a new product?
2. How to formulate a Pricing Strategy With current commodity products: 1. Implement a system for price-sharing within the community. Community could also share information about which sellers may use unfair weighing methods. 2. Attempt to form information sharing alliances with other communities who sell the same products. 3. Use technology to make national commodity prices more readily available to farmers. 4. Negotiate better prices based on multiple families selling identical quality products at the same time. 5. Attempt to form a long-term contract with trusted buyers. With a new product: 1. Use profitability analysis to identify break-even price. Below this price, farmers should be selling old commodity product. 2. Use any NGO or government assistance to cover sunk costs (Ie. Costs already paid and not directly related to the production quantity. Investment in improving the land or buying machinery). Do not include these costs when considering profit. (If they get help from the government or an NGO it could go towards eliminating sunk cost. ) 3. Research competitor prices for similar products. Evaluate the feasibility of selling at that price point. 4. Survey or interview potential customers on willingness to pay for the product. 5. Use the answer from Step 4 to conduct market tests. Consider Steps 1-3 in making the pricing decision, but Step 4 is the most important. If the price is too low, the customer
could perceive poor quality and the community will be leaving money on the table. If the price is too high the customer will not buy.
STEP 7: Channel and Selling Strategy 1. Key Questions 1. 2. 3. 4. 5.
Which communities are the buyers in? How much will transportation cost to reach new buyers? Are there other logistics costs in reaching new channel partners? (ie. retail shelf rental). Can the community play the market through warehousing? Who will represent communities in new markets? Also, how will the communities deliver their products to these markets?
2. How to formulate a Channel/ Selling Strategy 1. Based on the segment selected, focus one or two channels where the customer buys. 2. Set aside investment and work on strategy to decrease transportation costs to get the product to market. 3. For business to consumer products, the community needs a representative with strong sales and negotiation experience as a representative. Working within a structure where each family farm agrees to have a representative from the community negotiate with buyers on behalf of all the producers requires trust, training, regulations and monitoring, and a community compact to ensure each family farm is accurately compensated. 4. Research options for warehousing within the community. This will require space as well as best practices to ensure the product does not expire. Selling Strategy To be more successful in current markets, MAP communities must change the balance of power and find an alternative to selling at a lower market price. Once MAP understands the most important characteristics for their particular buyer, the community will have a framework to improve and be the best one to deliver those needs to the buyer. Collective bargaining will also reduce the power and control of the buyer. With fewer sellers of the same good, the buyer is not able to as aggressively negotiate or set price. Forming mutually beneficial long-term partnerships with buyers will also ensure a consistent buyer and price for the community’s products. This can be done through short-term contracts, informal and formal strategic alliances. The community should also look into negotiating with buyers based on quantity, quality, packaging, delivery terms, and payment terms.
For a new, value-added product introduction, selling will be especially important. Communities can start with small, informal markets. Test markets can include selling to neighbors, unregulated or open street markets, volunteers and others who might pass through the community. The next step would be to begin calling on independent shop owners, hostal owners, and other small businesses. As the business expands, the sales force also needs to expand and professionalize. To make the jump to selling to formal markets and large retailers, the community will need a professional sales force who can keep close contact with retailers and confidently represent the product and the community. The community will also need business and accounting resources to ensure compliance with government regulations.
STEP 8: Promotion Strategy MAP’s reputation and international scope is a strong asset in the marketing promotional strategy. For the commodity product, MAP can use newsletters, YouTube, web articles, Facebook, and blogs to build awareness about the product, the market, and how the local community operates in the market. This awareness will generate donations for MAP as well as shifting consumer awareness which will in the very long-term shift commodity market conditions for the farmers. For the value-added, specialized product, MAP can assist the community in creating promotional materials that include the product qualities as well as the community’s heritage. It’s important to include the story and photos of the community in all promotional material while stressing value proposition. Informational pamphlets and/or flyers will important as the community begins the selling process. These should be professional and uniform among sellers. It’s important to keep a customer list and reach out to customers frequently via mail, email, or phone. If going after an end-consumer customer, it’s important to send messaging around any special buying events like holidays. The best messaging will address customer needs and be as personalized as possible.
Stage 6: Profitability Assessment Purpose of the stage To determine annual profitability and time needed to recover initial investment when a community decides to increase the number of steps of the production process that they undertake.
Key Questions 1. What are the initial costs, such as equipment purchases, required to achieve this increase in the scope of the production process?
2. What are the recurring annual costs required to maintain this increase in the production process?
Performing a profitability assessment 1. Open Profitability Analysis File (Profitability Analysis Template.xlsx) 2. Fill in Worksheet Tabs a. Instructions and definitions i. Worksheet tabs are listed at bottom of excel page, tabs are listed below with instructions. ii. Be sure to maintain consistent units iii. Initial Costs - all costs needed upfront such as purchase of new equipment iv. Annual Costs - costs that will recur year after year such as equipment maintenance b. Tabs i. Revenue 1. Question – How much can you realistically sell? 2. Yearly Sales Units = the number of units that you estimate can be sold by the community (or group of farmers) per year 3. Be sure to take into account both demand for the output and the community’s production capacity ii. Cost - Raw Materials Worksheet 1. Raw materials can include other materials that need to be purchased. 2. For example, one of the new steps in the production process may require an additional input such as oil or sugar. iii. Cost - Labor Worksheet 1. All labor that needs to be hired either initially or on a recurring basis 2. Each different type of labor, if there are different pay rates for different types of labor, should be listed on a new line iv. Cost - Equipment Worksheet 1. Be sure to include equipment maintenance as a recurring cost v. Cost – Marketing 1. Marketing costs are those associated with creating demand for the product and should be established in Stage 5 vi. Cost - Personnel & Misc Wksheet 1. Personnel costs are those associated with training or otherwise supporting existing labor force (including the farmers themselves). Do not confuse this with the labor worksheet which is used to account for hired labor
2. Include here all additional costs that are not accounted for in other worksheets 3. Review Cost - Summary Tab a. Gives an idea of the overall costs of undertaking this project b. No action needs to be taken here other than to scan this and make sure that it looks reasonable given previous experience or benchmarks 4. Read Output from Summary Tab a. Annual Profit – How much profit can be expected on a yearly basis b. Annual Profit Margin – How much profit is made as compared to the yearly cost (as a percentage) c. Years to Breakeven –Estimate of the number of years before the initial investment (upfront costs) will be recovered through annual profit
Stage 7: Social Impact Assessment Purpose of the stage To identify both positive and negative impacts on the community that may occur as a result of executing the project. Significant non-financial benefits may be a selling point for some organizations (for example, giving people an alternative to exploiting rare resources may attract organizations that protect these resources).
Environmental impact analysis 1. How does the project affect : a. Natural resource use (e.g. would this prevent the community members from cutting down the rainforest?) b. Contamination/hazardous waste risks (pesticides)
Health impact analysis 1. How does the project affect: a. Working and living environment of the community from the health perspective (more or fewer days in the field, more or less manual labor) b. Healthcare alternatives available to the community
Economic independence/poverty cycle analysis 1. How does this project affect the community's ability to break the poverty cycle and start on the path of sustainable economic development leading to financial independence? Is the project sustainable? Can it be replicated to other households in the community?
Education impact analysis 1. How does this project affect community's exposure to valuable knowledge? Are successes and strategies shared? Do other villagers benefit from the work others put forth? Is there broad interest to teach, learn and implement proven techniques?
Stage 8: Additional considerations Purpose of the stage Consider all important aspects that may affect the success of this project that were not considered in any of the prior stages.
Examples of additional cultural considerations 1. Does the community have a sense of ownership that may prevent it from business alliances or form joining a cooperative? 2. Does the community have particular preferences of one product over another rooted in culture or tradition? 3. Does the community have any cultural or traditional predisposition for or against certain types of activities (e.g. trade or manufacturing)?
Examples of additional economic considerations 1. 2. 3. 4. 5.
Loss of existing revenue from other activities Loss of relationships with current buyers (they may become competitors) Long-term demand trends Economic environment Changes to the demand/supply balance if the increase in supply by the community affects a sufficient market volume
Stage 9: Make a decision Previous stages should provide you with sufficient information to make a decision. Before making financial commitments, make sure that: 1. 2. 3. 4. 5.
The project is one of the better alternatives you were able to identify The project is feasible and can be replicated across the community The community can successfully compete on the new market You have a clear understanding of what it takes to put the project together The project is more profitable than the current economic activity of the community that will be substituted 6. The community can differentiate its product from others in the market, it is able to gain the attention of new buyers, and they are able to work together to promote key messages about the product. 7. Social impact and other considerations of the project are taken into account