Business model innovation in the water sector in developing countries
Introduction
Although water treatment technologies improve continuously, challenges remain in making water safer and more affordable for the low-income segments of the populations in developing countries. Low-income segments refer to the approx. 3.3 billion people living close to the poverty line of about 3975 USD per year in purchasing power parity (PPP) (World Bank, 2012). These people already pay for their water, and have annual water expenditures estimated at 20 billion USD (Rangan et al., 2009, Hammond et al., 2007). However, these people face a “poverty penalty”, as their water is less safe while they simultaneously pay a higher price for it than higher income segments (Banerjee and Morella, 2012, Mendoza, 2011, Prahalad, 2004).
In the context of fluoride and arsenic mitigation, for example, relevant water treatment technologies (such as pretreatment oxidation, absorption and ion exchange, adsorption, precipitation and coagulation and membrane methods) face difficulties in becoming more affordable for the low-income segment (see German et al., 2014, Johnston et al., 2014, Osterwalder et al., 2014 for further information). For example, the Ethiopian organization Oromo Self Help Organization (OSHO) has experimented using bone char as a low-tech adsorption solution for fluoride mitigation for a couple of years already. Until now, OSHO has installed a few community filters and promoted a few hundred household filters. This scale remains minor when compared to the 14 million Ethiopians in the rift valley affected by fluoride mitigation (Zewge and Emiru, 2011). The Nepalese organization Environment and Public Health Organization (ENPHO) has promoted Kanchan filters on a large scale, but many filters are not maintained and people do not use them continuously (e.g., Ngai et al., 2006, Thakur et al., 2010). Safe and affordable drinking water for mitigating fluoride and arsenic is therefore still available on a limited scale only.
Although reaching scale with water services has been financed primarily by philanthropic contributions, donations and government subsidies, supplementing these investments with market-based approaches has however been discussed recently (Easterly, 2006, Sachs, 2005, UNDP, 2010). Market-based approaches rely on the view that serving low-income markets is an economically viable business strategy. As such, these market-based approaches differ from grant-based poverty alleviation initiatives because the goods and services provided by the venture are not free of cost (London, 2008). Market-based approaches advocate traditional “business” based investments in which the revenues cover these costs and generate profits. Unlocking private investments allows the water sector to become more independent of donations, governmental subsidies and philanthropic efforts (London and Hart, 2010).
Market-based approaches also change the awareness of people from getting something for “free” to receiving something “valuable”. When people pay for goods and services, they become aware of their value, which, in turn, motivates them to use and maintain them more carefully. People become more self-confident and even prouder, because they can afford something themselves (Viswanathan et al., 2009).
Within the debate of market-based approaches, providers of water services have started to experiment with business model innovations. OSHO, for instance, experiments with water revenues from the community to finance the bone char material. Unfortunately, the water sector still lacks knowledge of how business model innovation could reshape water markets. Lack of knowledge means that there is little empirical evidence of the long-term impact of business models and business model innovation (see Section 2 for definitions) on the demand and supply of water (Ahlstrom, 2010, Hystra, 2011, London and Hart, 2004, Prahalad, 2004, UNDP, 2010, Yunus et al., 2010).
We attempt to close this knowledge gap by drawing on our recent empirical investigations. However, being a feature article rather than a full research paper, neither the research methods used to collect the data nor the analysis of the specific case studies of business model innovations is described in detail. In short, an ethnographic method (e.g. interviews, observations and participation in workshops and meetings) (Arnould and Mohr, 2005, Lindeman et al., 2010) and secondary data (e.g. research reports and documentation of water projects) were used. We have taken examples from A Vision for Clean Water, ENPHO, Grameen Veolia, Nakuru Defluoridation Company (NDC), OSHO, Sarvajal, Trunz, Unilever and Water Health.
Section snippets
Theoretical framework for business models and business model innovation
A business model is an overarching concept, which assembles the different components that constitute an organization as a whole (e.g. Chesbrough et al., 2006, Demil and Lecocq, 2010, Morris et al., 2005, Johnson et al., 2008, McGrath, 2010, Osterwalder and Pigneur, 2010, Zott et al., 2011). A business model is a representation of an organization's underlying core logic and strategic choices for creating and capturing value (Shafer et al., 2005).
The term “business” is not meant to imply that the
Business models for fluoride and arsenic mitigation
The mitigation of fluoride and arsenic from water sources in peri-urban and rural areas requires decentralized water treatment solutions such as household devices or micro-water treatment plants (capacity ranging from 5000 to 25,000 l per day). Such decentralized solutions have high investment and operational costs. The concentrations of arsenic and fluoride in the water source, which also affect costs, vary across the seasons, and are therefore, difficult to predict. Costs for chlorine sachets,
Business model innovations
Table 2 summarizes four main directions for business model innovations. The first innovation is a diversification within the water business model. A business diversification describes a strategy for increasing revenues by expanding into new services and/or new markets (Ansoff, 1957). Organizations invest in a promising business beyond the scope of the existing water services. Some water service providers have, for example, looked into the carbon credit market to create additional revenues (
Early suggestions on capacity building for business model innovations
Business model innovations do not happen automatically: they require certain capacity building. Our research has indicated some early suggestions for facilitating capacity building. Capacity building refers to strengthening the skills, competencies and abilities of organizations so they can succeed with their business models and business model innovation. While the term capacity building is used in the context of economic development, business research frames these skills and competencies as
Conclusions
This article provides some early insights into business model innovations for water services in low-income countries. Four business models are described for the mitigation of fluoride and arsenic: A) low-value devices given away to people living in extreme poverty, B) high-value devices sold to customers on low incomes, C) communities as beneficiaries of micro-water treatment plants and D) entrepreneurs as franchisees for selling water services. Our four business models are key examples but, of
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