November 06, 2006

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Hindustan Lever at the Base of the Pyramid: Growth for the 21st Century

About Hindustan Lever Limited

Hindustan Lever Limited began operating in India in 1888 with the distribution of its Made in England Sunlight detergent. In 1931, when India was still a British colony, Hindustan Vanaspati Limited was formed
Published by GlobaLens, a division of the William Davidson Institute at the University of Michigan. Research Assistant Maulin Vakil and Professor Ted London of the University of Michigan developed this case. They thank Vijay Sharma and Rohithari Rajan of Hindustan Lever for their assistance. 2008, Ted London.

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: Permissions@GlobaLens.com or 734-615-9553.

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In fact, since 1999 revenues at HLL had remained nearly constant, an outcome stockholders had not welcomed. With this lack of growth, increasing attention was directed to the companys Millennium Plan an ambitious blueprint outlining the companys growth strategies for the 21st century. The Millennium Plan was a part of the companys renewed emphasis on business focus and operational efficiencies. Additionally, a core aspect of the Plan was to identify and nurture businesses of the future. Over 150 new businesses were proposed before the list was narrowed down to nine. These included a foray into drinking water, a plan for network-based marketing (along the lines of Amway) and an entry into retailing herbal therapy products and services through a chain of therapy centers. Perhaps the most interesting, though, was an initiative called Shakti, which aimed to extend the reach of HLLs products to the 742 million rural consumers in 637,000 villages at the base of the economic pyramid, a market not well-served by HLL at the time.

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On August 30, 2004, Hindustan Lever Limiteds (HLL) share price on the Bombay Stock Exchange touched Rs.100.5 (US$ 2.28) - a new low for one of the largest Indian companies by market value (see Exhibit 1). In its Q2 2004 results, HLLs bottom line had fallen by 43% due to price pressures in its mainstay detergents business. Procter & Gamble, its long-time nemesis, had unveiled a series of price cuts on its leading detergent brands, Ariel and Tide, forcing HLL to respond. As a consequence, operating profit margins, which had peaked in 2002 at 19.6%, declined to 14%.2 Furthermore, although the mergers, restructuring, and operating changes that HLL underwent in the 1990s had helped profits grow through 2003, the companys top-line growth had remained more or less stagnant over the past few years, causing some analysts to re-align their portfolios.

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Rural demand for, and consumption of, consumer products is set to explode. The challenge for most companies is to be able to offer appropriate products in an affordable way in relatively remote locations. It is our view that India will soon see an inflexion point in rural consumption.1 Mr. K.B. Dadiseth, Hindustan Lever Limited Chairman

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as a 100% subsidiary of Unilever in India. It primarily sold soaps, detergents, and other household products to a select group of affluent consumers, such as British government employees and the Indian elite. In November 1956, the company merged the groups companies Lever Brothers India Limited and United Traders Limited to form Hindustan Lever Limited. HLL offered 10% of its equity to the Indian public, and was the first the first international company in India to do so. Unilever, which gradually divested its stake in HLL, now holds 51.55% equity in the company. The rest of the shares are distributed among about 380,0003 individual shareholders and financial institutions. Until the 1960s, the company remained a medium-sized player, choosing to market high-end brands to a select class of Indian consumers. However, it gradually began to relinquish control to local managers, and in 1961, P.L. Tandon took over as its first Indian Chairman. In the years that followed, HLL continued to launch new brands in the FMCG (fast-moving consumer goods) segment, including the highly successful Lifebuoy and Liril bath soaps, Surf detergent powder, Fair and Lovely Fairness cream, and Close-Up toothpaste. The company also began a backward integration plan, setting up a subsidiary for chemicals (Hind Lever Chemicals), and acquiring Ponds India, Lipton India, and Brooke Bond India. In 1993, HLL completed the acquisition of Tata Oil Mills Company (TOMCO), its long-time rival. On January 1, 1996, the groups companies merged to create Indias single largest foods and beverages company and one of the biggest publicly traded companies in India. Today, the company is a $2.5 billion juggernaut in the Indian market, with a commanding presence across several product segments. HLL is comprised of two operating divisions: Home and Personal Products (HPC), consisting of its detergents, soaps, and personal care lines of products; and Foods, consisting of staple foods, bakery, confectionary, beverages, and frozen foods. In past years, leading national and international publications like The Economic Times, Business World, Far Eastern Economic Review, and Business Today have frequently rated HLL as one of Indias best-managed and most admired companies, and commended its achievements at enhancing shareholder value. HLL currently employs 42,000 employees, including about 1,425 managers,4 with a corporate objective to meet everyday needs of people everywhere - to anticipate the aspirations of our consumers and customers, and to respond creatively and competitively with branded products and services which raise the quality of life.5

Growth at the Top: Strategy Rooted in Consumer Marketing and Distribution

As suggested by the corporate objective, Hindustan Lever Limiteds business focus is directed at better serving consumers, and its reputation as a leading consumer marketer in India is unparalleled. HLL brought a scientific, consumer-oriented approach and competitive acumen to its business in a manner previously unknown in the country. Early on, it came to be known across India for its products that had slowly but steadily appeared on virtually every shop shelf across urban and semi-urban India. In the 1970s, HLL emerged as a prominent advertiser on the radio, in magazines and daily press, and on billboards across the country, and it spent as much as 10% of its annual turnover on advertising and media. With the advent of television in India in the early 1980s, HLL quickly became a powerful force to be reckoned with. Its brands quickly captured the imagination of the Indian public with the clever use of characters such as the Liril waterfall girl, Lalita-ji of Surf detergent, and leading stars from Bollywood (Indias film industry) who endorsed Lux bath soap. The companys philosophy as a maker of high quality, mostly premium-priced products continued to influence HLLs marketing strategy.
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HLL also built a strong national distribution system, which became a source of competitive advantage for the company. As its rivals tried to play catch-up, HLL continued to invest heavily in maintaining its advantage, expanding first from urban to semi-urban markets, then gradually to rural markets, in a bid to stay ahead. By focusing on efficiencies, reach, and visibility, HLL was able to carve out a vast network of retail outlets that were connected seamlessly by the countrys most sophisticated distribution chain. By 2000, the company had the largest national distribution network of its kind in the country, with 7,000 stockists helping directly cover 1 million outlets. The total coverage was far higher, servicing 1.5 million outlets in 3,700 towns and cities through the urban network, and 3.6 million outlets through the rural network. These retailers were loyal because a large portion of their revenues were typically comprised of Unilever products. Using this distribution chain, HLL could efficiently provide its products to consumers in a convenient fashion, providing the company with an advantage that was the envy of its competitors. Yet, even HLLs large network was insufficient to cater to a majority of Indian people who lived in remote villages, where supplying and selling every-day products could not be done using the companys existing distribution methods. Indeed, HLLs vaunted distribution network failed to serve more than 500,000 rural villages, meaning the company was ignoring over 500 million potential customers (nearly half of the countrys population) located at the base of the economic pyramid.6

A Challenger from the Base: The Growth of Nirma

Nirma also maintained a low-cost distribution structure, unlike Hindustan Lever Limited, which had created a vast network of intermediaries. Initially, Karsan-bhai himself supplied the product to the doorstep of his customers, making sales visits on his bicycle. Gradually, he expanded his reach using wholesale distributors who ensured his products reached the farthest corners of the country without requiring him to invest in a sales organization. So successful was his product that wholesale traders could be seen standing outside his factory waiting patiently to purchase their supply of Nirma from Karsan-bhai.
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Nirma was created around a simple premise: that of putting a convenient and affordable product within reach of millions of households that could not afford expensive detergents. To be able to do this profitably, Karsan-bhai made a series of innovative business decisions that maintained a low cost structure. For example, he leveraged the home-grown nature of his business to gain tax and duty concessions from the government of India, which was actively promoting the small-scale industrial sector at that time. This led to a significant cost advantage in manufacturing for Nirma, including exemption from the minimum wage laws that were applicable to other companies operating in India. Also, the relatively simple and labor-intensive production process did not require electricity, and packaging was done by hand, further minimizing operating costs.

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In 1969, a Gujarati entrepreneur, Karsan-bhai7 Patel, set up his first detergent-making unit in the back yard of his home in Ahmedabad. Being a chemist, he devised a way to synthesize washing powder in a plastic bucket without electricity, using soda ash as the chief ingredient. He would prepare the dry mix detergent powder, pack it by hand in polythene bags, and set off on his bicycle to sell the packets door-to-door. He named the product Nirma, after his daughter Nirupama (whose image was to become the brands visual identity of the dancing girl). Every packet of Nirma that Karsan-bhai Patel sold to his consumers came with a money-back guarantee. Nirma was priced at Rs.3 per kilogram, when competing products like Surf sold for as much as Rs.15. As sales grew, so did Nirmas scale of operations. Even with its fast growth, the firm was able to maintain its business model based on broad, cost-effective distribution and low operating costs.

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Furthermore, Nirmas advertising adopted the value-for-money philosophy. While HLL spent around 10% of its sales on advertising and promotions, Nirmas rarely exceeded 2% of sales. Its advertising jingle stressed the product attributes and also saluted the savvy and budget-conscious Indian housewife. The company was also highly creative in maximizing the impact of its advertising. For instance, according to Karsan-bhai: In the early 1980s, when television began to make inroads into rural and urban India, Nirma would be one of the advertisers for the Sunday evening Hindi feature film (the most widely watched TV program). But the positioning of the TV commercial was such that a majority of the populace thought the film was being presented by Nirma! Since the modest beginnings from Karshan-bhais home in 1969, Nirma has grown rapidly. The flagship company Nirma Consumer Care achieved a turnover of Rs.25,830 million ($587 million) and a profit of Rs.2,470 million8 ($56 million) in FY2004, and it reaches across the Indian subcontinent, serving 300 million consumers through a channel of one million retail outlets and 400 distributors.

HLL Ignores the New Challenger

Hindustan Lever Limited appeared to have the most to lose with the success of Nirma. HLL had almost single-handedly created the category known as Non-Soapy Detergents (NSDs) with the launch of Surf in 1959. Traditionally, Indian households used soap bars to wash clothes (or fabric-wash), making it a time-consuming and physically strenuous chore. At a time when washing machines were non-existent in India, newly introduced detergent powders provided convenience and high-quality fabric care, and were, consequently, premium products - with pricing to match.

To HLLs surprise, by 1982 Nirma had steered itself into a dominating position in the Western India detergent market, and by 1985 it was the highest-selling detergent in India, with a whopping 58% of the market. By this time, Nirmas growth had begun to have an impact on HLLs market share. From its commanding market position in the early 1970s, HLL was left with a depleted market share of only 8.4%. Nirmas erosive impact on sales and market share was now quite obvious.

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Through the early 1970s, Nirmas success did not affect HLL. By 1977, however, Nirma had grown to be the number 2 brand with 12% market share, compared to Surfs 33%. HLL conducted consumer studies to understand the emerging competition from Nirma and other small-scale sector9 brands, and the view was that these products were not as effective in washing clothes as NSDs. Besides, due to their soda-based formulation (and thus high alkalinity) they were harmful to the skin. The study seemed to reassure HLL that its superior quality product would prevail in the long run.

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Surf used product demonstrations with a bucket to induce housewives to replace soap-scrubbing Nirma with a convenient detergent powder. Also, Surf used petrochemical-based raw materials (essential to qualify as NSD) in fabric-wash products instead of soda ash, which had been the traditional ingredient. While Surf soon became popular, the price tag meant that its appeal was largely restricted to the urban, middle- to upper-middle class households.

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HLLs Early Responses

In the late 1970s, Hindustan Lever Limited initiated a nationwide market research effort that provided the company with several key consumer insights into its competition with Nirma. Managers at HLL began to recognize the new lower-income segment in the marketplace. They also saw the need to fend off the bottomup brands such as Nirma with a new brand distinct from Surf, which targeted a more premium segment. This market research also led HLL to understand that consumers who purchased Nirma had daily wage income, thus leading to their preference for products that required not only value but also lower perunit price. In an effort to close the market divide between Nirma and its own product offerings, HLL fired its first salvo with the test launches of Ala and Rinso (see Exhibit 2). These brands from Unilevers successful international product lineup were priced at 35% less than Surf with an intention of filling the gap in the market. This attempt at merely using international brand names in the Indian market failed, however, as the products could not match Nirma in value, even though they were priced significantly below Surf. For instance, when Nirma was priced at Rs.6 per kg, the new offerings were available at Rs.12 per kg, and Surf was at about Rs.15 per kg. Hindustan Lever Limited made a second attempt, this time by reviving an old, but popular, brand Sunlight. By the early 1980s, Nirma was attempting to gain national foothold by expanding its presence from the Western states into Northern India. Sunlight, which was popular in its soap-bar form, was launched by HLL in washing-powder form in response to this new move by the challenger. HLL made some notable exceptions for Sunlight. For example, Sunlight was packed in plastic bags instead of standard (but expensive) glossy cardboard boxes to keep prices low, a move that had hitherto been taboo due to the MNCs norms on product presentation and packaging. HLL experienced success for the first time in this battle, managing to stymie Nirmas growth in the Northern markets, albeit temporarily. However, Sunlights success in Northern India attracted regional small-scale sector brands like Fena and Ghadi, which imitated Nirmas low-cost, low-price strategy. Indeed, Nirmas success had inspired several local start-up businesses that also challenged HLLs market share. HLLs approach was looking increasingly inadequate in the changing marketplace. Nirma and other small-scale players provided much greater value than even Sunlight did, and they eventually nibbled away almost all of HLLs gains in North Indian markets.

A New Approach at HLL

In 1986, Hindustan Lever Limited started a company-wide initiative to understand and strategically counter Nirma.10 The initiative was a result of a growing realization of the need to adopt a more comprehensive approach to the problem. Rather than modifying an existing product, the companys scientists began working to develop new ways to create detergents by using locally available raw materials and low-cost manufacturing technologies. This development effort was combined with a large-scale marketing campaign to win back Indian detergent consumers. HLL senior managers had identified three strategic priorities for the initiative, in order to protect Surf in the premium-end of the market and to challenge Nirma in the lower income segment:

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To emphasize Surfs superior quality: This was accomplished through a new advertising campaign using Lalita-ji, a housewife who reminded consumers that buying Surf makes better sense due to its better cleaning quality and price-value equation. The campaign was an instant success, and Lalita-ji became a household name.

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To create dissonance toward Nirma by highlighting its skin-damaging effects: A comparative advertising campaign was created to raise awareness of the harm caused to hands after the use of low-quality detergents as a result of the extensive use of soda-ash. To directly attack Nirma in the bottom-end segment with a new product: This led to the creation of Wheel detergent powder. At last, HLL believed that it had created a suitable product with which it could potentially beat Nirma. Wheel offered superior cleaning and attractive pricing of Rs.9 per kg compared to Nirmas Rs.7. The product was priced to induce Nirma and other small-scale sector brand users to try it. By 1987, Wheel was available nationally, and HLL backed it with a large advertising and trade budget.

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What made Wheel a truly unique story at HLL was that for the first time, manufacturing was outsourced to a low-cost subsidiary that benefited from small-scale sector concessions. Wheel also followed a lower distribution cost structure. For Wheel, HLL eliminated the Carrying and Forwarding (C&F) agents from the distribution chain by shipping directly to major distributors, thereby reducing costs. Wheel also broke another long-held tradition at HLL by using wholesalers who purchased Wheel in large quantities from the company, much like what Nirma did. Furthermore, Wheel marked the first time that HLL reduced its profit margins per unit in its battle with Nirma. However, while margins were lower, return on capital employed was very impressive, suggesting a different metric for evaluation for base-of-the-pyramid ventures (see Table 1). The Wheel brand team was also unique in that it was lean and staffed with general managers rather than functional specialists. Together, this helped keep overhead expenses low and improve bottom-line results.

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Table 1
Sales ($m) 150 100 180 Gross Margin % 18 18 25 6

Detergent Brands Profitability, 1999

ROCE% 121 93 22 Economic Prot ($m) Na 4 7

Nirma HLL Wheel

Wheel denoted a significant shift in mindset for the management team at HLL, which had relied on premium-brand image and high margins to market within India. The Indian business press hailed HLLs long-overdue acknowledgement of a new market segment that it had largely missed for so long. A further factor aiding HLL was that Nirma had grown too large to enjoy the tax benefits of being a small-scale sector company. Persistent lobbying with the government of India by the Indian Soaps and Toiletries Association resulted in the removal of some tax benefits and ensured a more level playing field.

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HLL Premium Wash

Source: The Fortune at the Bottom of the Pyramid. Prahalad & Hart, 2002; Hindustan Lever Re-invents the Wheel. Ellison, Moller & Rodriguez, IESEUniversity of Navarra, 2003.

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Wheel offered consumers the convenience of a bucket wash without causing harm to skin or to clothes, and it was available at an affordable price, which met the low unit-price requirement of the target market segment. The advertising was done in an over-the-top, Bollywood-style melodramatic tone, with a housewife saving the day for her husband by washing his clothes sparkling clean and thus earning his admiration.

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HLL had finally successfully responded to Nirma in this long war for market share, with Wheel eventually emerging in 2003 as the largest fabric wash brand in India, with a 16% market share of the total laundrywash category.11

A New Challenge: A Slowdown in Growth at HLL

After growing its revenues at a fast pace throughout the 1990s, the company seemingly stopped growing in 1999. From 1993-1999, sales had surged five-fold to Rs.101.42 billion ($2.305 billion). Since 1999, however, sales had stagnated, and the company closed fiscal year 2004 with Rs.102.43 billion12 ($2.327 billion) in revenues. Hindustan Lever Limiteds series of mergers had added market clout and created opportunities for efficiencies, but had also made it difficult to maintain growth momentum. HLLs FMCG market had also borne the brunt of the Indian recession of 1997-99, as even higher-end consumers began choosing low-priced products over the premium brands being touted by HLL. Additionally, at this time new players such as Ghadi (detergents), Chik (personal care), and Nyle (shampoos) were challenging HLL in prized segments through value-for-money, marketing, and packaging innovation. Analysts highlighted some obvious areas of concern at HLL: a high margin structure, high overheads relative to those of its local competitors, and a lack of genuine product and business model innovation.13

HLLs Millennium Plan

A New Ventures team, under Executive Director Dalip Sehgal, was handed the task of selecting and implementing growth opportunities for HLL in the new millennium. Among those that were selected was an idea for reaching rural India, a market that HLL had only touched with the introduction of Wheel. The centerpiece of this initiative was a fundamentally different rural distribution system based on Self-Help Groups (SHGs).15 A cross-functional team consisting of managers from finance, technology, and marketing, and headed by a business manager was set up to get the idea off the ground. In the first year, much of the focus was on conceptualizing the entry strategy and testing it out in the market. If the plan met the action standards, it would be scaled up. Thus, with a seed capital of Rs.100 million ($2.3 million)16 and a new management structure, Shakti was born.17

Rural India: Challenges and Opportunities

Roughly three quarters of Indias population lives in rural villages. Indias nearly 639,000 villages comprise over 128 million households and have a population of 742 million,18 which is nearly three times the population of urban India (285 million). The Indian rural population is substantially poorer, with a per capita annual income below Rs.10,00 ($227),19 compared to the national average of approximately Rs.21,000 ($477).20 Exhibit 3 shows the dispersion of rural income by household.
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On April 25, 2000, at the annual shareholders meeting, then-Chairman K.B. Dadiseth (who has since retired) unveiled the much-talked-about Millennium Plan - a strategic blueprint for the company that had been prepared in collaboration with external consultants. Ideas for growth were extensively debated, and the team of consultants and company managers identified 142 ideas of which nine were short-listed, based on Hindustan Lever Limiteds existing capabilities or its ability to build them over time.14

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Due to the sheer size of the population, rural India is potentially a lucrative market for any consumer products company. In fact, its consumption has also been growing steadily since the 1980s and is now bigger than the urban market for both FMCGs (53% share of the total market) and consumer durables (consumer products such as electronics, automobiles, etc. that are purchased infrequently, 59%). More than half of Hindustan Lever Limiteds products were bought by rural consumers. Yet when HLL considered that its products were available in less than 15% of the villages, the company recognized the vast untapped potential of rural India.

A Need for a New System

With the success of Wheel, Hindustan Lever Limited had made efforts to further expand into rural markets. For instance, the company had developed Project Streamline, a large-scale effort to increase its distribution in inaccessible rural areas by adding a new component to its distribution network, known as star sellers. Star sellers were wholesale merchants who purchased HLL products from the rural distributor and supplied retailers in smaller villages using low-cost transport such as bicycles or rickshaws. With Project Streamline, HLL managed to add 6,000 new star sellers who helped expand HLLs reach to 50,000 new villages.21 However, these numbers paled in contrast to 500,000 untapped villages that were either too small or too far flung to be reached even by star sellers. Overall, these efforts were limited in their ability to solve the entire problem. They emphasized enhancing HLLs reach by using a familiar partner. Indeed these efforts focused on getting products into the hands of interested retailers who previously were outside of HLLs distribution network. In both Streamline and Wheel, for example, HLL was selling to a customer experienced in, or comfortable with, acting as an intermediary between the top and base of the pyramid. In addition, these efforts did not address the need to create sustained local demand in the marketplace via locally based advertising and promotion, nor did they generate substantial investments in consumer education directed at promoting behavior change. In the words of Dalip Sehgal, Executive Director, New Ventures: HLL was realizing that a lot of the previous initiatives had worked on the reach parameter, or the communication initiatives had worked on the communication parameter. But there wasnt a comprehensive business model that looked at getting all three (reach, communication, and sustained demand) together. Thats how Shakti was conceptualized. While the idea of expanding presence in rural markets was not new, HLL was for the first time taking a proactive and holistic approach to reaching out to the most rural of consumers in India. The company had always been a pioneer in the way it expanded into new consumer segments, but this was an extremely ambitious initiative even for the experienced marketers at HLL. Indeed Shakti (which means strength or empowerment in many of the local Indian languages) was different from other rural expansion efforts by HLL, as well as those of other consumer product companies in India, for two key reasons. First it was designed to overcome most, if not all, the hurdles encountered in prior rural forays while still maintaining channel control and cost-efficiencies. Second, the Shakti mindset provided the company an opportunity to participate in social and economic development of rural areas, a significant shift in the selling-only model that previously dictated MNC activities in rural markets. The initiative was explicitly looking to generate value both for the company and for the rural communities it was trying to serve.

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How Shakti Works

The team at Hindustan Lever Limited manages three separate initiatives under the Shakti umbrella: 1) the Shakti Entrepreneur Program, 2) the Shakti Vani Program, and 3) the I-Shakti community portal. Shakti leverages the network of self-help groups that had been created by the federal and state governments across villages in India. These self-help groups were development initiatives targeted at enhancing local savings and industry (such as handicrafts and other hand-made products), and at creating a stronger social system within rural villages. A typical self-help group consists of 8-20 members, and its activities include learning new vocational skills, airing grievances and resolving local disputes. Moreover, self-help groups act as savings cooperatives. Regular contributions by the members are invested in a joint account and then loaned internally to members according to their needs. Based on savings, these groups also can gain access to micro-credit institutions, many of them supported by the government or local or international non-profits. However, a continuing gap in both the rural economy and the development of self-help groups was the limited number of opportunities to use micro-credit in developing new ventures. Most micro-enterprises usually consisted of small ventures such as basket-weaving, local handicraft, and agriculture projects that produced outputs that were sold within the same community. The managers at HLL recognized the opportunity to create a new type of profitable venture by applying micro-finance to building a local business that had long-term profit and growth potential for the entrepreneur. Villages served by Shakti are carefully chosen by the HLL team based on a number of criteria, chief among them are the absence of HLL products and a population of less than 5,000. The HLL Shakti team then typically approaches local self-help groups through contact with the NGOs that work with them. Although each of the three Shakti initiatives relies on self-help groups, they perform a distinctly different function for the community and for the company.
The Gender Issue in India The status of women in contemporary India is reflected in the state of their health, education, employment, and life in society. It is a paradox of modern India that women wield power and hold positions at the highest levels of administration, government, and business, yet large groups of women are among the most underprivileged. The clearest indicator of discrimination is the skewed sex ratio: 933 females* for 1000 males in India, lower than the global average of 990. Moreover, the average Indian female has only 1.2 years of schooling, while the Indian male spends 3.5 years in school. More than 50% of girls drop out of school by the time they are in middle school.** Women in rural India are primarily involved in household chores such as cooking and looking after children. The womans status as a wife does not give her control over the family income, which has remained with the husband, who also makes most decisions for the family. In the vast majority of cases, the traditional view of a maledominated society continues to prevail. Even today, there is considerable resistance to changing the stereotypical roles, and women find it difficult to assert themselves in a male-dominated rural society. By providing enterprise opportunities to rural women, Shakti can enhance its societal impact. As Rohithari Rajan of HLL puts it, when we looked at Shakti, we were clear that while it was going to help HLL, it was also going to help the people that we were going to partner with. In Shakti, there is a very strong development aspect since we work specifically with underprivileged rural women. And that makes a big difference. Additionally, as seen in the well-studied case of Grameen Bank in Bangladesh and in micro-finance projects elsewhere, poor women have an excellent track record when it comes to commitment, repayments, and performance.
*Census of India, 2001 **Womens education in India, Vtoria Velkoff International Programs Centre

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Shakti Entrepreneur Program The longest running Shakti initiative is the Entrepreneurship Program, which began in 2001 with a pilot project in the south-central Indian state of Andhra Pradesh. The Shakti Entrepreneur Program seeks to expand HLL reach by involving the village communities, specifically rural women, into its business venture. By focusing on women, Shakti can play a role in shaping the gender equation within the community and increasing awareness of key social and development issues (see The Gender Issue in India on previous page). Leveraging the participants of existing self-help groups, HLL invites one woman (or sometimes more, depending on the size of the area to be served) from a target village to become a Shakti entrepreneur or Shakti-ammas22 to promote and distribute HLL products within of a group of 4-6 neighboring communities. Initially, Shakti entrepreneurs are expected to invest around Rs.10,000 ($227, which is approximately equal to the annual per capita income in rural India) to buy inventory of HLL products. These funds are usually made available via micro-credit through self-help groups, since prospective entrepreneurs may not have access to traditional means of credit. Sometimes, though, bank loans may be obtained against collateral such as cattle and livestock. HLL products such as bath soap, laundry detergent, oral and skin care products, hair oil and shampoos, flour, tea, and salt are provided in affordable daily-use sizes (e.g. sachets), each costing between Rs.2 to Rs.18 ($0.04 to $0.38). The entrepreneur is supported by an HLL team member, the Rural Sales Promoter (RSP), who trains and guides the Shakti-amma in the skills required to be a distributor. The training is mostly on-the-job and covers selling skills, order-taking, book-keeping, knowledge of HLL brands, and customer segmentation. Shakti entrepreneurs are encouraged to sell to the village community as well as to small local retailers. They sell to consumers at the retail prices and to retailers at the trade prices, earning 11-13% on consumer sales and 3% on trade sales. Monthly turnover is expected to average around Rs.10,000 ($227) although in the case of mature entrepreneurs it is known to reach over Rs.25,000 ($568). This leaves the entrepreneur with a net profit (after deducting expenses and loan repayments) of Rs.700-1,200 ($16-27), which is equal to or exceeds the average monthly income in rural India. Moreover, for most Shakti entrepreneurs these business activities are designed to be supplemental in nature, leaving sufficient time for existing local livelihood activities. The entrepreneur is expected to follow a fixed route, making stops at homes and shops along the way. The mornings are usually spent taking orders. The Shakti entrepreneur is then expected to diligently record these sales in a register provided by HLL. Some of the women are literate, while others rely on children and family members to help with the order-booking tasks. Entrepreneurs are known to apply ingenuity in overcoming the infrastructural and promotional challenges faced in rural India. For example, an entrepreneur in the Nalgonda district was able to expand her market reach by contracting the back-hauling services of an auto-rickshaw that plied between neighboring villages. Others are known to hire the help of relatives and friends in surrounding villages to act as salespersons. The RSP also assist the entrepreneur in creating sales promotions and special events. In the past, Shakti-ammas have organized an Arogya (health) day,23 which brings in a doctor to disseminate information about health and hygiene, and a Shakti day, which creates a village fair atmosphere with games, songs, and product giveaways. The goal of these promotional efforts is to create broader local awareness of the health benefits of specific practices, such as hand-washing and tooth-brushing.

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Shakti Vani Program The second initiative in HLLs Shakti is a communicationled program, called Shakti Vani (Sanskrit for speech). This is a socially-led communication effort which involves a Vani (speaker), selected to spread information and awareness on important issues such as health, hygiene, sanitation, and personal care. The objective of this program is to be an advertising medium for both health challenges and company solutions within the rural markets. Hence, Shakti Vani helps create awareness of not only the problems but also how HLLs products offer ways to overcome them.

I-Shakti Kiosk

The kiosk can also be used as a computer-based classroom, as it has modules to cover education from grades one to seven. Another important feature is the ability to communicate with local experts such as doctors and agriculture technologists and to ask specific questions. For villages with poor road connections, I-Shakti provides a substantial benefit compared to having to travel to a town to obtain information on local weather forecasts, appropriate use of fertilizers, price of agriculture outputs, and medical issues. While the I-Shakti program was designed primarily as a resource for the local community, the company can also use it as a medium to convey its brand messages. Although the advice provided is brand-neutral, the program has in-built button options through which users can find out more about HLL products. In an area which was not conducive to traditional advertising methods, these community-based portals provide a useful marketing tool. By building brand messages into the software package, HLLs I-Shakti portal helps the company market to areas with limited media coverage and low literacy. To scale up the program to other regions, the cost was estimated to be approximately Rs.29,000 (US$648) per portal.

Shakti Today
Since its inception in 2001, Shakti has expanded its network to cover 80,000 villages in 12 of Indias 28 states through 25,000 Shakti entrepreneurs. What makes the project especially intriguing is that it offers a model for generating economic benefits for the company while also producing social benefits for rural communities (see The Social Impact of Shakti on the following page).
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Shakti Community Portal A recent addition to Shakti is the I-Shakti community-based portal, an interactive computer-basd module with inputs on health, beauty, agriculture, animal husbandry, etc. I-Shakti provides internet connectivity, relevant information, and education services to rural areas. Currently, the project has been rolled-out in Andhra Pradesh in cooperation with the local government, which has set up computer kiosks across the state. The portal has modules covering important information such as health, sanitation, agriculture, and animal husbandry, and is linked to the internet via a once-a-day dial up connection.

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The Vani is appointed from the self-help group and, after a training program, travels from village to village spreading the companys message at gatherings such as village events, local schools assemblies, and SHG meetings. Games and interactive quizzes are used to generate audience interest in the issues, and they end up showcasing HLL products such as soap and toothpaste. The Vani earns a fixed salary per day, based on the route and villages covered. The program does not generate any revenues for HLL. Rather, it is designed to be a cost-effective approach to generating behavioral change and promoting the companys existing brands. The program had covered 10,000 villages in 2004 and targeted 50,000 more in 2005. It was expected to cost Rs.9,000-11,000 ($200 - $244) per village per year.

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The Social Impact of Shakti In Peddakaparthy, a small village in the Indian state of Andhra Pradesh, agriculture is the chief occupation. The state has been facing droughts in many districts, and it has the dubious distinction of having one of the highest farmer suicide rates in the country. In 2004, over 300 farmers* took their lives as a result of poor agricultural output, drought, and indebtedness. Bharatamma is 55 years old and lives in Peddakaparthy. For decades, her family members worked in the fields for their livelihood. The erratic nature of monsoon rains over the years had forced them to the brink of an impoverished existence. Given these challenges, when Bharatamma heard about Project Shakti, she decided to become a Shakti Entrepreneur. In September 2003 she started her business with a small loan, and her efforts paid off very quickly. Now, her husband and her son have joined her in selling products door-to-door and to retailers in their village and in surrounding areas. Their monthly income now exceeds Rs.1500 ($34), and Bharatamma claims that our lives have finally changed for the better. The Shakti story has drawn media attention both in India and overseas, including The Wall Street Journal, which featured it on its front page on May 25, 2005. Beside the income-generation aspect, the project has made a great impact on the confidence of its participants. As Ratna, a Shakti entrepreneur from Tamil Nadu puts it: It is more important than money. When they see me, they crowd around me and call me Shaktiamma. I am someone today.
*P. Sainath, When Farmers die, Indiatogether.org

While not disclosing specific revenue targets, Vijay Sharma, Business Head of Shakti, states that the project has clear profit-making objectives, just like any other HLL project. We look at profit-making objectives. The parameters have to be the same. If they are relaxed, it becomes a subsidy. If that happens, Im not sure if we would be as accountable. You could call it a social initiative that is accountable to business or a business initiative that is accountable to society, but we [HLL] have certain action standards that have to be respected at all times. Sharma explained further: Right now, Shakti is a self-sustaining model that is generating a lot of returns, and we are currently investing all of that into the Shakti business. So, it is certainly going to impact the brands in terms of the reach and sales they get, but beyond that, Shakti is looking at plowing it back into Shakti or I-Shakti or Vani, and looking at how they can be advanced. But the reason it is scalable and sustainable is that it conforms to rules of business. Otherwise, there are a lot of companies that can do CSR [corporate social responsibility] initiatives. We dont talk about that when we talk about BoP [Base of the Pyramid] business initiatives because, quite simply, those [CSR efforts] are activities geared towards philanthropy and this is a [BoP] initiative that is scalable and sustainable. For HLL, Shakti offers a more comprehensive and entrepreneurial approach to addressing the issues faced in serving rural India. First, it leads to greater reach without having to augment an expensive distribution chain built around large volumes (see Exhibit 5). Second, it creates good will and awareness for the company by using local talent that act as spokespersons in areas where traditional advertising media cannot reach. In this environment, word-of-mouth is an effective source of influence and persuasion. Finally, it creates a stake in the community within which Shakti operates, creating first-mover advantage over rival FMCG companies and countering the future growth of possible imitation products.
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While it has been the most successful Millennium Plan initiative to date, HLL managers are reluctant to label Shakti a success. What is clear is that if it is sustainable and scalable, Shakti will provide a radically new channel for the company through which it can serve the needs of 742 million rural consumers and lift its flagging revenue and stock numbers. Shakti, however, is not without its own unique challenges.

Shakti: The Challenges Ahead

The Shakti model took some time to be perfected before allowing for large-scale implementation. While the project was approved within Hindustan Lever Limited in 2000, by end 2003 there were less than 3000 entrepreneurs. The pilot project covered 50 villages in the Nalgonda district of Andhra Pradesh, and the Shakti team took this opportunity to prove to themselves, as well as to others, that the model could indeed work. The team felt that once an effective model was developed, it could be scaled across India. By mid-2005 scaling was beginning to occur, and the Shakti team was looking to extend its reach to 100,000 villages and 30,000 entrepreneurs by the end of 2006. As the project gathers steam, it faces new challenges. Currently, a major issue is the drop-out rates of the Shakti entrepreneurs. When the initiative first started, the drop-out rates were as high as 50%. They are now down to about 5-7% per quarter, depending on the location. The main causes of drop-outs are low support received from the family and the community, and limited success at income-generation. The Shakti management team has found that training is a critical element of the entrepreneurs ability to improve her earning capabilities. Another idea being considered is to develop partnerships with non-competing companies to increase the portfolio of products available to a Shakti Entrepreneur. HLL in general, and Shakti in particular, also needs to consider the influence of nature and geography on the local economy in rural India. Rural markets are primarily dependent on agricultural income, which in turn, is dependent on annual rainfall. The 1990s were perhaps the best years for rural India in recent memory, but since 2002, monsoons have been below normal. As the initiative scales up, the sheer size of operations has also brought challenges. Shakti started off as a two-member team with ambitious goals at HLL. Today, the project has relationships with over 350 nonprofit organizations and other non-traditional partners. For Shakti, local and international non-profits play a vital role in providing an understanding of local communities. Moreover, they act as aggregators of the local communities through the self-help groups, they offer Shakti credibility due to the goodwill established in rural villages. To help manage these new partnerships, the Shakti team at HLL has grown to 45 members. Collaborating with such a diverse and growing group of partners, however, brings out a set of challenges around relationship management and social performance expectations that are new for HLL.

Is Shakti a Solution to the Growth Crisis at HLL?

When Hindustan Lever Limited announced its FY 2004 results, there was more bad news (see Exhibit 6). Its top-line revenues had fallen 2%, and profit after tax had plunged 33%. The companys laundry business, comprising brands like Wheel and Surf and accounting for 43% of the companys turnover, had posted an 8% volume growth. However, its value-based market share had stayed virtually stagnant at 37.5%, indicating that price cuts and not value were driving business. Nikhil Vora, an FMCG sector analyst with SSKI Securities, summarized as follows: Of critical importance are market share gains on key products which are not visible. Secondly, the growth in new categories is also not visible.

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The company has put together its ambitious Millennium Plan to move it into the next stage of growth. Since 2000, the Shakti has taken off and is now poised to reach 100,000 villages and 30,000 entrepreneurs. As a result, the Shakti model has been extensively studied by other Unilever subsidiaries, journalists, and students, as well as competitors. Currently, Shakti-inspired models are being implemented in Unilever Bangladesh and Unilever Sri Lanka under different identities. Yet, crucial questions remain: Will Shakti and the BoP markets it targets deliver to HLL much-needed long term growth and become a key source of a future sustainable competitive advantage? HLLs BoP strategy had evolved from the development of a low-cost detergent named Wheel to Shakti, a business strategy specifically targeting the BoP segment. But is this evolution sufficient, or are further developments required in HLLs business model to serve the rural poor? Finally, how effective is HLL in achieving its stated goal of making a positive social impact in the communities in which it operates?

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Exhibits
Exhibit 1

HLL 3-Year Stock Price on Bombay Stock Exchange

Source: Bombay Stock Exchange Limited

Exhibit 2

The Nirma Story Timeline

1960

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Nirma powder launched

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1980

Nirma becomes 2nd largest brand in India Nirma becomes the largest detergent brand in India

HLL launches Sunlight powder Operation STING conceived Wheel launched

2000
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Surf launched

1970

HLL tests Ala, Rinso Nirma detergent bar launched

1990

Wheel overtakes Nirma as the largest detergent brand

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Exhibit 3

Distribution of Rural Income By Household

Consumer Class Very Rich Consuming Class Climber Aspirant Destitute Total Annual Income Above Indian Rupees 215,000 Indian Rupees 45,001- 215,000 Indian Rupees 22,001- 45,000 Indian Rupees 16,001 - 22,000 Indian Rupees 16,000 & Below Distribution by percentage population(est.) 1995-1996 2006-2007 0.3 13.5 31.6 31.2 23.4 0.9 25.0 49.0 14.0 11.1

Note: In December 1995, the exchange rate was US$1 = 35.2 Indian Rupees; in May 2005, it was US$1 = 44 Indian Rupees

Source: National Council for Applied Economic Research. The NCAER study is based on the population data provided by the Census of India, which is conducted every 10 years. In 2001 (most recent data), the ratio of rural-to-urban population in India was 742 million to 285 million. The same ratio was 628 million to 217 million in 1991.

Exhibit 4

Distribution of Rural Population

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Population # of villages 92,541 Less than 200 200-500 127,054 501-1000 144,817 1001-2000 129,662 80,313 18,758 593,154* 2001-5000

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5001-10000

Total # of villages

*Total inhabited villages is 638,691

Source: Census of India, 2001

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100.0 100.0

% of total villages 15.6 21.4 24.4 21.9 13.5 3.2 100.0

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Exhibit 5

Hindustan Lever Limited Distribution Chain

HLL Factory

C&F Agent

Redistributor Stockist

Large Retailer

Urban Consumer

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Shakti Dealer
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Rural Distributor Sub-stockist Outlet

Redistributor Stockist

Outlet

Rural Consumer

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Exhibit 6

Profit and Loss Statement Years 2000-2004

Year INCOME Sales Turnover Other Income Total Income EXPENDITURE Power & Fuel Cost Other Mfg Cost Employee Cost Selling & Admin Expenses Expenses Capitalised Operating Prot Interest and Financial Charges Depreciation Other Write-offs Prot Before Tax Tax Prot After Tax 1,647.7 56,843.0 5,748.4 20,916.6 0.00 15,415.4 1,299.8 1,209.0 0.00 14,766.4 3,207.4 1,678.4 55,149.3 1,664.1 54,323.7 1,527.7 62,708.9 1,399.5 66,153.7 6,143.5 100,571.2 1,859.8 102,431.0 102,290.4 2,907.8 105,201.9 100,590.3 2,673.9 103,264.2 107,141.2 2,815.5 109,956.7 106,429.7 3,044.8 109,474.5 Dec 04 Dec 03 Dec 02 Dec 01 Dec 00

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5,786.3 5,991.1 5,917.1 18,618.5 18,367.4 19,126.7 0.00 0.00 0.00 21,061.5 20,244.0 17,860.9 667.6 91.8 77.4 1,247.8 1,341.0 1,446.6 0.00 0.00 0.00 22,053.8 21,485.0 19,152.3 4,883.0 4,798.5 16,686.5 25,297.1 7.58 16.62 4,024.2 15,128.1 20,832.9 6.87 13.82 17,170.8 29,699.5 7.80 9.71
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17,130.8 0.00

15,602.2 131.5 1,309.4 0.00

17,206.1 3550.0 13,656.1 15,201.7 6.21 11.30

Amount Available for Appropriation Earnings Per Share (Rs)

Book Value (Rs) Per Share

Note: Rupees in Millions 1 US$ = Rs. 44 (based on prevailing exchange rate in May 2005) Source: Hindustan Lever Limited

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11,559.1 20,159,5 5.25 9.50

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Endnotes

Dadiseth, K.B.. Annual shareholders meeting address, where Hindustan Lever Limited Chairman Mr. K.B. Dadiseth unveiled the companys strategic vision, entitled Millennium Plan. 25 Apr. 2000. Equitymaster.com. 6 Nov. 2006. < www.equitymaster.com>. HLL Corporate Profile. 2004. Ibid. Ibid. Rangan, V. Kasturi, and Rohithari Rajan. Unilever in India: Hindustan Levers Project Shakti--Marketing FMCG to the Rural Consumer. Harvard Business School Case 505-056. -bhai: an Indian term of respect, literally meaning brother. Company P&L Statement. 31 Mar. 2004. Small-scale sector: a part of industry with small capital needs and high labor-intensity. Personal Conversation with Ajit Andhare, HLL. ORG-GfK Retail audit. A Premium Future for HLL. Economic Times. 4 Sept. 2004.

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7 8 9 10 11 12 13 14

A New Improved HLL. Rediff - India Abroad. 6 Nov. 2006. <www.rediff.com>.

Rangan, V. Kasturi, and Rohithari Rajan. Unilever in India: Hindustan Levers Project Shakti--Marketing FMCG to the Rural Consumer. Harvard Business School Case 505-056. Grameen Bank, a micro-credit organization started in 1976 in Bangladesh by economics professor Mohammad Yunus, was a pioneer in using local groups as a key component in an enterprises business model. The Bank defied conventional banking rules by lending to the poor with no collateral and relied on self-help groups as a means to ensure accountability of borrowers. As of 2005, Grameen Bank had made cumulative loans of US$5,025 million and maintained a repayment rate of 96%, higher than that of traditional commercial banks. Widely admired by the development community, Grameens model of relying on the power of self-help groups has been replicated in a number of other emerging economies. Remaking Lever. Business World. 30 Aug. 2004. Census of India. 2001. Ibid.

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National Council for Applied Economic Research.

HLL Project Shakti To Cover All Rural India. The Financial Express. 2 Mar. 2004. -amma: literally, mother but also a general term for elder women in India. Prahalad, C.K.. The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Upper Saddle River, NJ: Wharton School Publishing, 2004.

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Exchange rate: $1 USD to Rs.43.5.

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