BP – Emerging/Consumers/Energy/Business

27Jun09

Been thinking about social business and the private sector’s role in poverty alleviation through economic growth. The elephant in the room is the scale and financial might and resources that multinational companies (MNCs) have in driving forward social business initiatives. Primarily thinking about pharmaceutical business models for the Base of the Pyramid (low and middle income countries), but here’s one on BP and the energy sector. 

BP

Posting up BoP Case study for thought: 

BP (MNC and huge player in the world’s energy sector) has a Alternative Energy Division. $2 billion in capital expenditure budget which with external leveraging provides arsenal for $8B annually in capex for new alternative energy projects. The need is undeniable – climate change, security of water supply and increased demand for power means global energy MNC must adapt business models and innovate. BP invests in solar, wind, biofuels and carbon management technologies. 

BP established a emerging consumers business in India focused on Solar Energy. The benefits of solar cooking stoves are two-fold:

1) Better health because decreased smoke inhalation from cooking with traditional coal and biomass burning

2) Increased safety for women and children as less time is spent searing for burning materials and increased focus on rearing children 

BP implemented the plan with a bottom-up approach. A team went to India and for the first six months did not even bring technology. Market research and surveys were conducted, consumers were asked what they “needed” and the answer was “efficient cooking”.  BP then went about creating an ecosystem of support of technology (with help from Indian academy of national sciences), local manufacturers, biomass pellets, distributers and ended up shipping 2.5 million solar stoves. Biggest attributes for BP on the project were the management know-how and the ability to make social impact SCALABLE. 

However, the 2.5 million stoves and social impact did not directly translate into a financial impact for BP and this emerging consumers business program was wound up. There was a financial loss of $20m. 

(-) not enough profit to sustain program 

(-) imposing profitability standards of the remainder of BP operations, this program failed to reach those standards

(-) imposing safety standards were also difficult to meet 

This case study was wonderfully told by Vivienne Fox, CEO of BP Alternative Energy and one of the most interesting comments from the discussion that followed is this: 

When you run a project/business/division aimed at the social sector (BoP) in a large MNC, you are competing for the same internal capital as every.other.division. in the company. You are not cut any slack, WACC is still WACC and IRR and NPV valuation and go/no-go decisions are made the same way because the MNC is in the business of for-profit entity. As a social enterprise project, you not only have to meet the high financial returns, but you also need to social impact. Financial returns are what makes the project ultimately sustainable. This is not CSR. This is pure-play for-profit strategy. And it’s what makes projects with positive social impacts ultimately sustainable.

So when we are thinking of new business models – let’s not forget this huge sticking point for MNCs. No matter the economic climate, let’s make new propositions financially sustainable.

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