07 September 2020

Step Up your Game

WHAT IF... you raised your revenues by further refining your products?

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What can you do if your core product or service does not generate sufficient revenue because of its low market value? One option is upgrading your offer to pivot your business model. By following this strategy, you aim to increase the value of your product/service as much as possible by moving up the value chain. Accordingly, refining your offer to reach the next levels in the value chain helps you to increase the value that you can offer to customers. With this strategy you will essentially re-position your business in the market by upgrading your value proposition and expanding your business to cover more steps in the value chain. This can result in additional costs for new activities that are required to refine your offer – of course, these should be outweighed by the increase of the market value of your offer. Beyond the financial aspects, the Step Up Your Game strategy may yield other benefits like reduced risks associated with supplier dependency or lower transportation costs, among others.

Turning challenges into opportunities

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Small business ventures in the water, sanitation or waste recovery sector frequently struggle to become or remain financially sustainable. On the one hand, this can be attributed to the high operating expenditure, a low-return rate but also a lack of incentives and subsidies from government (COSSIO, C. et al., 2020:5). On the other hand, basic services have to be accessible for everybody and the market price of drinking or irrigation water or waste(water) management services should be low. Yet, some of these services and inputs are used for value creation – e.g. food or beverage production, cleaning or hygiene services, etc. Here, water or compost from organic waste are used to produce a product that has a higher market value than the different input factors. In case your basic product or service offer does not allow you to cover costs, it could be worthwhile to analyse if you could further refine it or expand your business to the next steps of the value chain that increase product value in the market.

Moving Towards a Strategy

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The Step Up Your Game strategy is about claiming more parts of the value chain to make your products/services more profitable. To do so you need to identify if and how you could generate more value building on your basic offer and its related activities. In the Global Value Chain (GVC) literature this process is described as ‘upgrading’ and it consists of moving up in the value chain of a product or commodity “to perform more profitable activities” (ARMANDO, E. et al. 2016).

In order for this strategy to work, the costs of the additional upstream activities needed for the production of the new product or service would have to be outweighed by the increase in revenue they generate. This strategy therefore requires a careful balancing act between the introduction of a new product or service and making sure that it has enough value to justify the costs incurred.

The first step to apply this strategy is to conduct a value chain analysis to determine how your products or services are used by your target group, and how they generate value out of the basic services or products you offer. This will allow you to know if, where and how you could upgrade your value proposition and business model. There are different types of upgrading strategies that you can apply depending on what your value chain analysis reveals, including upgrading your product, your production process, the channels used for distribution, your product/service’s function and upgrading different aspects of your business simultaneously or in sequence (also referred to as intersectoral upgrading). The Step Up your Game strategy borrows elements from both functional upgrading and intersectoral upgrading.

Functional vs. Intersectoral Upgrading
  1. Functional upgrading: this type of upgrading is understood as the process of “acquiring higher level functions or abandoning lower level functions” (BLAZEK 2015: 7). According to BLAZEK,  functional upgrading can be classified into five different types including: 1) Penetration among higher tier suppliers or even among lead firms; 2) Abandoning some activities with lower added value; 3) Voluntary transfer of some high value-added functions by higher tier firm; 4) Developing new (intermediary) market and 5) Upgrading via mergers and acquisitions“.

 

  1. Intersectoral upgrading: this type of upgrading consists of taking your company’s existing skills and knowledge, which have been acquired in the production process of the product/service, and using them to produce a new and higher value product or service that can enter a new market.  (BLAZEK 2015: 7)
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The amount of money you need to invest into shifting your business model in accordance with this strategy depends on the need to change aspects in your already established production model and the market segment it seeks to target. You are either looking at a moderate or drastic redesign – the latter applies when drastic changes in the production process or positioning of your business (e.g. entering a new market or targeting a different customer segment) are required, and resource requirements and risks related to the pivot increase (drastic redesign). In this case you should be sure you have the required capacities and competitive advantage and conduct a thorough risk analysis.

In some cases, this strategy may require a transition from a B2B model to a B2C model. This is the case, for example, if you pivot from selling compost to farmers (B2B) towards using compost to grow vegetables which are sold to end-users (B2C). Here, your customer relationships would need to be significantly re-shaped, requiring different kinds of resources for marketing, customer service, legal liability etc. Understanding how such a transition would look for your intended market and context is crucial for getting a clear picture of the benefits your business could gain.

In other cases, upgrading your products and services will require heavy investments. For example, if you wanted to process agricultural produce e.g. into pre-cooked food, you would have to invest into new equipment and build additional skills. Risks of such investments should be duly analysed, but the investment may pay off.

However, if your existing resources can also be used for your new product or service you are on to a winner. Going back to the composting example: if you already have access to land for your composting activities and your staff has agronomy knowledge, adding agricultural activities becomes doable. If you find a way of growing produce directly on your compost piles, this may become even easier.

Case Study 1

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Shri Somershwar Sahakari Sakhar Karkhana (SSSSK)

SSSSK is a cooperative sugar factory in Maharashtra, India, that produces sugar from sugarcane grown by local farmers. Since the company was suffering from fluctuations in revenues, it decided to increase its revenue streams by using its by-products to generate other high-margin products. The main by-products of the sugarcane industry are bagasse, molasses and press mud. The company invested in the following:

  1. Distillery unit which produced ethanol using molasses: there is growing demand for ethanol from petroleum and pharmaceutical companies
  2. Biogas unit using spent wash from the distillery to generate biogas
  3. Cogeneration facility generating heat and power through bagasse and biogas: surplus electricity is sold to the state electricity utility
  4. Bio-fertiliser unity using press mud from the biogas plant: the fertiliser is given to the sugarcane farmers at no cost

SSSSK is a perfect example of a company that has applied the Step Up Your Game strategy to secure its financial sustainability. It is important to note however, that despite the company being vertically integrated, it still depends on the supply of sugarcane from the farmers. If farmers shifted to other crops as a result of fluctuating sugar prices, SSSSK’s business model would be undermined. It is therefore important that the company maintains good relationships with the farmers to avoid them shifting to other cash crops. An example of how it has done that is by providing farmers with free bio-fertiliser from its plant. 

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SSSSK Plant. Source: http://www.someshwarsugar.com/Photogallery.php

Case Study 2

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Sanergy is a social enterprise that provides quality sanitation at an affordable price to poor people in Nairobi’s slums. Its business model is founded on the premise of circular economy, in which waste is given value and can therefore generate revenue for the company – in this way contributing to its financial sustainability. Sanergy has moved up the value chain by transforming waste into high-margin agricultural products, such as animal feed and organic fertiliser. Since there is an increasingly high demand for these products in Kenya, mainly due to soil depletion and unsustainably harvested fishmeal (used for animal feed), Sanergy can guarantee reliable revenue streams from their sales. Sanergy is a good example of a company that has used the Step Up Your Game strategy for making its business financially sustainable: it manages to provide affordable and good quality sanitation services thanks to the revenues it receives from its higher-margin products.   

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Sanergy Resource Reuse. Source: Sanergy

Library References

Business strategy and upgrading in global value chains: a multiple case study in Information Technology firms of Brazilian origin

ARMANDO, E. et al.

The issue of upgrading in global value chains has been treated in the literature, but there are still gaps to be filled in. One issue that still needs further investigation is the relation of business strategy and evolution of firms in global value chains, known as upgrading in the literature. In this paper, we have the objective of examining the occurrence and quality of upgrading in internationalized Information Technology firms of Brazilian origin. We employed the multiple case study method researching eight IT firms to study the issue. Different from what is expected, facts presentedin the paper imply that although global value chains and upgrading are confirmed as useful concepts, not all the findings the literature presents converge with what this research brings. As for example, results do not converge with what was found in the literature for clothing. In other results, we confirmed what is in the literature, most notably, having the evolution in the chain blocked by clients and also competitive marginalization. Similar to any research, this one has limitations, which we list at the end of the manuscript.

ARMANDO, E., AZEVEDO, C.A., FISCHMANN, A.A. & COSTA PEREIRA, C.E. (2016): Business strategy and upgrading in global value chains: a multiple case study in Information Technology firms of Brazilian origin. In: RAI Revista de Administração e Inovação : Volume 13 URL [Accessed: 12.08.2020]

Indicators for sustainability assessment of small-scale wastewater treatment plants in low and lower-middle income countries.

COSSIO, C., NORRMAN, J., MCCONVILLE, J., MERCADO, A. & RAUCH, S.
COSSIO, C., NORRMAN, J., MCCONVILLE, J., MERCADO, A. & RAUCH, S. (2020): Indicators for sustainability assessment of small-scale wastewater treatment plants in low and lower-middle income countries.. In: Environmental and Sustainability Indicators: Volume 6 URL [Accessed: 12.08.2020]

Resource Recovery from Waste

Humans generate millions of tons of waste every day. This waste is rich in water, nutrients, energy and organic compounds. Yet, waste is not being managed in a way that permits us to derive value from its reuse, while millions of farmers struggle with depleted soils and lack of water. This book shows how Resource Recovery and Reuse (RRR) could create livelihoods, enhance food security, support green economies, reduce waste and contribute to cost recovery in the sanitation chain.

While many RRR projects fully depend on subsidies and hardly survive their pilot phase, hopeful signs of viable approaches to RRR are emerging around the globe including low- and middle-income countries. These enterprises or projects are tapping into entrepreneurial initiatives and public-private partnerships, leveraging private capital to help realize commercial or social value, shifting the focus from treatment for waste disposal to treatment of waste as a valuable resource for safe reuse.

The book provides a compendium of business options for energy, nutrients and water recovery via 24 innovative business models based on an in-depth analysis of over 60 empirical cases, of which 47 from around the world are described and evaluated in a systematic way. The focus is on organic municipal, agro-industrial and food waste, including fecal sludge, supporting a diverse range of business models with potential for large-scale out- and up-scaling.

OTOO, M. DRECHSEL, P. (2018): Resource Recovery from Waste. Business Models for Energy, Nutrient and Water Reuse in Low- and Middle-income Countries. Oxon, UK: Routledge URL [Accessed: 21.02.2020] PDF

From Waste To Resources

World Bank 2019
World Bank (2019): From Waste To Resources . Shifting paradigms for smarter wastewater interventions in Latin America and the Caribbean. In: Background Paper VI: Market Potential and Business Models for Resource Recovery Products:

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