Distribution of HUL

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Rural demand or, and consumption o, consumer products is set to explode. The challenge or most companies

is to be able to oer appropriate products in an aordable way in relatively remote locations. It is our view

that India will soon see an infexion point in rural consumption.1

Mr. K.B. Dadiseth, Hindustan Lever Limited Chairman

On August 30, 2004, Hindustan Lever Limited’s (HLL) share price on the Bombay Stock Exchange touched

Rs.100.5 (US$ 2.28) - a new low or one o the largest Indian companies by market value (see Exhibit 1). In

its Q2 2004 results, HLL’s bottom line had allen by 43% due to price pressures in its mainstay detergents

business. Procter & Gamble, its long-time nemesis, had unveiled a series o price cuts on its leading detergent

brands, Ariel and Tide, orcing HLL to respond. As a consequence, operating prot 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 prots grow through 2003, the company’s top-line

growth had remained more or less stagnant over the past ew years, causing some analysts to re-align their

portolios.

In act, since 1999 revenues at HLL had remained nearly constant, an outcome stockholders had not

welcomed. With this lack o growth, increasing attention was directed to the company’s Millennium Plan -

an ambitious blueprint outlining the company’s growth strategies or the 21st century. The Millennium Plan

was a part o the company’s renewed emphasis on business ocus and operational eciencies. Additionally,

a core aspect o the Plan was to identiy and nurture businesses o the uture. Over 150 new businesses were

proposed beore the list was narrowed down to nine. These included a oray into drinking water, a plan or

network-based marketing (along the lines o Amway) and an entry into retailing herbal therapy products and

services through a chain o therapy centers. Perhaps the most interesting, though, was an initiative called

Shakti, which aimed to extend the reach o HLL’s products to the 742 million rural consumers in 637,000

villages at the base o the economic pyramid, a market not well-served by HLL at the time.

About Hindustan Lever Limited

Hindustan Lever Limited began operating in India in 1888 with the distribution o its “Made in England”

Sunlight detergent. In 1931, when India was still a British colony, Hindustan Vanaspati Limited was ormed

as a 100% subsidiary o Unilever in India. It primarily sold soaps, detergents, and other household products

to a select group o afuent consumers, such as British government employees and the Indian elite. In

Hindustan Lever at the Base o the Pyramid: Growth or

the 21st Century

Research Assistant Maulin Vakil and Proessor Ted London o the University o Michigan developed this case. They thank Vijay Sharma and

Rohithari Rajan o Hindustan Lever or their assistance.© 2008, Ted London.

case 1-428-604 06 November 2006

THEWILLIAM DAVIDSON I NSTITUTE



Hindustan Lever at the Base o the Pyramid: Growth or the 21st Century 1-428-604

November 1956, the company merged the group’s companies Lever Brothers

India Limited and United Traders Limited to orm Hindustan Lever Limited.

HLL oered 10% o its equity to the Indian public, and was the rst the rst

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 o the shares

are distributed among about 380,0003 individual shareholders and nancial institutions.

Until the 1960s, the company remained a medium-sized player, choosing to market high-end brands to a

select class o Indian consumers. However, it gradually began to relinquish control to local managers, and in

1961, P.L. Tandon took over as its rst Indian Chairman. In the years that ollowed, HLL continued to launch

new brands in the FMCG (ast-moving consumer goods) segment, including the highly successul Liebuoy

and Liril bath soaps, Sur detergent powder, Fair and Lovely Fairness cream, and Close-Up toothpaste.

The company also began a backward integration plan, setting up a subsidiary or chemicals (Hind Lever

Chemicals), and acquiring Ponds India, Lipton India, and Brooke Bond India. In 1993, HLL completed the

acquisition o Tata Oil Mills Company (TOMCO), its long-time rival. On January 1, 1996, the group’s companies

merged to create India’s single largest oods and beverages company and one o 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 o two operating divisions: Home and Personal Products

(HPC), consisting o its detergents, soaps, and personal care lines o products; and Foods, consisting o staple

oods, bakery, conectionary, beverages, and rozen oods. In past years, leading national and international

publications like The Economic Times, Business World, Far Eastern Economic Review, and Business Today have

requently rated HLL as one o India’s 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 o people everywhere - to anticipate the aspirations o our consumers and customers,

and to respond creatively and competitively with branded products and services which raise the quality o

lie.”

5

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

As suggested by the corporate objective, Hindustan Lever Limited’s business ocus is directed at better

serving consumers, and its reputation as a leading consumer marketer in India is unparalleled. HLL brought

a scientic, 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 or its products that had slowly but

steadily appeared on virtually every shop shel 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% o its annual turnover on advertising and media.

With the advent o television in India in the early 1980s, HLL quickly became a powerul orce to be reckoned

with. Its brands quickly captured the imagination o the Indian public with the clever use o characters such

as the Liril waterall girl, Lalita-ji o Sur detergent, and leading stars rom Bollywood (India’s lm industry)

who endorsed Lux bath soap. The company’s philosophy as a maker o high quality, mostly premium-priced

products continued to infuence HLL’s marketing strategy.

HLL also built a strong national distribution system, which became a source o competitive advantage

or the company. As its rivals tried to play catch-up, HLL continued to invest heavily in maintaining its

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advantage, expanding rst rom urban to semi-urban markets, then gradually to rural markets, in a bid to

stay ahead.

By ocusing on eciencies, reach, and visibility, HLL was able to carve out a vast network o retail

outlets that were connected seamlessly by the country’s most sophisticated distribution chain. By 2000,

the company had the largest national distribution network o its kind in the country, with 7,000 stockists

helping directly cover 1 million outlets. The total coverage was ar higher, servicing 1.5 million outlets in3,700 towns and cities through the urban network, and 3.6 million outlets through the rural network. These

retailers were loyal because a large portion o their revenues were typically comprised o Unilever products.

Using this distribution chain, HLL could eciently provide its products to consumers in a convenient ashion,

providing the company with an advantage that was the envy o its competitors.

Yet, even HLL’s large network was insucient to cater to a majority o Indian people who lived in

remote villages, where supplying and selling every-day products could not be done using the company’s

existing distribution methods. Indeed, HLL’s vaunted distribution network ailed to serve more than 500,000

rural villages, meaning the company was ignoring over 500 million potential customers (nearly hal o the

country’s population) located at the base o the economic pyramid.6

A Challenger rom the Base: The Growth o Nirma

In 1969, a Gujarati entrepreneur, Karsan-bhai7 Patel, set up his rst detergent-making unit in the back

yard o 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 chie ingredient. He would prepare the dry mix detergent

powder, pack it by hand in polythene bags, and set o on his bicycle to sell the packets door-to-door. He

named the product Nirma, ater his daughter Nirupama (whose image was to become the brand’s visual

identity o the ‘dancing girl’). Every packet o 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 Sur sold or as much as Rs.15. As sales grew, so did Nirma’s scale o

operations. Even with its ast growth, the rm was able to maintain its business model

based on broad, cost-eective distribution and low operating costs.

Nirma was created around a simple premise: that o putting a convenient and

aordable product within reach o millions o households that could not aord expensive

detergents. To be able to do this protably, Karsan-bhai made a series o innovative

business decisions that maintained a low cost structure. For example, he leveraged the home-grown nature o

his business to gain tax and duty concessions rom the government o India, which was actively promoting

the small-scale industrial sector at that time. This led to a signicant cost advantage in manuacturing or

Nirma, including exemption rom 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, urther minimizing operating costs.

Nirma also maintained a low-cost distribution structure, unlike Hindustan Lever Limited, which had

created a vast network o intermediaries. Initially, Karsan-bhai himsel supplied the product to the doorstep

o his customers, making sales visits on his bicycle. Gradually, he expanded his reach using wholesale

distributors who ensured his products reached the arthest corners o the country without requiring him to

invest in a sales organization. So successul was his product that wholesale traders could be seen standing

outside his actory waiting patiently to purchase their supply o Nirma rom Karsan-bhai.

Furthermore, Nirma’s advertising adopted the value-or-money philosophy. While HLL spent around 10%

3




4

o its sales on advertising and promotions, Nirma’s rarely exceeded 2% o sales. Its advertising jingle stressed

the product attributes and also saluted the savvy and budget-conscious Indian housewie. The company was

also highly creative in maximizing the impact o 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 o the advertisers or the Sunday evening Hindi eature lm (the most widely watched

TV program). But the positioning o the TV commercial was such that a majority o the populacethought the lm was being presented by Nirma!

Since the modest beginnings rom Karshan-bhai’s home in 1969, Nirma has grown rapidly. The fagship

company Nirma Consumer Care achieved a turnover o Rs.25,830 million ($587 million) and a prot o

Rs.2,470 million8 ($56 million) in FY2004, and it reaches across the Indian subcontinent, serving 300 million

consumers through a channel o 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 o Nirma.

HLL had almost single-handedly ‘created’ the category known as Non-Soapy Detergents(NSDs) with the launch o Sur in 1959. Traditionally, Indian households used soap bars to

wash clothes (or ‘abric-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 abric care, and were, consequently, premium

products - with pricing to match.

Sur used product demonstrations with a bucket to induce housewives to replace soap-scrubbing Nirma

with a convenient detergent powder. Also, Sur used petrochemical-based raw materials (essential to qualiy

as NSD) in abric-wash products instead o soda ash, which had been the traditional ingredient. While Sur

soon became popular, the price tag meant that its appeal was largely restricted to the urban, middle- to

upper-middle class households.

Through the early 1970s, Nirma’s success did not aect HLL. By 1977, however, Nirma had grown to

be the number 2 brand with 12% market share, compared to Sur’s 33%. HLL conducted consumer studies

to understand the emerging competition rom Nirma and other small-scale sector9 brands, and the view

was that these products were not as eective in washing clothes as NSDs. Besides, due to their soda-based

ormulation (and thus high alkalinity) they were harmul to the skin. The study seemed to reassure HLL that

its superior quality product would prevail in the long run.

To HLL’s surprise, by 1982 Nirma had steered itsel 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% o

the market. By this time, Nirma’s growth had begun to have an impact on HLL’s market share. From its

commanding market position in the early 1970s, HLL was let with a depleted market share o only 8.4%.

Nirma’s erosive impact on sales and market share was now quite obvious.

HLL’s Early Responses

In the late 1970s, Hindustan Lever Limited initiated a nationwide market research eort 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 end o the bottom-

up brands such as Nirma with a new brand distinct rom Sur, which targeted a more premium segment. This




5

market research also led HLL to understand that consumers who purchased Nirma had daily wage income,

thus leading to their preerence or products that required not only value but also lower per–unit price.

In an eort to close the market divide between Nirma and its own product oerings, HLL red its

rst salvo with the test launches o Ala and Rinso (see Exhibit 2). These brands rom Unilever’s successul

international product lineup were priced at 35% less than Sur with an intention o lling the gap in the

market. This attempt at merely using international brand names in the Indian market ailed, however, asthe products could not match Nirma in value, even though they were priced signicantly below Sur. For

instance, when Nirma was priced at Rs.6 per kg, the new oerings were available at Rs.12 per kg, and Sur

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 oothold by expanding its presence

rom the Western states into Northern India. Sunlight, which was popular in its soap-bar orm, was launched

by HLL in washing-powder orm in response to this new move by the challenger. HLL made some notable

exceptions or Sunlight. For example, Sunlight was packed in plastic bags instead o standard (but expensive)

glossy cardboard boxes to keep prices low, a move that had hitherto been taboo due to the MNC’s norms on

product presentation and packaging. HLL experienced success or the rst time in this battle, managing to

stymie Nirma’s growth in the Northern markets, albeit temporarily.

However, Sunlight’s success in Northern India attracted regional small-scale sector brands like Fena and

Ghadi, which imitated Nirma’s low-cost, low-price strategy. Indeed, Nirma’s success had inspired several

local start-up businesses that also challenged HLL’s market share. HLL’s 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 o HLL’s 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 o a growing realization o the need to adopt a more comprehensiveapproach to the problem. Rather than modiying an existing product, the company’s scientists began

working to develop new ways to create detergents by using locally available raw materials and low-cost

manuacturing technologies. This development eort was combined with a large-scale marketing campaign

to win back Indian detergent consumers. HLL senior managers had identied three strategic priorities or

the initiative, in order to protect Sur in the premium-end o the market and to challenge Nirma in the lower

income segment:

To emphasize Sur’s superior quality:1. This was accomplished through a new advertising campaign

using ‘Lalita-ji,’ a housewie who reminded consumers that ‘buying Sur 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.

To create dissonance toward Nirma by highlighting its skin-damaging eects:2. A comparative advertisingcampaign was created to raise awareness o the harm caused to hands ater the use o ‘low-quality

detergents’ as a result o the extensive use o soda-ash.

To directly attack Nirma in the bottom-end segment with a new product:3. This led to the creation o

Wheel detergent powder. At last, HLL believed that it had created a suitable product with which

it could potentially beat Nirma. Wheel oered superior cleaning and attractive pricing o Rs.9 per kg

compared to Nirma’s 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.




Wheel oered consumers the convenience o a bucket wash without causing harm to skin or to clothes,

and it was available at an aordable price, which met the low unit-price requirement o the target market

segment. The advertising was done in an over-the-top, Bollywood-style melodramatic tone, with a housewie

saving the day or her husband by washing his clothes sparkling clean and thus earning his admiration.

What made Wheel a truly unique story at HLL was that or the rst time, manuacturing was outsourced

to a low-cost subsidiary that beneted rom small-scale sector concessions. Wheel also ollowed a lowerdistribution cost structure. For Wheel, HLL eliminated the Carrying and Forwarding (C&F) agents rom 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 rom the

company, much like what Nirma did.

Furthermore, Wheel marked the rst time that HLL reduced its prot margins per unit in its battle with

Nirma. However, while margins were lower, return on capital employed was very impressive, suggesting

a dierent metric or evaluation or base-o-the-pyramid ventures (see Table 1). The Wheel brand team

was also unique in that it was lean and staed with general managers rather than unctional specialists.

Together, this helped keep overhead expenses low and improve bottom-line results.

Wheel denoted a signicant shit in mindset or the management team at HLL, which had relied onpremium-brand image and high margins to market within India. The Indian business press hailed HLL’s

long-overdue acknowledgement o a new market segment that it had largely missed or so long. A urther

actor aiding HLL was that Nirma had grown too large to enjoy the tax benets o being a small-scale sector

company. Persistent lobbying with the government o India by the Indian Soaps and Toiletries Association

resulted in the removal o some tax benets and ensured a more “level playing eld.”

HLL had nally successully responded to Nirma in this long war or market share, with Wheel eventually

emerging in 2003 as the largest abric wash brand in India, with a 16% market share o the total laundry-

wash category.11

A New Challenge: A Slowdown in Growth at HLL

Ater growing its revenues at a ast pace throughout the 1990s, the company seemingly stopped

growing in 1999. From 1993-1999, sales had surged ve-old to Rs.101.42 billion ($2.305 billion). Since

1999, however, sales had stagnated, and the company closed scal year 2004 with Rs.102.43 billion 12

($2.327 billion) in revenues. Hindustan Lever Limited’s series o mergers had added market clout and created

opportunities or eciencies, but had also made it dicult to maintain growth momentum.

HLL’s FMCG market had also borne the brunt o the Indian recession o 1997-99, as even higher-end

6

Sales ($m) Gross Margin % ROCE% Economic Profit ($m)

Nirma 150 18 121 Na

HLL Wheel 100 18 93 4

HLL Premium Wash 180 25 22 7

Source: “The Fortune at the Bottom o the Pyramid.” Prahalad & Hart, 2002; “Hindustan Lever Re-invents the Wheel.” Ellison, Moller & Rodriguez, IESE-University o Navarra, 2003.

Table 1

Detergent Brands Proftability, 1999




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-or-money, marketing, and packaging innovation. Analysts

highlighted some obvious areas o concern at HLL: a high margin structure, high overheads relative to those

o its local competitors, and a lack o genuine product and business model innovation.13

HLL’s Millennium Plan

On April 25, 2000, at the annual shareholder’s meeting, then-Chairman K.B. Dadiseth (who has since

retired) unveiled the much-talked-about Millennium Plan - a strategic blueprint or the company that had

been prepared in collaboration with external consultants. Ideas or growth were extensively debated, and

the team o consultants and company managers identied 142 ideas o which nine were short-listed, based

on Hindustan Lever Limited’s existing capabilities or its ability to build them over time.14

A New Ventures team, under Executive Director Dalip Sehgal, was handed the task o selecting and

implementing growth opportunities or HLL in the new millennium. Among those that were selected was

an idea or reaching rural India, a market that HLL had only touched with the introduction o Wheel. The

centerpiece o this initiative was a undamentally dierent rural distribution system based on Sel-HelpGroups (SHGs).15

A cross-unctional team consisting o managers rom nance, technology, and marketing, and headed

by a business manager was set up to get the idea o the ground. In the rst year, much o the ocus was on

conceptualizing the entry strategy and testing it out in the market. I the plan met the action standards,

it would be scaled up. Thus, with a seed capital o Rs.100 million ($2.3 million) 16 and a new management

structure, Shakti was born.17

Rural India: Challenges and Opportunities

Roughly three quarters o India’s population lives in rural villages. India’s nearly 639,000 villagescomprise over 128 million households and have a population o 742 million, 18 which is nearly three times

the population o 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 o approximately Rs.21,000

($477).20 Exhibit 3 shows the dispersion o rural income by household.

Due to the sheer size o the population, rural India is potentially a lucrative market or any consumer

products company. In act, its consumption has also been growing steadily since the 1980s and is now

bigger than the urban market or both FMCGs (53% share o the total market) and consumer durables

(consumer products such as electronics, automobiles, etc. that are purchased inrequently, 59%). More than

hal o Hindustan Lever Limited’s products were bought by rural consumers. Yet when HLL considered that

its products were available in less than 15% o the villages, the company recognized the vast untapped

potential o rural India.

A Need or a New System

With the success o Wheel, Hindustan Lever Limited had made eorts to urther expand into rural

markets. For instance, the company had developed Project Streamline, a large-scale eort 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 rom the rural distributor

7




8

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 HLL’s 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 ar fung to be reached even by star sellers.

Overall, these eorts were limited in their ability to solve the entire problem. They emphasized

enhancing HLL’s reach by using a amiliar partner. Indeed these eorts ocused on getting products into thehands o interested retailers who previously were outside o HLL’s distribution network. In both Streamline

and Wheel, or example, HLL was selling to a customer experienced in, or comortable with, acting as an

intermediary between the top and base o the pyramid. In addition, these eorts 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 o Dalip Sehgal, Executive Director, New Ventures:

HLL was realizing that a lot o the previous initiatives had worked on the ‘reach’ parameter, or

the communication initiatives had worked on the ‘communication’ parameter. But there wasn’t

a comprehensive business model that looked at getting all three (reach, communication, and

sustained demand) together. That’s how Shakti was conceptualized.

While the idea o expanding presence in rural markets was not new, HLL was or the rst time taking

a proactive and holistic approach to reaching out to the most rural o 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 or the experienced marketers at HLL.

Indeed Shakti (which means “strength” or “empowerment” in many o the local Indian languages) was

dierent rom other rural expansion eorts by HLL, as well as those o other consumer product companies

in India, or two key reasons. First it was designed to overcome most, i not all, the hurdles encountered in

prior rural orays while still maintaining channel control and cost-eciencies. Second, the Shakti mindset

provided the company an opportunity to participate in social and economic development o rural areas,a signicant shit in the selling-only model that previously dictated MNC activities in rural markets. The

initiative was explicitly looking to generate value both or the company and or the rural communities it was

trying to serve.

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 o sel-help groups that had been created by the ederal and state governments across

villages in India. These sel-help groups were development initiatives targeted at enhancing local savings

and industry (such as handicrats and other hand-made products), and at creating a stronger social system

within rural villages.

A typical sel-help group consists o 8-20 members, and its activities include learning new vocational

skills, airing grievances and resolving local disputes. Moreover, sel-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 o them supported by the government or local or international non-prots.




However, a continuing gap in both the rural economy and the development o sel-help groups was the

limited number o opportunities to use micro-credit in developing new ventures. Most micro-enterprises

usually consisted o small ventures such as basket-weaving, local handicrat, 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 o protable venture by applying micro-nance to building a local business that had

long-term prot and growth potential or the entrepreneur.

Villages served by Shakti are careully chosen by the HLL team based on a number o criteria, chie

among them are the absence o HLL products and a population o less than 5,000. The HLL Shakti team then

typically approaches local sel-help groups through contact with the NGOs that work with them. Although

each o the three Shakti initiatives relies on sel-help groups, they perorm a distinctly dierent unction or

the community and or the company.

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 o Andhra Pradesh. The Shakti Entrepreneur Program seeks to

expand HLL reach by involving the village communities, specically rural women, into its business venture.

By ocusing on women, Shakti can play a role in shaping the gender equation within the community and

increasing awareness o key social and development issues (see “The Gender Issue in India” below).

Leveraging the participants o existing sel-help groups, HLL invites one woman (or sometimes more,

depending on the size o the area to be served) rom a target village to become a Shakti entrepreneur or

Shakti-ammas22 to promote and distribute HLL products within o a group o 4-6 neighboring communities.

9

The Gender Issue in India

The status o women in contemporary India is refected in the state o their health, education,

employment, and lie in society. It is a paradox o modern India that women wield power and hold

positions at the highest levels o administration, government, and business, yet large groups o women

are among the most underprivileged. The clearest indicator o discrimination is the skewed sex ratio:

933 emales* or 1000 males in India, lower than the global average o 990. Moreover, the average

Indian emale has only 1.2 years o schooling, while the Indian male spends 3.5 years in school. More

than 50% o girls drop out o school by the time they are in middle school.**

Women in rural India are primarily involved in household chores such as cooking and looking ater

children. The woman’s status as a wie does not give her control over the amily income, which has

remained with the husband, who also makes most decisions or the amily. In the vast majority o cases,

the traditional view o a male-dominated society continues to prevail. Even today, there is considerable

resistance to changing the stereotypical roles, and women nd it dicult 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 o 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 specically with underprivileged

rural women. And that makes a big dierence.” Additionally, as seen in the well-studied case o Grameen

Bank in Bangladesh and in micro-nance projects elsewhere, poor women have an excellent track record

when it comes to commitment, repayments, and perormance.*Census o India, 2001**Women’s education in India, Vtoria Velko International Programs Centre




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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 o HLL products. These unds are

usually made available via micro-credit through sel-help groups, since prospective entrepreneurs may not

have access to traditional means o 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, four, tea, and salt are provided in aordable “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, theRural 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 o 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 o mature entrepreneurs it is known to reach over Rs.25,000 ($568). This leaves the entrepreneur

with a net prot (ater deducting expenses and loan repayments) o Rs.700-1,200 ($16-27), which is equal

to or exceeds the average monthly income in rural India. Moreover, or most Shakti entrepreneurs these

business activities are designed to be supplemental in nature, leaving sucient time or existing local

livelihood activities.

The entrepreneur is expected to ollow a xed 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 o the women are literate, while others rely on children and

amily members to help with the order-booking tasks.

Entrepreneurs are known to apply ingenuity in overcoming the inrastructural and promotional challenges

aced in rural India. For example, an entrepreneur in the Nalgonda district was able to expand her market

reach by contracting the back-hauling services o an auto-rickshaw that plied between neighboring villages.

Others are known to hire the help o relatives and riends in surrounding villages to act as salespersons. The

RSP also assist the entrepreneur in creating sales promotions and special events. In the past, Shakti-ammashave organized an Arogya (health) day,23 which brings in a doctor to disseminate inormation about health

and hygiene, and a Shakti day, which creates a village air atmosphere with games, songs, and product

giveaways. The goal o these promotional eorts is to create broader local awareness o the health benets

o specic practices, such as hand-washing and tooth-brushing.

Shakti Vani Program

The second initiative in HLL’s Shakti is a communication-led program, called Shakti ‘Vani’ (Sanskrit or

‘speech’). This is a socially-led communication eort which involves a ‘Vani’ (speaker), selected to spread

inormation and awareness on important issues such as health, hygiene, sanitation, and personal care. The

objective o this program is to be an advertising medium or both health challenges and company solutions

within the rural markets. Hence, Shakti Vani helps create awareness o not only the problems but also how

HLL’s products oer ways to overcome them.

The Vani is appointed rom the sel-help group and, ater a training program, travels rom village to

village spreading the company’s 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 xed salary per day, based on

the route and villages covered. The program does not generate any revenues or HLL. Rather, it is designed to

be a cost-eective approach to generating behavioral change and promoting the company’s 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.




11

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 inormation, 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 inormation such as health,

sanitation, agriculture, and animal husbandry, and is linked to the

internet via a once-a-day dial up connection.

The kiosk can also be used as a computer-based classroom, as it has modules to cover education rom

grades one to seven. Another important eature is the ability to communicate with local experts such as

doctors and agriculture technologists and to ask specic questions. For villages with poor road connections,

I-Shakti provides a substantial benet compared to having to travel to a town to obtain inormation on local

weather orecasts, appropriate use o ertilizers, price o agriculture outputs, and medical issues.

While the I-Shakti program was designed primarily as a resource or 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 nd out more about HLL products. In an

area which was not conducive to traditional advertising methods, these community-based portals provide

a useul marketing tool. By building brand messages into the sotware package, HLL’s 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 o India’s

28 states through 25,000 Shakti entrepreneurs. What makes the project especially intriguing is that it oersa model or generating economic benets or the company while also producing social benets or rural

communities (see “The Social Impact o Shakti” on the ollowing page).

While not disclosing specic revenue targets, Vijay Sharma, Business Head o Shakti, states that the

project has clear prot-making objectives, just like any other HLL project.

We look at prot-making objectives. The parameters have to be the same. I they are relaxed, it

becomes a subsidy. I that happens, I’m not sure i 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 urther:

Right now, Shakti is a sel-sustaining model that is generating a lot o returns, and we are currently

investing all o that into the Shakti business. So, it is certainly going to impact the brands in terms

o 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 conorms to rules o business. Otherwise, there are a lot o companies that can

do CSR [corporate social responsibility] initiatives. We don’t talk about that when we talk about BoP

[Base o the Pyramid] business initiatives because, quite simply, those [CSR eorts] are activities

geared towards philanthropy and this is a [BoP] initiative that is scalable and sustainable.

I-Shakti Kiosk




For HLL, Shakti oers a more comprehensive and entrepreneurial approach to addressing the issues aced

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 or the company

by using local talent that act as spokespersons in areas where traditional advertising media cannot reach.

In this environment, word-o-mouth is an eective source o infuence and persuasion. Finally, it creates

a stake in the community within which Shakti operates, creating rst-mover advantage over rival FMCG

companies and countering the uture growth o possible imitation products.

While it has been the most successul Millennium Plan initiative to date, HLL managers are reluctant to

label Shakti a success. What is clear is that i it is sustainable and scalable, Shakti will provide a radically

new channel or the company through which it can serve the needs o 742 million rural consumers and lit

its fagging 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 perected beore allowing or 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 o Andhra Pradesh, and theShakti team took this opportunity to prove to themselves, as well as to others, that the model could indeed

work. The team elt that once an eective 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 o 2006. As the project gathers steam, it aces new

challenges. Currently, a major issue is the drop-out rates o the Shakti entrepreneurs. When the initiative rst

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 o drop-outs are low support received rom the amily and the community,

12

The Social Impact of Shakti

In Peddakaparthy, a small village in the Indian state o Andhra Pradesh, agriculture is the chie

occupation. The state has been acing droughts in many districts, and it has the dubious distinction o

having one o the highest armer suicide rates in the country. In 2004, over 300 armers* took their lives

as a result o poor agricultural output, drought, and indebtedness.

Bharatamma is 55 years old and lives in Peddakaparthy. For decades, her amily members worked

in the elds or their livelihood. The erratic nature o monsoon rains over the years had orced them to

the brink o 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 eorts paid o 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 nally changed or the

better.”

The Shakti story has drawn media attention both in India and overseas, including The Wall Street

Journal, which eatured it on its ront page on May 25, 2005. Beside the income-generation aspect, the

project has made a great impact on the condence o its participants. As Ratna, a Shakti entrepreneurrom 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




13

and limited success at income-generation. The Shakti management team has ound that training is a critical

element o the entrepreneur’s ability to improve her earning capabilities. Another idea being considered is

to develop partnerships with non-competing companies to increase the portolio o products available to a

Shakti Entrepreneur.

HLL in general, and Shakti in particular, also needs to consider the infuence o nature and geography

on the local economy in rural India. Rural markets are primarily dependent on agricultural income, whichin turn, is dependent on annual rainall. The 1990s were perhaps the best years or rural India in recent

memory, but since 2002, monsoons have been below normal.

As the initiative scales up, the sheer size o operations has also brought challenges. Shakti started o

as a two-member team with ambitious goals at HLL. Today, the project has relationships with over 350 non-

prot organizations and other non-traditional partners. For Shakti, local and international non-prots play

a vital role in providing an understanding o local communities. Moreover, they act as aggregators o the

local communities through the sel-help groups, they oer 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 o partners, however, brings out a set o challenges

around relationship management and social perormance expectations that are new or 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 allen 2%, and prot ater tax had plunged 33%. The company’s laundry business,

comprising brands like Wheel and Sur and accounting or 43% o the company’s 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 ollows: “O critical importance are market share gains on key products which are not visible.

Secondly, the growth in new categories is also not visible”.

The company has put together its ambitious Millennium Plan to move it into the next stage o growth.Since 2000, the Shakti has taken o 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 dierent 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 o

a uture sustainable competitive advantage? HLL’s BoP strategy had evolved rom the development o a

low-cost detergent named Wheel to Shakti, a business strategy specically targeting the BoP segment. But

is this evolution sucient, or are urther developments required in HLL’s business model to serve the rural

poor? Finally, how eective is HLL in achieving its stated goal o making a positive social impact in the

communities in which it operates?




14

Exhibits

Exhibit 1

HLL 3-Year Stock Price on Bombay Stock Exchange

Source: Bombay Stock Exchange Limited

1970

1960

Nirma powder launched

Surf launched

1980

2000

1990

Iniative started to counter Nirma;

Wheel launched

Nirma becomes 2nd largest

brand in India

HLL launches Sunlight powderNirma becomes the largest

detergent brand in India

Wheel overtakes Nirma as t

largest detergent brand

Nirma detergent bar launch

HLL tests Ala, Rinso

Exhibit 2

The Nirma Story Timeline



0


15

Exhibit 3

Distribution o Rural Income By Household

Consumer Class Annual Income Distribution by percentage population(est.)

1995-1996 2006-2007

Very Rich Above Indian Rupees 0.3 0.9215,000

Consuming Class Indian Rupees 13.5 25.0

45,001- 215,000

Climber Indian Rupees 31.6 49.0

22,001- 45,000

Aspirant Indian Rupees 31.2 14.0

16,001 - 22,000

Destitute Indian Rupees 23.4 11.1

16,000 & Below

Total 100.0 100.0

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

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: Census o India, 2001

Population # of villages % of total villages

Less than 200 92,541 15.6

200-500 127,054 21.4

501-1000 144,817 24.4

1001-2000 129,662 21.9

2001-5000 80,313 13.5

5001-10000 18,758 3.2

Total # of villages 593,154* 100.0

Exhibit 4

Distribution o Rural Population

*Total inhabited villages is 638,691



0


16

Exhibit 5

Hindustan Lever Limited Distribution Chain

C&F Agent

HLL Factory

Large

RetailerRedistributor

Stockist

Urban Consumer Shakti

Dealer

Rural

Distributor

Redistributor

Stockist

Sub-stockist

Outlet

Outlet

Rural Consumer



0


17

Exhibit 6

Proft and Loss Statement Years 2000-2004

Year Dec ‘04 Dec ’03 Dec ‘02 Dec ’01 Dec ‘00

INCOME

Sales Turnover 100,571.2 102,290.4 100,590.3 107,141.2 106,429.7

Other Income 1,859.8 2,907.8 2,673.9 2,815.5 3,044.8

Total Income 102,431.0 105,201.9 103,264.2 109,956.7 109,474.5

EXPENDITURE

Power & Fuel Cost 1,647.7 1,678.4 1,664.1 1,527.7 1,399.5

Other Mfg Cost 56,843.0 55,149.3 54,323.7 62,708.9 66,153.7

Employee Cost 5,748.4 5,786.3 5,991.1 5,917.1 6,143.5

Selling & Admin Expenses 20,916.6 18,618.5 18,367.4 19,126.7 17,130.8

Expenses Capitalised 0.00 0.00 0.00 0.00 0.00

Operating Profit 15,415.4 21,061.5 20,244.0 17,860.9 15,602.2

Interest and Financial Charges 1,299.8 667.6 91.8 77.4 131.5

Depreciation 1,209.0 1,247.8 1,341.0 1,446.6 1,309.4

Other Write-offs 0.00 0.00 0.00 0.00 0.00

Profit Before Tax 14,766.4 22,053.8 21,485.0 19,152.3 17,206.1

Tax 3,207.4 4,883.0 4,798.5 4,024.2 3550.0

Profit After Tax 11,559.1 17,170.8 16,686.5 15,128.1 13,656.1

Amount Available for Appropriation 20,159,5 29,699.5 25,297.1 20,832.9 15,201.7

Earnings Per Share (Rs) 5.25 7.80 7.58 6.87 6.21

Book Value (Rs) Per Share 9.50 9.71 16.62 13.82 11.30

Source: Hindustan Lever Limited

Note: Rupees in Millions1 US$ = Rs. 44 (based on prevailing exchange rate in May 2005)




18

Endnotes

1 Dadiseth, K.B.. Annual shareholders meeting address, where Hindustan Lever Limited Chairman Mr. K.B. Dadiseth unveiled the

company’s strategic vision, entitled “Millennium Plan.” 25 Apr. 2000.

2 Equitymaster.com. 6 Nov. 2006. < www.equitymaster.com>.

3 HLL Corporate Prole. 2004.

4 Ibid.

5 Ibid.

6 Rangan, V. Kasturi, and Rohithari Rajan. “Unilever in India: Hindustan Lever’s Project Shakti--Marketing FMCG to the Rural Consumer.”

Harvard Business School Case 505-056.

7 -bhai: an Indian term o respect, literally meaning ‘brother’.

8 Company P&L Statement. 31 Mar. 2004.

9 Small-scale sector: a part o industry with small capital needs and high labor-intensity.

10 Personal Conversation with Ajit Andhare, HLL.

11 ORG-GK Retail audit.

12 “A New Improved HLL.” Redi - India Abroad. 6 Nov. 2006. <www.redi.com>.

13 “A Premium Future or HLL.” Economic Times. 4 Sept. 2004.14 Rangan, V. Kasturi, and Rohithari Rajan. “Unilever in India: Hindustan Lever’s Project Shakti--Marketing FMCG to the Rural Consumer.”

Harvard Business School Case 505-056.

15 Grameen Bank, a micro-credit organization started in 1976 in Bangladesh by economics proessor Mohammad Yunus, was a pioneer

in using local groups as a key component in an enterprise’s business model. The Bank deed conventional banking rules by lending

to the poor with no collateral and relied on sel-help groups as a means to ensure accountability o borrowers. As o 2005, Grameen

Bank had made cumulative loans o US$5,025 million and maintained a repayment rate o 96%, higher than that o traditional

commercial banks. Widely admired by the development community, Grameen’s model o relying on the power o sel-help groups has

been replicated in a number o other emerging economies.

16 Exchange rate: $1 USD to Rs.43.5.

17 “Remaking Lever.” Business World. 30 Aug. 2004.

18 Census o India. 2001.

19 Ibid.

20 National Council or Applied Economic Research.

21 “HLL Project Shakti To Cover All Rural India.” The Financial Express. 2 Mar. 2004.

22 -amma: literally, mother but also a general term or elder women in India.

23 Prahalad, C.K.. The Fortune at the Bottom o the Pyramid: Eradicating Poverty Through Prots. Upper Saddle River, NJ: Wharton School

Publishing, 2004.



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