Innovation and Entrepreneurship
The Power of Chicken Feed to Build Wealth in South AfricaPublished: May 14, 2009
Societal wealth creation, a concept formulated at Wharton, is a unique approach to social entrepreneurship. The idea is to use for-profit businesses to help build communities in underdeveloped countries. Co-founders Ian C. MacMillan, director of Wharton's Sol C. Snider Entrepreneurial Research Center, and James D. Thompson, director of the Wharton Societal Wealth Program -- both South Africans -- recently discussed their societal wealth projects in Zambia and other parts of Africa.
Knowledge@Wharton: What exactly is societal wealth?
Ian MacMillan: We're interested in using entrepreneurship as a weapon for attacking social problems. In the last 50 years, trillions of dollars have been wasted on programs that are supposed to help people, in particular in Africa. Jim and I conceived of an idea where we go out and try to create businesses to alleviate and solve social problems and make money.
Knowledge@Wharton: How does societal wealth differ from microfinance?
MacMillan: There's a lot of microfinance. It's very important. But microfinancing tends to impact a relatively small group of people. We felt we should be looking at projects with a more substantial impact than simply helping save a village. Hence, the term "societal wealth" as opposed to "social entrepreneurship."
Knowledge@Wharton: How are these ventures funded?
MacMillan: The seed capital is paid for by a philanthropist, which puts the process in motion. Once profits [are made], the tin cup need never come back again. If we develop the funding that's needed to get it started, then once it takes off, we won't be back. We focus mainly on Africa, but that doesn't mean that what works in Africa shouldn't be transferred to other parts of the world.
James Thompson: The typical nonprofit activity has very little chance of attracting capital because capital chases returns. Part of our approach is that if these things succeed and there is a return – well, now you have the ability to attract more investment.
Knowledge@Wharton: How do you decide which projects to take on?
Thompson: We have three objectives when we look at a project: Can it be profitable; will it create employment and therefore self-worth; and what is the societal outcome we hope to accomplish.
Knowledge@Wharton: How did you begin your societal wealth project in Zambia?
Thompson: The market in Zambia is essential to Southern Africa. It is a very stable country and resource rich in copper. The reason we started there -- besides the fact that we had someone interested in this concept -- is because in 2000, copper prices were depressed. The consequence is that Zambia has had two decades of divestment from mining. It has more than 50% unemployment, a high HIV rate, and a large population of widows and orphans. One of the key problems is that people with compromised immune systems are highly susceptible to opportunistic infection in the absence of decent nutrition. The hypothesis was that one of the reasons for this poor nutrition, aside from joblessness, was that decent food was expensive, particularly protein, and hard to come by. If someone was able to produce higher-quality animal feed for poultry (the choice protein aside from beef, which is just too expensive), people would grow more poultry and in doing so would improve the quality of their nutrition.
Knowledge@Wharton: How did you turn this concept into a business?
Thompson: A woman was willing to take this on. We told her our rules. You need to show us there's a market for this feed; you may not sell on credit -- if you can't sell for cash, we're not interested; you may not have assets -- you find a way to do this without investing in assets; and you don't do this on your own; you do this inside a big company that has an interest. If you can do those four things, then come and talk to us.
About 18 months later she came to us and said, 'Look, I've done what you said and we need to talk now.' This was started as an intrapreneurial initiative. She cut a deal with a company and hired six part-time workers. She found six shovels. She had about $8,000 in cash and a cell phone. She went to the University of South Africa and got some feed formulas and started mixing feed by hand, bagging it and going out to villages. She held seminars in villages around the region and began to build a client base.
Knowledge@Wharton: Did the business grow smoothly?
Thompson: [After a while] she was selling 180 tons a month. If you do the math, 180 tons of feed is 90 tons of chicken, which is 500,000 daily protein servings. But she said, 'I have a problem. My margins are about 4% to 5%. I think we've made an error in estimating the market size. I cannot break the ceiling. We can't continue like this because at a 5% margin we have no ability to withstand a shock. If there's a shock in the system, then we'll die.'
Knowledge@Wharton: What was the problem?
Thompson: Formulating cost-effective feeds is incredibly complex. In two years, the business had grown to 26 different types of feeds. It was a massive formulation problem. Big companies spend a few hundred thousand dollars to buy sophisticated software to do this. We got our undergrads to scope out a linear program that we thought would work in this environment. Computer skills are limited. This had to be something they could work on a laptop, a Microsoft product, fill in numbers and push run. We [found out about] software that Penn has been developing with Cornell for four years. It takes into account the stage of lactation of a dairy cow, its age, its body mass index, its weight, the ambient temperature of its environment and certain genetic information, and it formulates feed for that animal. After about six months, we took the CD to Africa and worked out the bugs for a few months. Just before we delivered the CD, my phone rang. It was the entrepreneur and she said, 'They know we're here and they're coming after us.' There was a rumor of a coordinated 20% across the board price cut by the three big competitors to try to kill this startup that had begun to show signs of disruption. So she said, 'This thing you're coming to deliver: How good is it?' We told her that we thought we could save her from between 17% and 25%. The next morning, she dropped her price by 20%.
Knowledge@Wharton: Has the company succeeded?
Thompson: Those numbers were realized. They are still selling feed at 20% below 2003 prices. The company we're dealing with is now selling 1,800 tons a month. This equates to significant protein consumption. What [her competitors] haven't figured out yet is that she's still making money when they cut their prices. She now has, in any given month, 1,000 to 1,400 small-scale producers. We have put in place a set of management practices and a technology in a protected center that enables more than 1,000 other businesses to operate.