Fortune favors the ingenious.
When profits sink or a competitor upends the market, it’s time to look beyond customary fixes. The experiences of these entrepreneurs, all participants in Columbia Business School’s Entrepreneurship and Competitive in Latin America (ECLA) program, offer fresh solutions to some pesky business problems.
Trash your current business model
Is remanufacturing the new recycling? Petar Ostojic certainly thinks so. As CEO of Neptuno Pumps, a $13 million Chilean company that makes industrial equipment for the mining industry, he’s become a leading spokesman for what’s known as the circular economy: in which manufacturers reclaim old products, re-engineer them to brand-new status, and resell to customers in a continuous, virtuous cycle.
Headquartered in Chile’s Atacama Desert — which is not only the driest place on earth but also a world-renowned mining locale — the company again rebooted its factory a decade ago to cast pipes for mining. But as the bottom dropped out of the commodities market and customers suddenly became cost conscious, the company revisited its business model once again in 2015. The challenge: to make their products cheaper, more efficient, customizable, and higher tech in a world that is turning to seawater rather than fresh water as a key component of operations.
Today’s circular economy model calls for Neptuno to make, sell, or lease then repair used equipment it resells to customers, a clear departure from the old “use and discard” practices common in the mining industry. The company touts clear advantages in this approach: Customers still get a one-year guarantee (the same that Neptuno issues for new products), but pumps are 60 percent to 70 percent of the cost of new products and can be delivered in a much shorter time frame.
Neptuno has rejiggered its design processes to make its pumps easier to disassemble and provide easier access to the equipment’s most expensive parts. It also works with customers to actively source material that it can recycle. And, going forward, it expects to build more local manufacturing capability to stay closer to its recycling suppliers.
Although large competitors have not yet followed suit, Ostojic said the world is starting to catch on to the advantages of a circular economy. The World Economic Forum suggests the linear economy squanders nearly 80 percent of the $3.2 trillion value of consumer goods each year. The Ellen MacArthur Foundation forecasts that European manufacturers could save $630 billion a year in material costs by adopting a circular model. The circular economy, notes Ostojic, could be particularly beneficial for fast-growing emerging markets, where development cash is scarce and the time and logistics needed to deliver heavy-duty solutions to remote locations is precious.
As a company grows, it often formalizes processes and chains of command to ensure a consistent, profitable customer experience.
But for Iluméxico, a solar energy provider, that just didn’t work. In its early years, the ten-year-old company ran from a centralized location in Mexico City. “We were very inefficient,” admitted CEO Manuel Wiechers, noting that the company was just too remote from its customers.
The solution was to set up 11 regional centers, dubbed ILUCentros, each costing an average $7,400. Locally recruited staffers assess their territories and sell the company’s solar solutions. ILUCentros “community engineers” install and maintain solar panels that Iluméxico still makes at two central factories, and hook LED light bulbs to its Prometeo device, a proprietary controller that regulates the flow of electricity and lets customers adjust the intensity of light.
Users can sign up for pay-as-you-go solar purchases that cost no more on a yearly basis than the budget they allotted for candles and diesel, and can even borrow through Iluméxico’s microloan program to fund their monthly bills.
A key to the company’s success has been its decentralized structure. Hiring locals not only cuts the expense of moving its higher-cost employees in-country, the practice also leverages community involvement since individuals are more likely to understand their regions and know the decision-makers among communities.
Which is not to say there weren’t difficulties along the way. As it began hiring local talent, Iluméxico ran into an employee turnover buzzsaw. “There are huge challenges that offset the extra costs of managing everything centrally, mainly related to HR and logistics,” said Wiechers, an industrial engineer by training. Through its involvement with ECLA, the company created a profile to identify which traits make a good hire. “We basically look for people who are not afraid to walk long distances and believe in our cause,” he explained.
Once it hires committed workers, Iluméxico rolls out a new standardized education program it devised, again with ECLA input. The goal is to have a local with no prior experience ready to hit the field in two weeks, although Wiechers admitted it still takes two months until a new hire is independent. By delivering education primarily online, training is easy and uniform, and allows for continual updates.
Cut the middleman
In her nine years in business, Rocio Gonazlez, owner of Argentinian home doctor and jewelry company Daravi, has figured out a lot of things along the way. For example, rather than stock large quantities of inventory, the company identified its 25 best-selling items and makes the rest of the items on demand.
It wasn’t until her visit to the Dharavi slums of India, part of her curriculum for Columbia Business School’s Entrepreneurship in Latin America program, that she had her “aha moment.” She changed the name of her company to “Daravi,” dropping the “h,” and moved its factory to Garrote, a slum in Argentina’s Tigre Sur District, to bring the work closer to employees. Rather than contract with cooperative organizations, as it had done in the past, the company now hires individuals, a move to achieve better quality control.
Startup costs for the factory’s molds and other equipment run $60,000 to $80,000. Once she is convinced that the model is sustainable, she plans to open additional factories in other Argentinean slums. “We want to generate a replicable model of factories using discards to give work throughout Argentina and Mercosur,” she said.
In addition to cash flow, Daravi will draw on government support and corporate grants to reach the scale González thinks is crucial, and she is busy lining up meetings with possible sponsors. “Both sectors are interested in recycling and employment,” she said, “but the public never thinks of the commercial side and private business is not so invested in the public interest.” By shoring up Daravi’s corporate side, González hopes, Argentina’s slums will bring some beauty and whimsy to the world.
Read more about Daravi.
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