(Undergrad Mid Term Exam)
I reproduce below a case study we did on Digicel’s decision to enter the cell phone market in Haiti. It was a controversial decision by Digicel CEO Denis O’Brien to go into Haiti, by far the poorest country in the western hemisphere. Digicel already had 11 million customers in 32 other markets, why take a risk on a nation with a record of poor governance, massive unemployment, sporadic violence and still recovering from a horrific earthquake?
But where everyone else including his BOD saw chaos and suffering, Denis saw opportunity not only of a commercial nature but also an opportunity to make a difference. Haiti, he thought, was a nation of micro-entrepreneurs-of-necessity who just needed modern communications tools to unleash their inner hero.
If you would like to try it, first read the news article I reproduce below, then try the midterm exam on your own. It’s an undergrad exam! Third or fourth year.
You’ll have to build a Digicel Haiti biz model and, in that process, you’ll learn why we believe that biz models are so fundamental to enterprise success. If you get it right, the harder you work, the more money you’ll make. With the wrong biz model, hard work won’t help you.
You can that look at the sample exam I include at the end of this post (mine). Good luck with your ‘exam’ (and reading my handwriting. I am a Dr after all.)
The Article
Cell firm walks the investment walk
Digicel became Haiti’s top employer by providing the phone service it didn’t have
BY RENE BRUEMMER, MONTREAL GAZETTE JANUARY 17, 2011
People wait outside a Digicel store to buy equipment and prepaid phone cards in downtown Port-au-Prince. Digicel is one of the largest private sector players in Haiti, but sources within the telecommunications industry accuse the Haitian government of “opportunistic public policy making” that favours Teleco, in which the state has a 40-per-cent stake.
Photo: ST-FELIX EVENS REUTERS
PORT-AU-PRINCE – When cellular phone company Digicel entered the Haitian market in 2006, many felt they were doomed to fail. They plowed ahead regardless, investing hundreds of millions of dollars, and in 10 months had built their cellphone network. The hope was to sign up 300,000 clients within the first five years.
They had 300,000 clients in the first month.
With the proper product, a good business plan and the right amount of moxie, Digicel showed, there is money to be made in Haiti.
By the end of its first year, the upstart telecommunications provider launched by Irish billionaire entrepreneur Denis O’Brien in Jamaica in 2001 had signed up 1.4 million clients in Haiti. It would go on to invest $370 million in the country, the largest-ever investment of a foreign private company in Haiti, and has plans to invest another $150 million. They have 900 employees, making it the largest employer in the country, as well as the largest taxpayer. Digicel says it employs an additional 60,000 indirectly, in large part through its mini-franchises visible on every Haitian street corner -a man or woman wearing a Digicel vest who can top up talking time on your telephone for as little as 25 cents. There are also the vendors who will charge your phone off a car battery for a few cents, or stand in the middle of the road selling cellphone chargers to passing drivers.
Much of Digicel’s success came because it catered to the Haitian masses. Where cellphones used to cost between $70 and $200, putting them out of reach of 98 per cent of the population, Digicel dropped prices to as low as $12.50 U.S. Users no longer had to pay for activation or incoming phone calls. Most phones work on a prepaid system, ending the need for upfront deposits, complicated contracts, or a fixed address.
“Denis O’Brien saw a market you could make money in, and at the same time a way to encourage other people to move in and invest,” Greg van Koughnett, an amiable Pointe Claire native who is head of legal and regulatory affairs for Digicel Haiti, said during an interview in his office in Digicel’s gleaming 11-storey, earthquake-proof building in Port-au-Prince, the tallest in the capital. It has also opened the benefits of wireless communication in a place with few land lines to millions of Haitians, allowing plumbers and masons to reach their clients, and family members and friends to reach each other. Digicel says 40 per cent of Haitians now have access to telephone service, up from five per cent before 2006.
Digicel’s successful gamble exemplifies what some say is Haiti’s best hope, and a much more effective solution than constantly bestowing aid -responsible investment by entrepreneurs interested in enriching themselves and Haiti at the same time.
“It’s perfectly fine to make money as long as it’s done responsibly,” Conor Murphy told the Slate.comonline magazine. “Responsible businesses are what’s needed here,” especially in light of the thousands of aid organizations that have failed to have an impact on the country’s overall standard of living.
Murphy is the country manager of “Soul of Haiti,” which is trying to build economic partnerships between Ireland and Haiti.
In Montreal this fall, hundreds of Haitian and Quebec entrepreneurs and officials attended what was billed as the first Quebec-Haiti Business Forum to spur economic opportunities.
“I think enlightened capitalism can go a long way,” van Koughnett said at then, noting that Digicel’s charitable foundation has created more than 20 schools in Haiti, and raised $20 million for disaster relief. O’Brien and his wife personally funded the rebuilding of Port-au-Prince’s vast, iconic Iron Market building, home to 900 vendors downtown, which collapsed in the earthquake. With $12 million in funding, the market was rebuilt in a year.
Enlightened capitalism has also gone a long way for Digicel -Haiti represents 20 per cent of its overall revenues, and is its second-largest market after Jamaica out of the 32 countries in which it operates in the Caribbean and Central America.
Investing in Haiti has its challenges, however. Digicel’s policy of not paying bribes means things sometimes take longer getting out of customs. Startup times for new foreign businesses in Haiti were among the slowest in the world, but Haitian Commerce and Industry Minister Josseline Colimon Fethiere told The Gazette that measures have been taken to reduce the period it takes to start a new business in Haiti from six months to six weeks. Money is being invested in training, customs and infrastructure like roads and ports, with the hope foreign investments can lead to 140,000 jobs in the next five years, Fethiere said.
For foreign employees like van Koughnett, Haiti represents a “fountain of youth” -the opportunity to see a new region, work with young, motivated people keen to learn, and try to make things better. There are challenges for him, too — since his picture and a short bio are displayed on Digicel’s web pages, he is considered a kidnapping risk, so he is accompanied by an armed guard and driven around in a bulletproof SUV.
Van Koughnett considers it a new adventure. “I’m quite tickled pink to be here,” he said.
For CEO O’Brien, the benefits are also two-fold. In 2010, the mayor of Port-au-Prince named O’Brien the city’s “goodwill ambassador” in recognition of his efforts to rebuild Haiti and attract foreign investment.
rbruemmer@montrealgazette.com
The Mid Term Test
ADM 3396 Entrepreneurialist Culture—Mid Term Exam Questions
“Whether you believe you can, or whether you believe you can’t, you’re absolutely right,” Henry Ford.
1. You are advising the CEO of Digicel, Denis O’Brien, who has mobile operations in 32 markets in the Caribbean, Central and South America and the South Pacific. After nine years of operation, Digicel Group Limited has 11 million cell phone customers.
2. Your CEO has decided to enter the Haitian market, the poorest country in the western hemisphere and one of the poorest in the world.
3. What’s worse, the Board of Directors is skeptical since not only does Haiti have a reputation for poor governance but it is also thought to have a massive problem with corruption compounded by violence.
4. But you remember reading a quote on Entrepreneur Sayings when you were in ADM3396 way back in 2006 attributed to Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, who said: “The time to buy is when there’s blood in the streets.” Rothschild knew what he was talking about since he made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. You believe that the original quote was: “Buy when there’s blood in the streets, even if the blood is your own.”
5. So you believe that this is the right time to enter Haiti when no one else would dare. If nothing else, the survivors of the horrific earthquake will understand the importance of being able to quickly communicate with family members and others and will take to your cell phone service quickly, you think.
6. There is also the fact that you know Haiti has a veritable army of craftspersons, artists, small scale entrepreneurs, contractors plus you believe there will be an influx of aid providers—all these people will need fast communications even if it is only cell phone service and not Internet at first. So you are doubly determined to move forward.
7. Pick from the following menu the elements you believe should go into your business model for your Haitian venture. Remember, even though you are advising the CEO of a largish company now, you know that he still believes that each new venture should stand on its own two feet and be bootstrapped. Draw a business model for Digicel’s new venture into Haiti from your selection.
a. Enter the market at the top end only with post-paid service and higher end smart phones costing $70 to $200 USD.
b. Require every user to have a fixed address.
c. You advise that you should take only the ‘cream’ from the top of the market and leave the masses either without service or let someone else/some other provider take that risk.
d. Get a local partner and back him or her.
e. Build a cell phone network that only covers the capital of Port-au-Prince where the majority of the people live. Leave the rest of the country for later thereby saving about half the $370 million you think it will cost to enter and develop the market.
f. Outsource customer service/call centre work to another Caribbean island where it is safer to work from.
g. You recommend providing cell phones for the masses.
h. You enter the market with cell phones as low $12.50 USD.
i. You are going to charge fees for activation.
j. You are not going to charge fees for activation.
k. Require every user to sign a contract.
l. Make incoming calls free.
m. Charge for incoming calls but not by the minute but by the second.
n. Set up a call centre and customer service centre in a new, earthquake proof building you plan to construct in Port-au-Prince.
o. Market penetration in 2006 in Haiti is 5%; you believe by 2010 you can get it to 10%.
p. Market penetration in 2006 in Haiti is 5%; you believe by 2010 you can get it to 40%.
q. Market penetration in 2006 in Haiti is 5%; you believe by 2010 you can get it to 25%.
r. Your largest current market is Jamaica. You believe Haiti has the potential to be the 2nd largest market for you out of the 32 you operate in because there is no competition.
s. Your largest current market is Jamaica. You believe Haiti has the potential to be the 2nd largest market for you out of the 32 you operate in because although there is competition, you believe that you can outcompete them and that the marketplace has such low penetration that you can go nowhere but up—all boats will rise.
t. Create a Charitable Foundation in Haiti to build schools.
u. Raise money for disaster relief.
v. A Foundation is nothing but a distraction and should not be part of your business model.
w. Raising money for disaster relief is up to other people and organizations and should not be part of your business model.
x. Your top Manager for Haiti should not be based in Haiti—it’s too dangerous and difficult to operate from there.
y. Your top Manager should be based in Haiti and your duty of care to him or her is accomplished by providing armed security.
z. Your top Manager should be based in Haiti and your duty of care to him or her is accomplished by providing unarmed security.
aa. You are going to establish two or three retail stores where people can come and buy your services and products.
bb. You are prepared to do whatever is necessary to be successful in Haiti—including paying bribes to get your product released from customs.
cc. You refuse to pay bribes and your product is being delayed every week in the harbour.
dd. You will get involved in the rebuilding of Haiti’s vast, iconic Iron Market building where 900 vendors work in downtown Port-au-Prince and raise the $12 million needed to do it.
ee. You believe that this is outside the scope of Digicel.
ff. If you are successful, you believe you could employ 900 people in Haiti becoming Haiti’s top private sector employer if you put CS in country.
gg. You expect to build your network in five years—by putting a toe in the water first in Port-au-Prince, you can not only save investment dollars, you can see if your model will work before making a full commitment to the island.
hh. You decide to go all-in and build out the entire network in just 10 months.
ii. You decide to have mini-franchises with men or women on practically every street corner wearing a Digicel vest.
jj. They can top up a customer’s cell phone minutes for a minimum of $10.
kk. They can top up a customer’s cell phone minutes for a minimum of $5.
ll. They can top up a customer’s cell phone minutes for a minimum of $1.
mm. They can top up a customer’s cell phone minutes for a minimum of 25 cents.
nn. They can charge your cell phone too for a fee from car batteries.
oo. No they can’t charge your phone but they can sell you a charger for your home or office.
(20 marks)
Digicel’s Haitian Business Model
[PLEASE TAKE A SHEET OF PAPER AND SKETCH OUT YOUR BIZ MODEL BEFORE LOOKING AT THE ONE I REPRODUCE BELOW. FOR MORE ON HOW TO BUILD A BIZ MODEL, PLEASE SEE: The Complete Business Model, http://www.eqjournal.org/?p=692. You can also use our online BMG, Business Model Generator to help you with your first draft. See: http://www.dramatispersonae.org/BusinessModels/BusinessModelGeneratorLandingPage.htm and http://www.dramatispersonae.org/bmg/.]
8. Do you see an example above where Digicel is working with more than 1-dimension on the client side of the business? (2 marks)
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9. Do you think that Digicel would provide a higher or lower level of service if they centralized customer service in one location outside of Haiti and why? (4 marks)
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10. Which of the elements of Digicel’s business model has allowed it to reduce its marketing problem from-one-to-many to one-to-a-few? (4 marks)
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11. Identify three examples of DV, differentiated value, or ‘pixie dust’ in the above model. (3 marks)
a. ____________________________________________
b. ____________________________________________
c. ____________________________________________
12. In just three sentences, can you sum up the value proposition of Digicel Haiti? (4 marks)
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13. Why would Digicel build its own building in Haiti? What are the two main reasons why Digicel might decide to do that? (2 marks)
a. ____________________________________________
b. ____________________________________________
14. What are two GM (Guerrilla Marketing) things that Digicel might do? (2 marks)
a. ____________________________________________
b. ____________________________________________
15. Francis has purchased a mini-franchise from Digicel. Calculate Francis’ cash conversion cycle based on the following data: (5 Marks)
a. Cost of mini-franchise: $100
b. Accounts Payable to Digicel at year end: $80
c. Accounts Receivable from clients at year end: $42
d. Inventory (minutes purchased and phones) at year end: $74
e. Francis annual sales are: $2,075
f. His COGS is: $33
Francis’ cash conversion cycle is: __ ________ days (Remember to put a + sign or a – sign in front of your CCC.)
If Francis’ inventory at year end increases by 10%, his cash conversion cycle changes significantly to: __ ________
16. There is a source of Bootstrap Capital in the above Biz Model. What is it and explain why it is bootstrap capital? (4 marks)
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(Note: Total marks available 50)
Copyright. Prof Bruce M. Firestone, Ottawa, Canada. 2011.
The Answers
You can see how to calculate CCC, Cash Conversion Cycles below but you can also download CCC calculators in .xls format from our server and keep those handy as you develop your own business cases. Here are the links for the Digicel base case and its sensitivity test: http://www.eqjournal.org/mid-term-CashConversionCycleMeasurement-digicel.xls and http://www.eqjournal.org/mid-term-CashConversionCycleMeasurement-digicel-case-2.xls.
