Chapter 5 A Path Out of Poverty: Turning Biowaste into Opportunity at the Base of the Economic Pyramid in Indonesia Linda Herkenhoff and Don A. Earnest – Humanistic Management: Social Entrepreneurship and Mindfulness, Volume II

CHAPTER 5

A Path Out of Poverty: Turning Biowaste into Opportunity at the Base of the Economic Pyramid in Indonesia

Dr. Linda Herkenhoff and Don A. Earnest

Overview: This case presents a model of corporate social action (CSA) integrated with corporate financial performance (CFP) on a platform that balances the general model of people, planet, and profit (Figure 5.1). The entrepreneurial approach presented in this case strives to protect human dignity while promoting social well-being.

Figure 5.1 General

The key stakeholders are the enterprise, JCI Bandung,1 and the subsistence chicken farmers in the region of Bandung, Indonesia. The enterprise seeks to generate a return on investment for their owners (profit) by means of creating value for the subsistence chicken farmers (people) and by using biowaste, which reduces the significant pollution problem in this part of Indonesia (planet). As in many developing nations around the world, the Indonesian government is concerned with the ongoing migration of villagers seeking better employment opportunities in the larger cities such as Jakarta and Bandung. In this case, JCI Bandung seeks to produce low-cost chicken feed from biowaste, thereby allowing villagers to operate profitable chicken farms without huge overheads in their own communities.

CSA is often narrowly associated with corporate (enterprise) ­philanthropy only, but this example expands that focus to also recognize its role in shared value creation, risk management, and humanistic management.

Humanistic management in this example includes engaging in best practices in management skills and processes while recognizing that the people involved are more than a means to an end. Sustaining a productive business includes working with people in such a way as to enhance their social well-being and to protect their human dignity. This type of approach recognizes that the profit model is not an exploitation game, pitting enterprise profits against human values.

Development of the concept of creating shared value in this chapter links CSA strongly to innovation, especially in terms of developing a new product (chicken feed from biowaste) that is commercially successful and that helps to address societal challenges while creating job opportunities at the base of the economic pyramid. By helping to mitigate the social effects of the migration crisis, in the longer term, JCI Bandung offers a set of values on which to build a more cohesive society and on which to base the transition to a sustainable economic system.

Through development of a financially sustainable rural market, JCI reduces the risk associated with demand for its low-cost chicken feed. The three underlying principles in this project are:

  • Doing good is good for everyone
  • Enterprise success and social welfare are interdependent
  • Preservation of human dignity can coexist with financial success

Background

The three main management objectives for this case include (a) establishing a viable organic waste recycling process to produce affordable chicken feed, (b) identifying the employment opportunities created by the recycling process and its ecosystem, and (c) creating a financial model for a sustainable business.

Bandung, Indonesia, located about 146 km (91 miles) from Jakarta, is facing a huge challenge with waste disposal, primarily the large amount of organic agricultural waste generated by local farms (Satriastanti 2011). As in many developing countries, the economy in the rural area surrounding Bandung is also plagued by high unemployment, causing its inhabitants to migrate to larger cities like Bandung and Jakarta in search of better opportunities. JCI Bandung, a start-up organization based in Bandung, is proposing to address both problems by (a) recycling organic waste to produce affordable chicken feed and (b) creating jobs in recycling activity, and in chicken farming. By producing affordable chicken feed, JCI ­Bandung enables more villagers to establish small chicken farms as a viable boost to the local economy.

The city of Bandung had 600,000 residents in the 1970s. Now with the population over 2.5 million, the garbage problem is acute. ­Indonesia’s Minister for the Environment invested IDR 700 million in a ­“reduce-reuse-recycle” program and assigned various agencies to address the problem but the garbage continues to accumulate (Rusman 2006). Adding to the garbage problem are discarded fruits and vegetables that remain unsold from local markets. An estimated 50 percent of all fruits and vegetables are not sold due to overstocking, bruising, or insect damage, and end up in waste piles. JCI Bandung recognized that this organic waste could possibly be used to manufacture feed for chicken. By manufacturing feed derived from recycled organic waste, they could reduce the waste problem, help employ local villagers, and help chicken farmers reduce their cost compared to the current feed supplies that are controlled by a tight network of large distributors.

To investigate the possibility of making feed from local organic waste, JCI Bandung constructed a manufacturing facility and developed prototype equipment. They defined a source of organic waste from local farmers’ markets. Currently they have a local mechanic and machine designer who are continuing to develop prototype equipment for them. Their main funding originates from an angel investor who is passionate about their philanthropic cause. A group of volunteers who have processed prototype feeds are ready and willing to become employees. JCI Bandung has a rudimentary chemistry lab where they believe that they may be able to analyze future feedlots for chemical compliance, a temporary facility for processing, and a chicken coop with chickens to feed while they analyze their prototype feed. However, after an initial review, it became clear that the existing process and equipment lacked reliability and efficiency. On a positive note, JCI Bandung has proven that a rudimentary feed can be manufactured with the local organic waste with the existing equipment.

There are some basic logistical barriers in distributing goods to the marketplace. Indonesia has about 438,000 km of roadways; however, only about 259,000 km of roadways are paved.

Women play a dominant role in the decision-making process in West Javan rural life, despite the religious influence of Islam (Christopher 2010; Wihbey 2012). Women should be involved in the marketing of JCI Bandung’s product, as it appears that they have a strong voice in agricultural decision making in this region of the world. This is an opportunity for women to rise above religious stereotypes and play an equal role in the subsistence marketplace. These opportunities serve to enhance equality, social well-being, and human dignity of women.

Market Attractiveness

The first step in any business review is to determine whether there is a viable marketplace for the product. The market for chicken feed is very attractive in the Bandung area. Chicken is fast becoming a primary source of protein. The root of the market attractiveness lies in the availability of organic waste and in the diet of Indonesians. The large amount of organic waste is in part due to the abundant rainfall and nutrient-rich volcanic soil. According to trends, the Indonesian diet is changing. This offers JCI Bandung an opportunity to capitalize on trends in the marketplace. The trend is away from other sources of protein and toward a rapidly increasing demand for chicken.

Protein consumption increases with income. With GDP growth exceeding 6 percent a year, Indonesia should see an increased demand for protein consumption as a result of increasing incomes. By way of ­comparison, in 2009, Indonesia’s chicken consumption was only 6 kg per year per capita compared to 38.3 kg per year per capita in nearby ­Malaysia. It is projected that chicken consumption in Indonesia will double by 2019 to 12 kg per person per year (USDA 2013); it will still be one-third the rate of its culturally similar neighbor, suggesting that further demand is likely. Indonesia has already passed the tipping point threshold at which development accelerates and consumer demand for products increases (Agriculture and Agri-Food Canada 2012).

Unfortunately, for many in Indonesia, between 40 percent and 60 percent of household expenditures are spent on food alone (Schmidt 2012). The government recognizes that agriculture will continue to play an important role in the economy and has encouraged the development of the chicken industry, particularly small-scale and medium-scale farmers. Forecasted demand for chicken among low-income rural dwellers is projected to increase between 10 percent and 17 percent per year. The estimated demand for chicken for low-income urban dwellers is projected to increase between 15 percent and 21 percent per year.

This suggests that a great opportunity for the chicken feed market and therefore an opportunity to develop a model, where commercial principles adapted to local conditions, can positively impact the local economy and social well-being through job creation in a sustainable marketplace. This is a prime example of corporate social action that recognizes the triple bottom line of people, planet, and profit.

Ecosystem Analysis

The business ecosystem contains those entities that may not have daily direct contact with the core business. It contains NGOs, partners, competitors, and universities that can offer technical business expertise. It can also be a source of potential funding. It is imperative that these relationships be cultivated carefully and that the social value and scalability of the enterprise is communicated. The market has been consolidating through acquisition of competitors. Furthermore, vertical integration strategy is being implemented via downstream acquisitions of animal feed products and services throughout Indonesia.

Despite the dominance of two major players, there are many smaller firms in the market. Therefore, the market structure is duopolistic competition and there is nonprice competition on features such as quality of feed and feed services. Because of this, entry into the market is feasible if JCI Bandung differentiates its product.

While the two major competitors compete on price, quality, and services such as customized animal feed analysis, the major driver for animal feed selection by customers is low price. The majority of cost to bring an animal to harvest is the procurement of feed. Cost competitiveness is a driving force to create scale economies. Despite the fact that the feed is produced in smaller allotments for the smaller sized farms and will be delivered using unconventional methods, JCI Bandung can provide feed at a lower cost than competitors, while realizing a profit for the enterprise and paying competitive wages to its employees. Both the enterprise and workers can benefit in a socially responsible model.

SWOT Analysis

A SWOT analysis was completed to determine the strengths, weaknesses, opportunities, and threats to the project (Figure 5.2). The SWOT analysis allows an enterprise to differentiate between internal issues and external issues.

Figure 5.2 SWOT analysis

The internal/helpful forces that are considered strengths are: the enterprise is a small operation, farmers have existing skills, and there are highly motivated employees who would be appreciative of the opportunity to work for JCI Bandung. External/helpful forces that are considered opportunities are that the participants have market knowledge, NGOs are willing to help, there is a great amount of organic waste because of the favorable climate and optimal soil conditions, and the green/recycling movement is gaining momentum in Indonesia as part of Eco-Islam (Christopher 2010; Satriastanti 2011; Wihbey 2012).

JCI Bandung has weaknesses in key core competencies of producing chicken feed, which limit predictability in volume, quality, and variety. Internal/harmful forces that are considered weaknesses include: The proposed product ingredients need to be carefully mixed, machine maintenance will need skilled technicians, and the business is new to the market and will be competing against established competitors. Challenges include the absence of warehouse facilities, distribution partners, and customer service experience in chicken feed service and distribution. External/harmful threats include: the enterprise will need seed money, sourcing material may be challenging especially if there is competition from the biomass industry for the same raw material, and there are existing competitors with more market knowledge and experience.

Significant competitive deficiencies include the need for frequent maintenance of existing machines and suboptimal storage facilities for materials and finished feed products. JCI Bandung has a high reliance on sun to dry the organic waste material instead of using water extraction machines.

The chicken feed industry in Indonesia is relatively new, as it did not develop until the early 1970s. It is highly concentrated on the island of Java with two companies, PT Charoen and PT JAPFA, commanding a 60 percent market (MBAIA 2010). The remaining 40 percent is highly segmented among 80 companies and independent producers (Prasetyawan 2012). The industry has grown to support a growing poultry industry. Deregulation of the industry in 1991 saw increased investment in the poultry industry with broiler production more than doubling between 1989 and 1993.

The large-scale producers have been able to vertically integrate their operations (from feed to chicken processing) and achieve economies of scale. “The industry is also characterized by homogeneous products, making it difficult to differentiate by price alone” (Prasetyawan 2012). However, opportunities exist for those who offer value-added products and differentiate themselves. It is important to employ a strategy such that JCI Bandung’s project does not attract the attention of the dominant market producers who can take advantage of their vertically integrated organizations and employ economies of scale, threatening JCI Bandung.

JCI Bandung can pursue a strategy to emphasize a few attributes to stand out from the major market holders. They should focus on differentiating their business from others. Emphasizing “green” and “locally owned” and “recycling” may appeal to the target market. Offering personalized service and “best practices” education are other ways JCI Bandung can differentiate itself from the larger market participants.

The minimum order with the large-scale producers is usually 50 kg. This large a quantity cannot be delivered via scooter, and since many of the access routes to the villages are difficult to negotiate with trucks, the farmers have difficulty with the basic logistics. JCI Bandung can deliver quantities in 5, 10, or 15 kg bags via scooters and still keep the costs competitive for these subsistence farmers.

Supply Model

In order to be competitive in the chicken feed market, JCI Bandung needs to supply the local chicken farmers with a quality chicken feed that will help them to raise chickens and bring them to market within a 30-day cycle. Substandard chicken feed (freshness and quality content) will result in underweight or unhealthy chickens and make the chickens unsuitable for sale or result in a delay in bringing these chickens to market. Another important factor is being able to consistently deliver the chicken feed on a timely basis. Any delays in delivering chicken feed will have a detrimental effect on the farmer. If JCI Bandung wants to be the supplier of choice to their customers they need to consistently supply quality feed on a timely basis.

Since the minimum order quantity (MOQ) of the fish meal protein additive is one metric ton and the prices don’t drop until the volume rises to 20 to 30 metric tons, there will not be any economies of scale to assist the profitability of the company for at least five years. Volumes are projected to rise after five years at which point the economies of scale will come into play.

Service Model

The distinctive characteristic of services is that the units of service cannot be inventoried easily. This means that capacity planning becomes important to control. Too much service capacity is costly, while a lack of capacity will lead to lost customers.

JCI Bandung will need to design customer service touch points and take service capacity into careful consideration. The customer touch points in chicken feed manufacturing and distribution include: marketing, sales, distribution, and feed returns.

Manufacturing needs to be directly tied to the daily interaction with customers. Manufacturing a perishable product for customers feeding animals with daily demand for feed requires effective communication to avoid substantial waste.

It is recommended that in the short-term JCI Bandung distributes its poultry feed directly. This will create multiple advantages, which include: Control short-term costs, gain greater knowledge of customers through on-site farm consultations, and develop capabilities to collect and run a feed bag recycling program to drive customer loyalty.

In the service encounter customers will order the feed product via e-mail or phone, with no customization. Even in the more remote villages there is no shortage of access to cellphones and coverage. Payment will be taken at the time of the order. A carrier on a scooter will pick the order from the warehouse and deliver the product to the customer. At this point there could be an input back into the system by collecting and recycling the feedbags. Finally, if a customer has an issue with the feed, it will need to be collected for return and the customer compensated via feed ­replacement or money return.

A major consideration for JCI Bandung is the logistics of moving the feed from the manufacturing facility, directly to the customer. This is especially important due the perishable nature of chicken feed. The feed is optimally consumed with 10 to 12 days after manufacture.

Logistics at JCI Bandung involve quickly distributing chicken feed product from the warehouses facility throughout the province to the local villages. The ideal form of transportation that is widely used throughout Indonesia is the motorized scooter. This can keep costs down and enable quick delivery of the product to the customer. In addition, if there is a larger quantity being ordered, lightweight trucks can be used to negotiate the heavy traffic and mountainous roads of Bandung.

Since the manufacturing facility, warehouse, and distribution center are all contained within one facility, the ideal location of the distribution center would be in central Bandung. This centralized location would minimize distances to deliver the product and lower the costs of petrol used in delivery, and therefore increase margins. Considering that the shelf life is low with chicken feed, keeping the production and warehouse/distribution center together helps keep costs down and decreases product lead-time.

Target Market

Based on the analysis of the value chain and the competitive strengths of the market rivals, it is recommended that JCI Bandung take a focused differentiation strategy. This requires that JCI Bandung narrow scope on both the geography and type of customer they are serving. They should focus on a niche market, with a differentiated product where buyers would be willing to purchase a quality, eco-friendly, locally made product.

To win market share, JCI Bandung will need to focus on a small segment of the market to position its brand of poultry feed. JCI Bandung should target a small geography of farms that raise small quantities of poultry in a specific manner. Further, JCI Bandung can focus on a particular species of chicken.

The optimum farm size for JCI Bandung is roughly between 10 and 1,000 birds. This smaller farm size is required due to JCI Bandung’s limitation on producing large quantities of feed and then distributing the feed quickly.

By sourcing organic ingredients from the local markets and keeping organic waste from the landfill, JCI Bandung can produce and deliver to its end customer an environmentally friendly and socially responsible product.

Pricing and Promotion

Large commercial farms can acquire Ayam Potong (commercial chicken) poultry feed at $0.82 per kg in bulk quantities. However, currently, the financial model estimates that JCI Bandung can produce and sell their poultry feed at $0.765 per kg. Therefore, there is a discount that is associated with JCI Bandung feed when compared to the lowest cost feed produced for large customers. This pricing strategy should work because the product is less expensive, differentiated, and is targeting a small niche of customers. The brand has an opportunity to develop a loyal customer base willing to purchase the product due to the pricing strategy and benefits it offers the local community.

While further research is needed to determine accurate price points for small start-up poultry farm sizes in the more remote villages of West Bandung, in the short term JCI Bandung will be able to build market knowledge in poultry feed production processes and determine if the model is scalable.

Financials

There is very little data on large-scale facilities in Indonesia that produce chicken feed from organic waste. The income statement was developed after carefully considering every step in the process of the organic waste collection, feed production, pricing considerations, marketing, advertising, and delivery of the final product.

There are certain risk factors that need to be taken into consideration in terms of financial sustainability. These include: a limited operating history of JCI Bandung, availability of raw materials, stability of government regulations, and dependence on three key personnel (Yudi ­Hermawan, Donie Pangestu, and Anonymous Sultan). JCI Bandung has been manufacturing chicken feed for less than two years and does not have a history of consistently producing chicken feed for clients. Consequently, operating results achieved to date may not be indicative of the results that may be achieved by any existing or new chicken feed production in the future. The chicken feed industry is subject to numerous national and local government regulations, including those relating to the preparation and sale of chicken feed, and building/zoning requirements.

Strategic Recommendations

It is highly recommended that JCI Bandung lease the required machines to produce commercial grade chicken feed in the short term (0 to 6 months). This will be the least risky way to start and run the operations and most beneficial in terms of employing the local population.

In the medium term (6 to 30 months) additional social components can be built in by recycling local organic waste as part of the chicken feed production input stream.

In the long term, the business will self-sustain and may use some of its profits to diversify and introduce fish feed and fertilizers into the product mix. Optionally, if JCI Bandung management desires, additional machines may be locally built once the business is past its early phase.

Throughout the life of the company, there will be several risk factors including the reliability of the machines used to process feed, seasonal variations in the raw material, weather patterns that may affect processing, product quality, and other factors that may need the attention of management in the early phase. By focusing on building the business with a single product line, chicken feed, JCI Bandung will be able to minimize risk while gaining the necessary time to build up the initial momentum.

This plan requires an initial level of funding of $15,000, with an additional $10,000 needed for liquidity and day-to-day operations.

For environmental sustainability, management must ensure that the environmental impact of the business is positive. This includes integrated waste management and sourcing of local organic waste as much as feasible in the production of chicken feed. For social sustainability, the business must actively recruit, train, and employ local people. Creating jobs at the local level is a win–win for the communities and the enterprise. JCI Bandung recognizes that this is not only a financially viable business but is also an opportunity to create jobs where they are most needed, back in the villages. JCI Bandung wants farmers to have improved employment opportunities while keeping family units intact. The current alternative model of migration of village males to the cities to engage in menial labor is not only demeaning but damaging to the fabric of family/community life in the villages. JCI Bandung recognizes a healthier model that promotes family values, human dignity, and profit for all. The organic waste-recycling project to produce chicken feed is indeed viable and will have a positive financial and social impact on the local population, meeting the objectives of JCI Bandung.

Based on several factors such as rapid acceleration of the economy, increasing incomes and the resulting demand for chicken over other sources of protein, JCI Bandung appears to have the potential to be a successful venture that can lift rural villagers out of poverty. It can be scaled across the archipelago throughout the nation. Since the demand exists and the nation has a goal of food self-sufficiency and protectionist trade policies, there is a captive market of 251 million people who will desire chicken as a source of protein.

There are some significant risks. First, seed money must be acquired. Second, the enterprise must not attract the attention of existing large feed operators in the market. Third, JCI Bandung must differentiate itself from the larger players by offering farmers the option to purchase smaller quantities at a competitive price. They need to differentiate the product by emphasizing that the company is locally owned, offers a green product from recycled “organic waste,” and provides personalized service and free education for their customers on best practices. Lastly, JCI Bandung must be aware of the challenges that the biomass movement may face with the availability of waste.

Summary

JCI Bandung has many advantages that are not attainable by the larger competitors. By exploiting these advantages and creating a niche market, JCI Bandung can achieve a sustainable and profitable enterprise with social value to the community. Further, if scaled, this enterprise can be a vehicle to lift rural Indonesians out of poverty.

JCI Bandung’s own application of its humanistic management ­philosophy involves hiring local unskilled employees to whom they can provide appropriate training. Paying competitive wages as part of improved profits encourages a strong work ethic that is recognized and rewarded. The pricing of the product is designed to allow the enterprise to be profitable, while allowing poverty-level farmers to purchase the required chicken feed. The social dignity is running one’s own chicken farm and providing for family in your own community is a much healthier model than moving to the city where living conditions are inhumane and exploitation is the name of the game.

In this example, CSA has evolved from a philanthropic-only endeavor to one that embraces strategic business initiatives. This startup has developed multiple types of utility that recognize the range of stakeholders and different interests, from the local villagers to the JCI Bandung angel investor and co-owner. The shared value approach of people, planet, and profit provides a realistic framework for enterprises to define their CSA initiatives and subsequently develop multiple utility metrics to evaluate outcomes.

Discussion Questions

  1. In promoting the social well-being of the subsistence chicken farmers, how does this project also balance environmental concerns with project goals? In other words, how does the project balance people, planet, and profit?
  2. If this project is successful, it should enhance human dignity of the farmers through successful work outcomes. Is there a wider impact that may improve the human dignity of nonfarmers as well? Explain.
  3. The possibility of using the same model for subsistence fish farming was discussed by the enterprise. Expansion and diversification can be good for business. Discuss if you think that JCI Bandung should expand into subsistence fishing.

Bibliography

Agriculture and Agri-Food Canada (AAFC). 2012. “The Indonesian Consumer Behavior.” Attitudes and Pereptions Toward Food Products, Retrieved October 2013 from http://ats-sea.agr.gc.ca/ase/5715-eng.htm

Christopher, C. 2010. “Eco-Islam: Javanese Madrassahs Leading the Way.” Inside Islam: Dialogues and Debates Challenging Misconceptions and Illuminating Diversity, 16, December, p. 1.

MBAIA 2010. “Comfeed Indonesia Tbk.” PT JAPFA Annual Report, Retrieved November 2013 from http://japfacomfeed.co.id/profile/annualreport_japfa.html

Prasetyawan, B. 2012. “Overview of the Indonesian Animal Feed Industry 2012.” ICRA Indonesia Research, Issue December, p. 2.

Rusman, A. 2006. “Three Killed in Huge Garbage Slide.” Jakarta Post, September 6, p. 1. Retrieved December 2013 from www.thejakartapost.com/news/.../three-killed-huge-dump-slide.html

Satriastanti, F. 2011. “Indonesia Lagging Behind World In Trash.” The Jakarta Globe, June 22, p. 1.

Schmidt, U. 2012. “Development Trends In Rural West Java.” Food and Agriculture Organization of the United Nations, Retrieved April 2013 from www.fao.org/docrep/006/p1227e/P1227E02

USDA 2013. “A International Egg and Poultry Indonesia.” The Poultry Site, March 27, pp. 1–2. Retrieved March 2013 from http://thepoultrysite.com/reports/?id=1773

Wihbey, J. 2012. “Green Muslims, Eco-Islam and Evolving Climate Change Consciousness.” Yale Climate Connections, April 11, Issue Science, pp. 1–4.


1 The following graduate students completed the research on behalf of JCI ­Bandung: D. Earnest, S. Corder, C. Fontanilla, T. Sepull, G. Sinha, D. Wagner.