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Business Models for Africa

Prof. Dr. Philipp von Carlowitz responds to questions about his research.

Professor Philipp von Carlowitz's research focuses on African markets. Now he has published a new case study on multinational pharmaceutical companies in sub-Saharan Africa. In this interview, he answers key questions about his latest publication.

In your book, you write about success in bottom-of-the-pyramid (BoP) countries in sub-Saharan Africa. What are the greatest ecological challenges in these countries?

Philipp von Carlowitz: Basically, every country is different. Some countries are economically larger than others. GDP in sub-Saharan Africa ranges from 250 million US dollars to more than 500 billion. Some countries are landlocked; this lack of access to the sea leads to additional logistical challenges and costs. There is also great diversity culturally and linguistically.

How is economic success possible despite the challenges?

von Carlowitz: It is a key success factor if companies get involved in the African markets and develop a suitable business model that takes into account the small size of the markets with their difficult basic conditions.

In addition, personal contact is more important in sub-Saharan Africa than in many other regions. A local partner who takes care of the operational side is therefore a good idea.

Are there other things to consider?

von Carlowitz: Companies must not assume that products can be easily sold in exactly the same form. A key factor is price competitiveness, although this does not mean competing with the lowest prices in the world. There is also a quality consciousness in Africa and a willingness to pay a premium for good quality. That said, German products are often two to five times more expensive than those of competitors from China, India or Turkey.

What conclusions did you reach on how multinational pharmaceutical companies can successfully and profitably manage the bottom-of-the-pyramid segments?

von Carlowitz: The companies operate a global business model and focus on a few older active ingredients for which the research and development costs have been amortized. Attention is paid to drugs with a large basic demand, such as antimalarials, antibiotics and the like.

The model goes like this: the multinational pharmaceutical companies produce in such a way that high production utilization lowers the cost per unit of drug. By selling the drugs to the population, there is high volume demand, which lowers the unit cost in production. Because manufacturing serves global demand, profit margins increase in higher-cost countries, so even if there is a small loss in the BoP business in sub-Saharan Africa, profit, globally, increases. The population has the advantage of having access to modern medicines at a very low price.

The critical point, however, is distribution. Local partners mark up the production price by up to 800 percent when they deliver to rural and hard-to-reach areas. Unfortunately, this is where most of the poorer people live.

Where have you been able to identify further research needs?

von Carlowitz: The analysis was unable to find a satisfactory solution to the matter of distribution. New approaches must be developed there, possibly using modern technologies such as drone transport, which are already in use in some countries. The analysis was also limited by the fact that the derived business model cannot be applied to all industries. Further analysis would have to be carried out with other industries.

Thank you very much for your time.