Why world leaders are promoting inclusive business as a way to tackle poverty
By Priya Thachadi
One of my top moments of 2016 was hearing Paul Polman deliver an inspiring speech in Singapore at the DBS NUS Social Venture Challenge Asia awards. Two key things he highlighted that are critical to the development agenda: First, the cost of not acting is higher than acting, it makes economic sense to address development challenges. Second, we have an unprecedented opportunity to work together and ‘finish the job now’ to eradicate poverty. To do that, we need businesses with purpose – from social enterprises to large corporates.
Paul’s vision that all businesses should be inclusive and responsible models means moving away from only traditional isolated CSR activities to core models that include the poor in the value chain as customers, producers, suppliers, or distributors – these models are critical to address the challenges that face the world today.
If you are an entrepreneur looking to build a business that also creates impact or someone in a strategic role at a corporation looking to sell products or services to low-income customers? Or as a member of the CSR team looking to create more strategic CSR activities? Or you have an idea that you feel can impact the poor, but aren’t sure how to structure it?
Here is your starting point – you have a huge market. The developing world’s 4.5 billion people spend about USD 5 trillion dollars a year, according to the Global Consumption Database. The market opportunity for Inclusive Businesses is immense created by a demand for goods and services by low-income segments, currently underserved to a large extent.
So what do we really mean by Inclusive Business?
Inclusive business is widely credited to have been coined by the World Business Council for Sustainable Development, a CEO-led global organization promoting sustainable development. As defined by the G20, ‘Inclusive businesses provide goods, services, and livelihoods on a commercially viable basis, either at scale or scalable, to people living at the base of the economic pyramid (BoP) making them part of the value chain of companies’ core business as suppliers, distributors, retailers, or customers’. To put it simply, inclusive businesses are those models that bring access to affordable products and services and create employment and livelihood opportunities for the poor – so the poor now are part of a company’s value chain.
How big is the sector?
According to the 2014 European commission report on social enterprises, over USD 15 billion has been invested by multilateral development banks in inclusive business approaches while ‘private investors raised USD 6 billion in funds for businesses that are commercially viable, but with explicit social objectives’. A new report Better Business, better World, (mapping the business opportunities against the SDGs), identified 60 market ‘hot spots’ like food and agriculture, cities, energy, health, etc worth worth US$12 trillion by 2030 in business savings and revenue with more than half being in developing countries.
Propelled by the potential of inclusive businesses, in 2015, the G20 launched the Inclusive Business Framework, to promote inclusive business as a strong platform for inclusive growth and development. The Framework highlights three approaches: Inclusive Business Models, Inclusive Business Activities and Social Enterprise Initiatives.
How are the three different?
Let’s start with IB Models. Inclusive Business models are those that integrate the BOP into their core business operations. The market viability of the business model is most relevant for companies as they see it as a core business activity and therefore success is measured by realizing market returns.
A great example in India is agribusiness Jain Irrigation Systems Ltd, the largest global manufacturer of micro-irrigation systems (MIS) and a leading processor of fruits and vegetables — Jain integrates the poor in a few different ways into their core business — the company works with small farmers on both ends of the supply chain, finding innovative farmers, providing them with micro-irrigation systems, training them in efficient planting, irrigating and harvesting, selling them organic fertiliser and high-yield seeds, and finally purchasing their raw produce.
The company also runs an institute to train its 3,000 distributors who in turn along with Jain’s own agronomist and engineers, train more than 100,000 farmers every year. In addition, Jain also procures from a network of 2,100 contract farmers, which allows them to maintain a high standard of food safety and traceability in a market that is otherwise highly fragmented. The company has worked with over 30 million smallholder farmers and have been recognized by the G20 for their outstanding inclusive business model.
So in this example, the low income small farmer is a core part of the business, and essential to Jain making profits, while still bringing benefits to the farmer.
How is that different from Inclusive Business Activities?
Inclusive Business Activities also include the BoP in the company’s value chain, but the activities need not be core to the commercial business model of the company, and the BoP need not make up a significant part of its customers, suppliers or business partners.
A company’s strategic CSR activities could be an Inclusive Business Activity in many cases.
For example, in China, Siemens Healthcare China launched the “Healthy China” initiative to help strengthen China’s healthcare in rural areas. The programme began with a donation of medical devices and medical equipment, such as radiation therapy, ultrasound systems and urine analyzers to the Jinggangshan TCM hospital and eighteen rural hospitals around Jinggangshan City.
Most of the systems were manufactured locally and specifically designed to make healthcare more affordable in rural Chinese communities and to improve hospitals’ early diagnostic and treatment competencies. The programme has expanded now in partnership with China’s Ministry of Health with support from Chinese Association of Medical Equipment (CAME). Their rural health centres improve affordable healthcare options in the region, featuring equipment specifically designed for smaller hospitals, and serve as a model for other rural areas. This Inclusive Business Activity has impacted the rural poor and also contributed to creation of jobs though it is only one part of Siemen’s business in China.
How is Social Enterprise different from IBM and IBA?
Social Enterprise Initiatives are gaining prominence across South and Southeast Asia. Social Enterprises have the double objective of creating profits while maximising social and environmental impact. What makes them different from corporation is that the pursuit of social impact is core to the mission of the company. Many enterprises across the developing world have demonstrated that social good and profits can go hand in hand. Social enterprises are also often smaller in scale, but many have the potential to become big.
India’s social enterprise ecosystem has evolved with the growing number of companies supported by early stage funders, institutional investors, intermediary organisations and, more recently, by the government. However, social enterprises have not yet scaled to large company sizes though many have met with success. In many nascent impact ecosystems in South and Southeast Asia, social enterprises are also taking the form of cooperatives and nonprofits, but generating revenue while creating social impact.
Selco, one of the top social enterprises in India, works to bring renewable energy solutions to India’s poor. In the past 18 years, more than 1.35 lakh solar home lighting systems have been installed. The company has succeeded by not just selling solar lighting solutions, but creating an entire ecosystem around it, including tie-ups with banks, NGOs and farmer co-operatives for innovative financing, creation of income-generation activities using high-quality products and superior after-sales service.
Are all sectors relevant for Inclusive Businesses?
Inclusive businesses are most seen in sectors that can actively engage the Base of the Pyramid (those who earn less than USD 8 per day):
*Approaches by Sector, G20 Inclusive Business Framework 2015
As you might notice, these sectors are also those where the government is active, and collaboration among stakeholders is essential needed for creating sustainable impact. .
So what are the challenges? Why haven’t we eradicated poverty yet?
Despite the huge potential of inclusive business, it faces some deep systemic challenges. Starting with lack of information about the BoP (people earning less than $8 a day) market, – from understanding their needs and preferences for products and services, or even capabilities of being regular suppliers to a business. Another big barrier is the lack of infrastructure which makes last-mile connectivity very expensive for businesses, for eg, if a distribution network doesn’t exist for solar lamps, then a company will have to create it.
Another area that worries companies is the limited rules and regulations – ]the informality of the low-income market makes legal instruments likes contracts is an area of concern for businesses – so if a company contracts organic poultry farmers and they fail to deliver despite being provided inputs and training, companies will face serious challenges . Finally, of course, there’s the lack of financing for these business models – often banks are reluctant to lend to business models that are new and untested, which in most cases inclusive businesses are.
However, as the world’s focus moves to the Sustainable Development Goals (SDGs), and governments focus on inclusive growth, inclusive businesses will play a significant role in long-term sustainable change. As Paul Polman says, ‘we’ve never had a better opportunity to finish the job than now.” The job is to eradicate poverty and build a sustainable world. Let’s get to it.
Looking to build an inclusive business model for your company?
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Priya is the co-founder-CEO of Villgro Philippines, an early-stage incubator in the Philippines, which she set up in 2016. She is also a leading inclusive business consultant in Southeast Asia. These days you can find her mentoring and training impact entrepreneurs in Manila, when not exploring the beautiful beaches around the Philippines.