The Diamond in the Ecosystem
From Inclusive Business Models to Inclusive Business Ecosystems
This post continues the journey from initially defining the term “inclusive business” to “inclusive business models” and their reach. With our previous post about Engro Foods, we put theory into a real-life context. This post argues that inclusive business ecosystems can improve the conditions for inclusive business models to succeed and scale.
Projects Must Be More Ambitious
Despite evidence that inclusive business models impact lives at the Base of the Pyramid (BoP) positively, it does not often happen at scale, a finding also reverberated in the Deloitte Study. Likewise, corporate social responsibility (CSR) programmes do often not have the envisaged impact. The researchers Robert S. Kaplan, George Serafeim, and Eduardo Tugendhat suggest
“that companies’ projects are generally not ambitious enough. Instead of trying to fix local problems, corporations and other actors need to reimagine the regional ecosystems in which they participate if they are to bring poor farmers and unemployed urban youths into the mainstream economy.”
According to the UNDP: “An inclusive business ecosystem refers to a network of interconnected, interdependent actors whose actions make it possible for inclusive businesses to succeed and generate impact at increasingly large scales.”
Principles for Creating Ecosystems
Targeted local solutions by individual companies rarely make supply chains work or can address “systemic talent gaps”. Instead, they should collaborate to create a new profitable ecosystem which draws more people into the formal economy. Kaplan, Serafeim and Tugenhat recommend three principles for building “inclusive, sustainable, and profit-generating ecosystems”:
Systemic, multi-sector opportunities: projects that create benefits for the initiating company and all actors in the new ecosystem.
Mobilisation of complimentary partners: collaborations of actors from multiple sectors initially led by a “catalyst”. They argue that corporate headquarter based company executives are less likely to spot opportunities for building public-private partnerships than catalyst organisations. Vice versa, a profit-seeking company increases the chances for ecosystems to become sustainable and scalable.
Securing seed and scale-up funds from organisations who make the creation of ecosystems their mission. Corporate investors tend to favour short-term financial returns and are less likely to support such high-risk investments.
Potentially, the researchers also suggest to implement “a new measurement and governance system to build commitment, monitor progress, and sustain alignment among the key players involved in creating the new ecosystem.”
The remaining article gives valuable guidance how to build the ecosystem relationships, how the roles change over time and emphasise the importance of measurable objectives and results for raising scale-up capital.
Like in all of nature, environments play a critical role for survival, growth and yields. In its Training Handbook, the UNDP identifies four environmental conditions that are conducive for the success of inclusive business ecosystems depicted as a diamond.
Considering the challenging conditions in which inclusive businesses operate, basic information about needs, preferences and spending patterns of consumer target groups or service providers who could be engaged for gaining market insight are largely absent at the BoP. For inclusive businesses to thrive in low-income markets, the following four “primary functions” are required:
Information about knowledge, technology and know-how pertinent to operating in this target market
Incentives to reward businesses who engage with low-income groups
Investment to reduce risks and costs particularly in the start-up phase
Implementation support in areas such as logistics, transaction, marketing and communication; technical support, small-business incubators, shared platforms, disseminating best practices, devising industry standards and infrastructure investments.
A Guardian article published from November 2014 by Business Call to Action describes how the Philippines have build a model ecosystem around these four functions. To improve information, the Philippine Business for Social Progress (PBSP), in collaboration with USAID and the Business Call to Action have undertaken sector-specific studies in areas like socialised housing and health.
Facilitated by the PBSP, government have consulted industry to voice their concerns with regards to infrastructure and production barriers in key sectors. Funding and financial guarantees are being made available. In terms of implementation support: “the government is working with PBSP and its member companies to support the private sector in areas like logistics, transactions, marketing and communications; this involves micro-business support to help inclusive businesses grow in challenging environments.”
In 2015, the UNDP published a rarely publicly available in-depth report about Brazil's inclusive business ecosystem. It analyses the success and remaining challenges of implementing the four dimensions of the diamond.
Virtually all market actors, such as multilateral organizations, government and private research institutions, organizations of the third sector and businesses engage in contributing to and sharing of information as well as encouraging dialogue. However, even when information is available, there are still challenges regarding the accessibility of information, the usefulness of the information for businesses (as it was collected for public planning purposes) and the ability of businesses to interpret data for business decision making. Confusion about inclusive business concepts, lack of knowledge among entrepreneurs how to create business models and limited awareness among businesses of the opportunities at the BoP still hamper the take-up. Further, even existing support mechanisms are underutilized. On the consumer-side, knowledge about the existence and how to gain access to products and services among low-income groups is still largely lacking.
Brazil also has made progress in developing incentives and programmes to support the inclusion of small producers and positive discrimination of small businesses in public tenders. Legislation and taxation have improved the status of micro-businesses and their access to social benefits. The private sector's internal policies to comply with national and international certifications such as the Fair Trade Agreement have improved livelihoods at the BoP. However, the regulatory environment still does not meet the needs of inclusive businesses. For example, there is a considerable need for the reduction of red-tape, regulatory inefficiencies and enabling existing policies to be effective.
In regards to the third ecosystem function, an overhaul of the regulatory framework has improved the investment climate by reducing finance transaction costs and broadening access to financial services. The modernisation and regulation of Credit Unions resulted in an increase of choice in financial services. Likewise, micro-credit operations were regulated to provide better protection. Increased competition has led banks to introduce more options geared towards lower income groups and micro-businesses. “Brazil is one of the few countries in the world with a national strategy for financial Education (ENEF), created as a state policy oriented to promote free financial education activities without any commercial interest.” Impact investment has been actively encouraged.
Lastly, some strides have been made to assist inclusive businesses with the implementation of their model. Actors such as class entities, federations, and employer unions offering support and technical assistance to entrepreneurs “are extremely relevant due to their reach and capacity to propel the implementation of inclusive business.” Incubators and impact accelerators support start-ups and create networking space. The local intermediation by civil societies are often essential for the successful implementation. Likewise national and international organisations are important partners in implementation processes. Brazil's lack of investment in infrastructure, logistics and mobility has been identified as a major hurdle for inclusive businesses reaching communities and regions.
So much more can be learned from this 123 pages-study how Brazil has set out to build an ecosystem to facilitate the success of inclusive business models! In 2015, the study finds: “over the last twelve years, Brazil has managed to reduce extreme poverty by 75% and has lifted 45 million people into the middle class.” It would be a foregone conclusion to attribute this success solely to inclusive businesses as there are still far to few. However, improvement in market conditions benefit all actors.
“Prosperous societies and healthy markets go handin-hand. By respecting and supporting universal principles in its operations, developing new business models, forming innovative partnerships and generating shared value, the private sector can make lasting contributions to social causes and sustainable development. “ (p. 23)
Inclusive Growth: Profitable Strategies for Tackling Poverty and Inequality by Robert S. Kaplan, George Serafeim, and Eduardo Tugendhat
FROM THE JANUARY–FEBRUARY 2018 ISSUE
Monitor Deloitte: Reaching deep in low-income markets, Enterprises achieving impact, sustainability, and scale at the base of the pyramid, June 2017