Unintended Consequences

Women sorting nuts

Reverbations of Inclusive Business Models

 

In this post, we return to “inclusive business models”, that “include the poor into a company’s supply chains as employees, producers and business owners or develop affordable goods and services needed by the poor” (UNDP, 2010). Since the inception of this concept, the increasing number of businesses pursuing such a strategy have led to more case studies and the sharing of best practices. In 2015, the World Economic Forum published an article (Bhaskar Chakravorti, 2015) outlining five key areas in which “unintended consequences” can occur when businesses adapt an inclusive business model. The article cites the experiences of businesses, such as Unilever and SKS Microfinance.

 

Shareholders' Expectations

A strategy is a long-term course a company takes. Due to the nature of an inclusive business strategy, the outcome is plagued with a higher uncertainty and less likely to yield quarterly returns shareholders' remuneration is generally based on. Market forecasts are less reliable. CEO Polman's popularity with Unilever's shareholders sank when he dropped quarterly reporting in favour of embarking on a long-term sustainable and inclusive strategy targeting growth in emerging markets. The discontent grew when Unilever's performance initially fell behind expectations.

In his blog post published also in April 2015, Oxfam's Erich Sahan focusses on the critical role shareholders of a public company play when a businesses wants to embark on an inclusive business strategy. He asks: “So why does the business sustainability establishment work so hard to avoid acknowledging that doing good usually costs money?” Likewise, Michael Blowfield concludes in his research paper: “the evidence of a positive correlation between private sector social and environmental initiatives in developing countries and business performance is often weak.” Sahan believes the answer why some businesses nevertheless put sustainability before profit is linked to business ownership.

Polman's success eventually convinced Unilever's shareholders. At his retirement in December 2018 following a decade at the helm of the company, Unilever recognised the achievements under his leadership: “During his tenure, the company has delivered consistent top and bottom line growth ahead of its markets. Its focus on successfully pioneering a new model of sustainable growth has served the needs of its many stakeholders and created excellent returns for its shareholders, delivering a Total Shareholder Return of 290% over that period.“

 

Supply chain

Businesses sourcing from emerging markets are exposed to higher risks “where value chains are incomplete and the supporting infrastructure and institutions are under-developed” (Bhaskar Chakravorti, 2015). Pressures on production costs and delivery times (just-in-time and lean practices) can quickly turn into a crisis, experienced by companies such as Yum! Brands’ KFC franchise, Apple and Mattel. The supply chains of inclusive businesses that are sourcing low-cost products from small suppliers in emerging economies are inherently weak and prone to higher risks. The pictures like those of the Dhaka garment factory collapse and/or burning garment factory buildings cannot be easily erased from public memory putting the brand reputations of garment manufacturers at stake.

 

Production Distortions

In rural areas, local communities and small farmers' livelihoods often depend on locally grown products. Creating employment, increasing crop yields and better balanced nutrition through the support from inclusive businesses has had a positive impact on many communities. However, a domination of commercial interests in food production can lead to production distortions and new dependencies. Particularly, the replacement of food crops and staples with cash-generating crops can affect food security and make farmers vulnerable to price movements beyond their influence.

 

Consumption Patterns

It is argued that the availability of new products at the Base of the Pyramid (BoP) has led to changes in the consumption patterns. Some essential products previously purchased from limited budgets may have been displaced by products that are most accessible. This observation is important for the introduction of new products and services at the BoP.

 

Sustainability and Scaling

Many initially successful inclusive businesses never manage to roll-out their products and services at larger scales or even falter. Reasons for this may be that public interest in innovations quickly wane and with it they get out of focus of investors when it is most needed. Shareholders may even become impatient or lack management resources to deploy at a large scale.

 

In conclusion, Bhaskar Chakravorti advises:

“For any manager inspired by Polman or Akula, it is advisable to read the label on the side-effects first and manage them before taking the pill and enjoying its many benefits.”


 

Sources:

UNDP: Brokering Inclusive Business Models, 2010

World Economic Forum, The unintended consequences of inclusive business, Bhaskar Chakravorti Dean of Global Business, The Fletcher School at Tufts University, 14 Apr 2015

https://oxfamblogs.org/fp2p/how-businesses-can-save-the-world-when-their-shareholders-arent-breathing-down-their-neck/

The International Research Network on Business, Development and Society (BDS), Poverty’s Case for Business: The Evidence, Misconceptions, Conceits and Deceit Surrounding the Business Case, Michael Blowfield, BDS Working Paper series no. 5, 2009

https://www.unilever.com/news/press-releases/2018/unilever-ceo-announcement.html

https://www.theguardian.com/business/2018/nov/29/unilever-boss-paul-polman-quits-after-botched-move-to-netherlands-rotterdam

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