Inclusive Business Model

Alternative Retail Channels

About Inclusive Business Models

 

In our previous post, we looked at various ways to define an “inclusive business”, its origins and impact on developing countries. With its emergence, private sector and development organisations have begun to collaborate as partners.


This post discusses the Inclusive Business Model. In its broadest definition, a model describes the process of how value is created. In general, consumers purchase products or services because of their value propositions, which could be meeting needs or providing solutions for specific problems. Resources needed in the production and supply of products and services are bundled into processes. A business model describes the processes and actors involved in generating value.

 

What characterizes an Inclusive Business Model (IBM)?

According to the UNDP:

Inclusive business models 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.

Sustainability, also with regard to natural resources, is inherent in the concept.

 

How it works in theory

The BoP (Base of the Pyramide) is the critical component in an IBM. Each role the BoP assumes in an IBM has its own challenges.

 

Customers

In its elearning course published in 2016, the IFC estimates the 4.5 billion BoP market to be worth 5 trillion USD per year spent on food, energy, health, education, housing and other basic products and services. When combined this sounds very attractive. However, at an individual level, challenges such as limited purchasing power, unpredictable cash flow, or risk averseness towards new products need to be addressed.

 

Retailers

Particularly manufacturers of food, beverages, consumer goods and mobile telecommunications use BoP retailers in IBMs. They tend to be small-scale local shops that have existing customer bases, know their customers and speak their languages or dialects. Commonly found challenges are limited business acumen of business owners, lack of literacy and numeracy skills, limited local market sizes, dispersed locations or overcrowding in areas often lacking basic infrastructure, cash-flow restrictions and communication problems.

 

Suppliers & Employees

In IBMs, many food processing companies and agribusinesses source from small-scale farmers. The sourcing of handicrafts from local artisans for shops in industrialised countries has been an IBM before it was even recognised as one. Others, such as tourism, translation services, call-centre outsourcing provide meaningful roles for the BoP in IBMs. However, BoP suppliers often require capacity building, access to inputs and financing.

 

Distributors

Challenges when working with local retailers, are often addressed through the use of BoP distributors who speak the local languages and can access remote villages or densely populated urban suburbs. Like suppliers, they also often require access to inputs and financing, such as vehicle leases, cash advances for fuel and communication expenses, credit purchasing of stock, etc.



Inclusive Business Sectors

Certain sectors have attracted more IB than others:

  • Agriculture: in order to procure and secure access to crops, food-processing companies and agri-businesses are turning increasingly to small-scale farmers. They are also new markets for the supply of farming inputs, technology and information to BoP farmers.

  • Education: colleges and tertiary educational institutions operated as businesses specialising in affordable education for low-income students and students who dropped out of formal eduction. This is often subsidised by governments that do not have the capacity to provide these services.

  • Financial Services: mobile money, micro-finance and micro-insurance provide vital services to the BoP

  • Health: use of technology and more efficient processes have allowed businesses to provide more affordable health services to lower income groups. Companies specialising in nutritional food have developed products to address malnutrition.

  • Housing: businesses design and build affordable housing and/or make affordable mortgages available

  • Utilities: businesses make major progress in the last-mile delivery of water and electricity to low-income, remote or densely populated population groups through increased connectivity, flexible payment schemes, and use of technology.
     

Challenges

Operating an IBM is a long-term strategic decision. Market or supplier development in emerging and developing economies have fundamentally different challenges than developed markets:

Limited information:

business are unlikely to find reliable market intelligence to evaluate market potentials, target group preferences for product design, marketing and distribution, or information about products and skills the BoP offers as employees and producers; even hiring market research and rating agencies may not be possible.

Inadequate infrastructure:

poorer population groups tend to live either in remote areas or overcrowded urban areas. Over 50% of Africa's population still lives in rural areas. Market development and business operations are affected by inadequate roads, access to water, electricity and sanitation, transport and telecommunications.

Ineffective regulatory and legal systems:

lacking regulatory frameworks, weak institutions and lacklustre rules enforcements substantially increase operational risks; red tape, licensing and lengthy business registration procedures increase costs; insufficient copyright protection increase operational risks.

Political instability

is a major deterrent for long-term investment; increased hedging costs to offset risks to core business activities in politically unstable markets are likely.

Underdeveloped financial systems:

when BoP retailers and suppliers lack access to financial services, formal loans and financing, IBMs have to find innovative ways to bridge this gap; high financial transaction costs and currency risks are often present; BoP employees and business partners also often lack access to appropriate insurance that would not only reduce risks of income loss but also makes them more productive;

Inadequate knowledge and skills:

BoP consumers often do not have the knowledge to use products effectively (appreciate the benefits and value) and producers and distributors do not have knowledge to deliver products and services in consistent quality and on time.

 

Inclusive businesses directly and indirectly create economic opportunities and expand access to basic products and services for communities living at the BOP.

 

 

Potential Impact of IB Models:

  • Meeting Basic Needs: such as clean water, electricity, waste water disposal, medical supplies, housing, education.

  • Increase Productivity: access to electricity, telecommunications and financial services create opportunities for income generation.

  • Income Generation: locally sourced products and services and the supply of lower-priced products generate new jobs and businesses

  • Empowerment: as a result of the above, people could gain confidence that they have more control over their lives.

 

 

Sources:

UNDP: Brokering Inclusive Business Models

Endeva: How to Develop Business and Fight Poverty, by Christina Gradl and Claudia Knobloch, 2009

IFC 2016, Open Learning Campus, What is Inclusive Business?

GIM Global Reports, First Global Report (2008) — Released 1 July 2008, “Creating Value for All: Strategies for Doing Business with the Poor”

https://www.unglobalcompact.org/docs/issues_doc/human_rights/InclusiveBusinessPrimer.pdf

 

 

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