Entrepreneurship can meet the needs of “base-of-the-pyramid” populations, provided the business in question has reached the critical size needed for profitability and sustainability. Examples of “inclusive businesses” which have successfully “scaled up”, however, are few and far between. Rectifying this situation means removing a number of practical, psychological and financial barriers. There are many ways in which development finance institutions can help this sector to grow.
PRO-Revu-Logo-UK.indd

This article is an excerpt from Issue 23 – Social business: a different way of doing business and investing

What role can businesses play in combating socio-economic inequalities and environmental depletion? This key issue in the current debate over development straddles three relatively independent phenomena. First, with financial ressources now limited or reduced, authorities and private foundations are looking for leverage that will boost the impact of their actions. Their watchwords now are social-business support, public-private partnerships and impact investing. The second phenomenon is the 2008 financial crisis which triggered a moral conflict in many business leaders seeking to reconcile their responsibilities towards their shareholders with their personal convictions. Here the watchwords are inclusive business, shared value and base- of-the-pyramid. The third phenomenon applies to NGOs, non-profits and social entrepreneurs who wish to sustain their initiatives and reduce their dependence on ad hoc resources such as grants and donations. Their watchwords are social business, sustainability and “turning beneficiaries into customers”.

While the outlook, ideologies and vocabulary differ, the key question is the same, i.e., can businesses – long considered the source of social and environmental problems – become part of the solution? Are there any concrete examples which prove that inclusive business1 approaches can solve social problems in an economically profitable way and on a large scale? While inclusive businesses may have sprung up in developing countries, we need to ask ourselves why they are not more wides- pread? What obstacles do they encounter when changing scale and what can development finance institutions do to help them grow?

Success of scaling up: examples of your inclusive businesses

The following examples of inclusive businesses prove that scaling up is indeed possible. The businesses in question have reached a critical size that ensures both profitability and sustainability. They also directly impact a huge number of customers and have inspired the creation of similar businesses.

Grameen Shakti, a subsidiary of Grameen Bank, distributes domestic solar energy systems and helps households to purchase them through an independent loan scheme. This non-profit organisation is now a commercially viable business. For a system capable of powering four lamps, a few mobile telephones and a television, for example, customers can either pay USD 250 in cash or make a down payment followed by monthly instalments over three years. The service includes a monthly maintenance visit. With a total of 1.5 million household solar energy systems installed as of June 2014, some 13,000 employees and a network of 1,300 village antennae, Grameen Shakti can justifiably claim to be one of the world’s largest social businesses. It has received public grants but its economic model is now sustainable. Its success has spawned many competitors, some of which operate for profit.

JAIN started out as an agricultural machinery supplier in India in the 1960s selling micro-irrigation systems to small farmers and helping them to double their yields while at the same time safeguarding the country’s water resources which were being jeopardised by the Green Revolution2. Realizing that farmers could not always find a market for their additional produce, JAIN diversified into buying and processing agricultural staples and then developed its own range of products, offering farmers fertilisers and seed and loans to purchase farm equipment. JAIN has worked with over four million smallholder farmers in India and in 2014 it posted revenue of more than USD 400 million (Hystra, 2015).

During Mexico’s recession in the 1990s, the directors of CEMEX, a global leader in the cement industry, realized that poor neighbourhoods were continuing to buy bags of cement despite the halt in commercial building work. CEMEX sent several employees into the shantytowns of Guadalajara to get a better understanding of this phenomenon and they discovered that the local home improvement process was very slow and inefficient. It took a family four to five years to add a room to their house, with an average of 40% of materials wasted. Furthermore, the resulting buildings were of very poor quality. CEMEX’s Patrimonio Hoy programme facilitates the self-build construction process through a comprehensive package that allows customers to build a 10 m² room in 70 weeks at a cost of USD 1,000, divided into weekly instalments of USD 17. This covers technical assistance in designing the room and compiling a list of materials needed, organising the project into stages and providing advice on building techniques. In 12 years, the Patrimonio Hoy programme has benefited more than 380,000 families. Not only is this a remarkable social business success story, it is also one of CEMEX’s most profi- table distribution channels. With more than USD 45 million in sales in 2011 (40% of which comprised CEMEX building materials), the programme brings in several million dollars in additional profit each year.

Codensa has been supplying power throughout the city of Bogotá since 1997. The electrification rate within its concession area is 99%. In 2002 the company realised that poor customers were using very little electricity because they had no cash to buy electrical appliances and no access to consumer loans.3 The company therefore created Codensa Hogar to offer consumer loans to the neediest households. The loan offering was so successful that by 2009 Codensa had carved out a 33% share of Bogotá’s electric appliance market. Not  only was Codensa able to assess the credit risk of its customers by looking at the payment history of their electricity bills, it was also able to add loan payments to electricity bills at a very low marginal cost.

These four examples demonstrate both the social impact potential and the profitability of inclusive businesses. However, they also show that patience and determination are required to run these types of business: with the exception of Codensa, the above models took between five and ten years to prove  themselves.

Overcoming obstacles to scaling up

As inclusive businesses expand, they cross three thresholds, meaning they have three obstacles to overcome. Firstly they must go from being technologically innovative to commercially successful; then they have to leverage the skills and resources needed to reach the size at which their model will be profitable in a given geographical market. Finally, they need to secure the buy-in of local and international actors who can replicate their business model on a larger scale.

First off, “good” products are not getting to the markets where they are needed because traditional marketing and distribution methods are ineffective. There are many well-developed, affordable products capable of improving the life of base-of-the-pyramid [BoP] populations.

Solar lamps, optimised ovens and water filters, for example, could improve the lot of millions of people for between just USD 20 and USD 40.

However, far too few BoP families are buying these products. Although engineers have done their job by designing affordable products, the challenge now lies in promoting and distributing them. There is no doubt that marketing to BoP populations requires very specific methods; it is not merely a question of preferring one solar lamp brand over another, but rather of deciding to replace a polluting oil lamp, which is expensive yet familiar, with a solar lamp that is bright and clean yet  unfamiliar.

The “last-mile challenge”4 is not just a challenge of physically delivering innovative products but also of advertising, explaining and financing these as consumers are either unaware of their existence or sceptical about their benefits (Hystra, 2013).

Next, the models that work do not attain the scale needed to become profitable because of ideological barriers and lack of resources.

Social entrepreneurs rarely combine both innovator and business leader skills

and they are even less likely to realise just how tight a bond they have with their company.

Their passion is for creating something bespoke rather than planning, streamlining and even mass producing their model for it to grow. For many social entrepreneurs, scaling up is synonymous with choosing between quality and quantity; some microfinance institutions, for example, refuse to accept purely commercial capital to grow their operations. Moreover, there are very few companies with both the true social value and investment opportunities needed to meet the expectations of traditional financiers. Investing in social business has no defined exit strategy and is often complex and subject to very high transaction fees (investor start-up and operating costs can account for 20% to 50% of invested capital). Social businesses need much more than financing to be able to develop and succeed: they need more complex support and technical assistance than that required by a traditional business.

Finally, these ideological barriers to growth and the lack of resources mean that social entrepreneurs who have been successful in their own country are not necessarily going to be able to replicate their model in other countries. Multinational corporations that could do so are often either unaware of existing models or unable to do something similar because they require a faster return on investment. Moreover, they may be reluctant to jeopardise their own products by offering cheaper alternatives (Kayser and Budinich,  2015).

The role of development finance institutions

Development finance institutions can help inclusive businesses cross these three thresholds: they can take risks, invest in common goods (methodologies and databases) and lobby governments.

Social businesses around the world are managing to find ways to market and distribute to BoP populations using iterative development approaches and imagination. Nevertheless, the lack of communication between sectors, countries and continents prevents best practices from being consolidated and condemns everyone to constantly “reinventing the wheel”. Authorities have a role to play in ensuring that good business practices are shared and disseminated. Methodologies and other benchmarking tools could be disseminated to social businesses worldwide via technical assistance funds.

High impact – albeit risky – investment opportunities must be identified to help proven models maximise their market potential and this is clearly something local branches of development finance institutions could do.

Development action mandates should also allow these institutions to support pioneering ventures trying to break into new markets or to develop new products withstrong social impact but higher risks.

If the company in question is successful and the concept proves effective, other more traditional investors will be willing to step in and finance the development of other companies wishing to enter the same market.

In addition to which distort the energy market and hinder the adoption of cleaner energies. They can also help develop new standards to encourage the creation of social businesses. For instance, regulating the quality of drinking water sold by small purification plants would protect consu- mers and maintain their trust and safeguard the longevity of these businesses.

Finally, proven models could be replicated more quickly by setting up a platform to “import” them into a given country. Once the requisite social and environmental challenges have been analysed (e.g., access to drinking water in rural areas, infant nutrition and urban sanitation), solutions that have proved effective in other countries must be identified and systematised. Entrepreneurs capable of replicating them then need to be found: the DNA of these businesses would then be passed on to local companies or individuals in the same sector that would develop them locally. Close monitoring, extensive technical assistance and appropriate financing solutions would be needed to launch and then expand businesses replicated in this  way.

This strategy of relying on a proven model would speed up the launch of social businesses and reduce their risk of failure. Investing in just such a collaborative approach based on reproduction and strong social impact must be included in the mandates of public-sector development bodies.

The simultaneous transformations at work in the business world and non-profit, philanthropic and public sectors are creating new opportunities for involvement. The challenge for stakeholders in public-sector development is to understand all these changes in the development ecosystem and define the particular role they can  play.

Footnotes:
1 Defined as a commercially viable business that provides low-income communities with products and services to which they did not previously have access.
2 The “Green Revolution” is a policy to transform farming in developing countries and to boost agricultural production through the use of fertilizers, irrigation and high-yield varieties of grain.
3 More than 65% of Codensa customers had no bank accounts and no credit history.
4 The “last-mile challenge” generally refers to the logistical difficulty companies face when distributing their goods and services to “base-of-the-pyramid” consumers, especially in rural areas.
5 A business trying to change the regulatory framework through lobbying may be suspected of conflict of interest but this would not be the case for a public body.

REFERENCES
Hystra, 2015. Smallholder farmers and business. 15 pioneering collaborations for improved productivity and sustainability. Final report.
Hystra, 2013. Marketing Innovative Devices for the Base of the Pyramid. 15 global pioneers challenge conventional sales & marketing approaches to meet the needs of the poorest populations. Final report.
changer d'échelle FR UK1Kayser, O., Budinich, V., 2015. Scaling Up Business Solutions to Social Problems: A Practical Guide for Social and Corporate Entrepreneurs. London.