How can the private sector and development organisations work together to create more inclusive business opportunities for poor people?

Produced by Beth Jenkins, on behalf of the CSR Initiative at the Harvard Kennedy School and Business Action for Africa. Download a pdf version for printing here.

Inclusive business models – business models that include the poor as clients and customers on the demand side or as employees, producers and business owners on the supply side – are generating shared interest among companies and development organisations alike.

Inclusive business models are designed to deliver benefits for business and for low-income communities – generating profits at the same time as creating jobs, expanding access to critical products and services, and increasing incomes. For companies, they are opportunities to pursue growth and competitiveness while leveraging core assets and activities for development impact. For development organisations, inclusive business models promise to empower the poor as economic agents and drive development in ways that are financially self-sustaining, with the potential to scale.

But while conceptually the case is clear, the practice of inclusive business can be challenging. Inclusive business models bring operational and reputational challenges often rooted in systemic constraints associated with the environments where the poor live.

Constraints and Challenges to Inclusive Business

The United Nations Development Programme has identified five major systemic constraints:

1. Lack of market information: Very little systematic research has been done to understand what the poor offer, value, and demand as market actors, as opposed to what they need as beneficiaries of development aid.

2. Ineffective regulatory environments: At one end of the spectrum, many poor people live their lives in the informal sector without official identity cards, property titles, or business licenses, which can make it hard to transact with larger, more formal businesses.

3. Inadequate physical infrastructure: Inadequate transportation, telecommunication, energy, and other infrastructure in the places where the poor live increase the cost and complexity of reaching them.

4. Missing knowledge and skills: At all income levels, people need knowledge and skills to make wise decisions as consumers and to qualify for jobs and business opportunities as producers. Where the quality of education is poor, where the opportunity cost is too great, and where experience is simply limited – due, for example, to geographic or economic isolation – the necessary knowledge and skills are often lacking.

5. Limited access to financial services: Like knowledge and skills, financial services enable both production and consumption. Without financial services, the poor cannot smooth their cash flows, protect themselves against shocks, or invest for the future – even if those investments more than pay for themselves over time.

These systemic constraints translate into a host of operational and reputational challenges for companies attempting to develop and operate inclusive business models. The International Finance Corporation, the CSR Initiative at Harvard’s Kennedy School, and the International Business Leaders Forum have identified a range of these challenges, such as:

• Building the capacity of poor consumers and producers
• Facilitating their access to finance
• Obtaining reliable, actionable market information
• Managing community expectations
• Reducing dependence on the business
• Measuring impact

Taken together, these challenges can also make it hard for a company to secure the buy-in and resources – both human and financial – that are needed to start and scale inclusive business models.

Collaboration – Part of the Solution

IFC, CSRI, and IBLF have identified a range of solutions that pioneering companies are using. Some of these are strictly internal – like tailored procurement policies and performance incentives – but many involve collaboration. UNDP, the World Economic Forum, the World Business Council for Sustainable Development and many others have highlighted the importance of collaboration as well.

Given the systemic roots of many challenges to inclusive business, development organisations can make good collaborators. The systemic issues that constrain inclusive business are often the same systemic issues that constrain social, economic, and human development, and development organisations have been working on them for a long time. Development organisations may not yet have the “silver bullets,” but they almost always have valuable insights and relationships generated through years of trial and error, blood, sweat, and tears. And for their part, they are increasingly interested in collaborating with companies because they see that if the challenges can be overcome, inclusive business models can trigger multiplier effects creating virtuous cycles of development.

Collaborating to Build the Capacity of Poor Producers

One challenge on which companies and development organisations collaborate frequently is building the capacity of the poor to participate in, and therefore benefit from, inclusive business models. Capacity-building can help the poor be more effective consumers and producers, but is a particularly critical “barrier to entry” on the producer side.

The inclusive business models of large companies, national and international, offer poor producers access to markets – often higher value markets than would otherwise be available. But eligibility criteria are often highly demanding. Requirements may include quality, consistency, compliance with corporate or international standards, and the ability to produce in volumes large enough to be interesting (and economical) for large companies to procure.

For poor producers, meeting these requirements takes some combination of information, training, coaching, and investment – investment in new equipment, in high-quality inputs, in auditing processes for relevant certifications. And yet, the relevant training may not be available on the market, at least at prices they can afford or distances they can access. Similarly, financing options may be limited due to informality, lack of collateral, or any of a whole host of reasons.
Lack of capacity among low-income producers adds to the cost and complexity for the company of operating an inclusive business model. Some companies find the extra investment makes business sense. Other companies are able to leverage CSR and philanthropy budgets to make up the difference. Still other companies look to collaborate with external financial partners. And regardless of where the money comes from, many companies collaborate for the technical expertise it takes to build the capacity of poor producers.

Discussion Question

This event will tackle the following questions about how companies and development organisations can work together to create more inclusive business models, touching upon opportunities for partnership to build the capacity of poor producers to participate in and benefit from such models:

• What are some of the highest-potential opportunities for business and development organisations to partner on inclusive business models that benefit the poor? How can business benefit?
• How can business partner with development organisations to build the capacity of poor producers to participate in and benefit from inclusive business models as suppliers and distributors? What types of capacity-building can donors help with?
• What can we learn from existing approaches, and what more can be done to scale up promising new models?

Further reading:

Jenkins, Beth and Eriko Ishikawa (2009). “Business Linkages: Enabling Access to Markets at the Base of the Pyramid.” Report of a Roundtable Dialogue March 3-5, 2009, Jaipur, India. Washington, DC: IFC, IBLF, and the CSR Initiative at the Harvard Kennedy School.
Nelson, Jane and Dave Prescott (2008). “Business and the Millennium Development Goals: A Framework for Action.” Second Edition. New York: UNDP and IBLF.
United Nations Development Programme (2008). “Creating Value for All: Strategies for Doing Business with the Poor.” New York: UNDP.
US Chamber of Commerce Business Civic Leadership Center (2009). “Partnering for Global Development: The Evolving Links between Business and International Development Agencies.” Washington, DC: US Chamber of Commerce.
World Business Council for Sustainable Development (2010). “Vision 2050: The New Agenda for Business.” Geneva: WBCSD.
World Economic Forum (2009). “The Next Billions: Unleashing Business Potential in Untapped Markets.” Geneva: World Economic Forum.

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Views: 100

Comment by Olumide Adisa on March 23, 2010 at 22:23
..No wonder only a couple of people had read the paper titled "The Next Billions". This briefing should have been posted much earlier.
Having said that, the event was quite an interesting one. I would most readily recommend it to anyone interested in partnering with the business sector to achieve those crucial development goals.

Comment by Phil on March 24, 2010 at 10:08
The event opened with advice from DFID that parts of Africa will not meet ANY of the millennium develoment goals by 2015 but swiftly moved on to the usual non solutions such as organic and fair trade cotton etc. This was followed by how to scale up and a general round up of the usual suspects. I don't think MDGs were mentioned again.

When will the organisers recognise that to lift millions out of poverty quickly it needs tremendous focus on local governance, infrastructure and partnership with business in projects where the major development institutions take on country risk within structured deals with mainstram markets.

Simon raised an issue partly as a joke about DFID lending money for a uranium mine in a conflict country which would employ many people. It is not lending as such that is required but a question of governments and development institutions puttung their money where their mouth is.

For example if there was a structured deal where the country risk was assumed by the World Bank via MIGA then the framework for a major project to go ahead in a conflict challenged country could be contemplated without necessairly putting the recipient country into debt for decades to come. Couple with this is the need for local authorities within rural communities to be empowered to deliver services including infrastrucutre to which the population they serve makes a contribution from the earnings of the new businesses. Young people in these communities have no vision of a future for that community and there is often no culture of contribution or engagemnt with public services which temd to be centrally provided (or not).

This is chicken and egg situation and whilst DFID and other agencies controlling up to £100bn or more per annum of development funding worldwide mess about with micro projects - they transfer the result of their poor preformance and aid ineffectiveness to us as tax payers encouraged to pay more via sport relief, Liveaid etc.

For business to fight poverty on a larger scale it really needs the G20 and others to move to income generating agenda for poor countries rather than funding thousands of NGOs to deal with alleviation if the results of poverty usually in the most unsustainable of ways. The current fragmentation of efforts between these develoment agencies is making the problem far worse than it needs to be. But no doubt the development agency workers are happily ticking boxes that their little independent of all others project has been implemented in accordance with some nanny state procedural manual. "Haven't we done well - and can I have a raise next year?"
Comment by Victor ILuna on March 27, 2010 at 7:19
It was my first time to take part to this kind of meetings, and I found it very positively interesting. I really liked the way the notion of the partneship being transparent and honest between partners was formulated and presented. Although these are common sense values, it is very easy to loose sight of them when caught up in what I call the "between interests zone". Another interesting point was about the bottleneck within the business chain. Again, this was a very basic and "first principle" kind of stuff that Simon (from DFID) raised; but an extremely important one. This point would seem even more of a "first principle" kind of stuff to some of us with an Engineering background, used to designing and setting up processes and mechanisms to generate tangibles results (products). But it was an important one to make. I liked the meeting and its contents. Unfortunately for me, I forgot my personal notebook in the meeting room at the end, along with all the handouts. I would like to be part of these events.

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