Inclusive business needs collective action

Inclusive Economy02 Jul 2013Rutger Bults

Only collective action can strengthen the inclusive business ecosystem and reach impact.

The Economist claims that ‘the world has an astonishing chance to take a billion people out of extreme poverty by 2030’. According to the article, the world’s next ‘great leap forward’ depends greatly on the ability of developing countries to maintain the impressive growth they have managed since 2000. Yet, to make sure this growth is shared, pro-poor or inclusive, an innovative and holistic approach needs to be introduced to systematically improve living conditions for the poor.

Looking at the fastest growing economies in the world, it is evident that there is growth potential in developing markets. Nonetheless, as David Woodward states in his blog post as part of this debate, ‘we need to shift from a model premised on the unrealistic assumption that the economic benefits of growth will automatically trickle down to the poor to one where the considerable economic benefits of poverty reduction will bubble up to the rest of the economy’. Rather than a focus on growth, poverty reduction should be the top priority of organizations aiming for inclusive transitions. In addition to his reasoning, we argue that in order to spur economic transition and to maximize inclusiveness we must shift from the prevalent isolated impact model to a collective impact approach: ‘the commitment of a group of actors across sectors to a common agenda for solving a complex social problem’.

The basic idea of the article in The Economist is that if developing countries do well and accumulate more wealth, benefits will ‘trickle down’ to the poorer market segments. These poorer market segments, defined as the Base of the Pyramid (BoP), consist of over 4 billion people earning less than 4 dollars a day. Woodward explains the ‘benefits of poverty reduction’ by linking local consumption to local production. As poor households’ incomes increase, they also buy more. He admits that published empirical evidence is lacking, which from our research on Base of the Pyramid consumer insights is true, but his assumption is valid: ‘the poor will typically spend much of their additional income on things which are (or could be) purchased locally, and largely from other low-income suppliers…’

Following Woodward’s standpoint, further poverty reduction depends largely on the capacity of poor producers to satisfy increased demand. Taking food as a metaphor, which accounts for up to 80% of the BoP’s household expenditures, interventions by the private sector in the food value chain can increase the income of chain actors, increase the availability of food products, make food products more affordable, or increase the – nutritious – quality of food. Thus, creating the capacity to satisfy demand. However, low levels of literacy and education, inadequate infrastructure and a constant struggle to make ends meet characterize the low-income Base of the Pyramid markets. These challenges are often too systemic to address through business model innovation alone. Inclusive business models can compensate for gaps in the market environment, or work around them, but inclusive business ecosystems – spanning a wide range of market players in business, government and civil society – can actually overcome them.

Only when many players act collectively are they capable of strengthening the inclusive business ecosystem and reach impact. This is not merely a matter of encouraging more collaboration or public-private partnerships. It requires a systemic approach to social impact focusing on relationships between organizations and progress towards shared objectives. Large-scale social change requires broad cross-sector coordination instead of focusing on the isolated, if successful, intervention of individual organizations.

However, most policy-makers are forced to work toward ‘isolated impact’. Faced with the task of choosing a few beneficiaries from many applicants, they try to focus on the organizations that make the greatest contribution to poverty reduction. Beneficiaries, in turn, compete to be chosen by emphasizing their own potential to achieve impact. In fact, in many cases, companies rely on the support of governments to enable them to move quickly with fewer transaction costs. There is a need for organizations that can fill institutional voids and support a wide range of actors that make it possible to start working towards what Al Hammond calls ‘collaborative system solutions’. When broader or more complex coordination problems exist, tools and instruments need to be developed to overcome the institutional distance between Base of the Pyramid and home markets experienced by private enterprises.

Increasingly, innovation intermediaries are emerging that use a number of strategies to intervene in the ecosystems around inclusive business models. In a developing country or Base of the Pyramid context this is an organization that specifically aims to steer more innovative efforts towards the Base of the Pyramid, to support innovators in overcoming the difficulties related to BoP markets, and to aggregate knowledge about these processes. However, creating successful collective impact initiatives requires that funders support a long-term process of social change without identifying any particular solution in advance. They must be willing to let beneficiaries steer the work and have the patience to stay with an initiative for years, recognizing that social change can come from the gradual improvement of an entire system over time, not just from a single breakthrough by an individual organization.

A concrete example to underpin this view will be the subject of my second blog in this series.