ReVista :: Social Enterprise :: Introduction

Social Enterprise

Making a Difference
Fall 2006

Business and Low-Income Sectors

Finding a New Weapon to Attack Poverty
James E. Austin and Michael Chu

Poverty has remained an intractable challenge to the world, despite record amounts of time and treasure devoted to its eradication since the end of World War II. Great institutions representing groundbreaking collaborations between the public sectors of the world, the governments of developed and developing nations, the vast resources of private philanthropy and the ingenuity and dedication of civil society organizations have all focused on the problem. These efforts have unfolded in every continent and culture, under democracies and dictatorships, command economies and open markets. Yet poverty endures. And where massive national economic growth sustained for long periods has led to dramatic improvements in overall standards of living, such as in China in the last quarter century or more recently in India, poverty remains the fault line threatening the future. The need for new thinking regarding poverty is as urgent as ever.

Looking at Business

In the search for effective solutions, attention has gradually turned to business, which even its detractors characterize by its ability to get things done. In recent years, analysts have started to view the intersection of business and the poor as a new venue to create economic value: a segment of underserved economic opportunities. But from society’s perspective, the more important question is whether there is an unrealized potential for business to be a driving force in crafting solutions to society’s enduring problems – the creation of social value. Possibilities abound. Can significant market inclusion and income enhancement be achieved by connecting poor farmers to global consumers? Can health and education, still so lacking among poor populations, be effectively delivered through market-based mechanisms? Is transforming illegal consumers of electricity into paying customers a path for social development? Is giving credit cards to the poor an effective way to generate citizenship? Can quality of life be enhanced by management innovations that make goods more affordable and accessible to low income consumers? Can productivity and earnings of low income producers be increased in a sustainable fashion through new access to financial resources and training?

Why this is critical lies in the very essence of the problem. An effective response to global poverty must meet three fundamental characteristics:

• Scale: The world has three billion people that must subsist on two dollars or less a day. Addressing the core of the problem requires the essential ability to ultimately scale an intervention to affect not thousands but millions of people.
  
• Permanence: Given the intractability of the problem, no intervention is likely to lift families out of poverty in one generation. Success demands initiatives that can be deployed across generations. Accordingly, enduring solutions cannot depend ultimately on resources determined by the finite attention spans of human beings, even when armed with the best of intentions and occupying the most eminent positions in governments, multilateral development agencies, or nonprofit organizations.. The vagaries and pressures of bureaucratic or political processes impede permanence. Politicians and political agendas tend to come and go, but the industries created by businesses endure.
• Efficiency and efficacy: Given the size of the problem and the scarcity of resources, effective responses must also incorporate the most productive utilization of those means.

Philanthropy, while making important contributions to fostering social innovations, lacks the financial resources and organizational structures to reach and maintain massive scale. Governments do have the resources to scale up, but often falter on efficiency and efficacy, and political instability and dynamics threaten continuity. Empirically, industries and markets have demonstrated an ability to operate massively, permanently, and efficiently. When an activity’s returns are proven to be equal or greater than those with similar risk profiles, economic rationale dictates the emergence of players that will seek to provide it to the last potential client. We see this every day. However, markets and market reforms have also not succeeded in eliminating poverty or the growing gap between rich and poor. So the key question is whether businesses can find new approaches to use the demonstrated capabilities of market-based initiatives to engage with the low income sector in ways that can achieve significant progress in the struggle against poverty.

For the businessperson, the issue may be whether, as the title of C.K. Prahalad’s milestone book put it, there is a “fortune at the bottom of the pyramid.” But for the social actor, increasingly the question may be whether, in the fight against poverty, the market is a path that has been overlooked. And if business serving low-income populations is indeed capable of creating social value, then this practice—beyond management science— is part and parcel of what we term “social enterprise:” organizations whose main activities address society’s ills, whether they are nonprofit, for-profit or public sector.

The study of business from this different perspective – Market-Based Poverty Initiatives (MBPI) - is the latest cycle of research for SEKN, the Social Enterprise Knowledge Network, comprised of nine business schools from Latin America and Spain plus the Harvard Business School (see Box) In the course of its current investigation, SEKN is examining 18 cases, 8 of which are discussed in this issue of ReVista, ranging from agribusiness to construction, healthcare, textiles and retail. Following these case studies, six additional articles address a set of more general MBPI issues that flow out of and build on the case studies. These include the following:

• the challenges of starting and building MBPI, particularly as they relate to dealing with the immersion into the cultural dimensions of LIS;
• the distinctive role that NGOs can play as MBPI protagonists;
• the importance of collaboration between businesses and NGO in building viable MBPI ecosystems;
• the positive or negative impacts that governments can have on MBPI;
• the different forms of social value that MBPI can generate and the challenge of scaling up; and
• the multilateral agency perspective of the Inter-American Bank for Development in its new initiative, Building Opportunities for the Majority.

The Issues

The cases profiled in ReVista illustrate SEKN’s exploration of key issues along five dimensions:

1. Who are the actors?
2. What are the barriers to effective engagement?
3. Which organizational forms offer particular advantages?
4. What are the dynamics of the ecosystems in market-based initiatives?
5. What is the nature of value destruction and creation?

Who: When looking at the impact of business on the poor, one of the first questions is how to view the population that comes into contact with the commercial enterprises. Recently, the term “bottom” or “base of the pyramid” has gained wide acceptance. While this graphic description has served well to focus attention on the subject, SEKN has chosen to anchor its definition on a narrower, more defined dimension, preferring the term “low income sectors,” or LIS. Although unintentional, a reference starting at the bottom, below everyone else, carries the risk of a pejorative connotation, of being less than others. One of the critical attitudinal precursors to this new business approach is to acknowledge the significant value and contribution of LIS as economic actors. Rather than always being less, they are also more in many dimensions. Thus, the focus is on the vehicle and the goal, which is captured by the term Market-Based Poverty Initiatives (MBPI).

Low income sectors are characterized by:

• Heterogeneity: Beyond the attribute of earning low-incomes and controlling few assets, LIS differ greatly all over the world and within each LIS. There can be differences along various dimensions: education, political and social integration, ability to navigate the formal and informal institutions of the community, social cohesion, and familiarity with legal frameworks and processes.
• Context: The particular context shapes different opportunities for engagement with distinct LIS segments. The cases discussed in the subsequent articles reveal, for example, the differences of engaging in business with poor agricultural workers in Central America or with the inhabitants of crowded barrios in Caracas or Bogotá.
• Broad Economic Agents: While much of recent work has focused on LIS as consumers of goods and services provided by external enterprises, often multinational corporations, the research done by SEKN indicates that low-income populations must be viewed as participants along the entire value chain. In addition to being consumers – for example, of prepaid health services in Caracas or ceramic products in Bogota - LIS are also important producers and intermediaries, such as will be shown in the subsequent cases of palm nut growers and processors in Peru and Brazil, and butterfly farming and exporting in Costa Rica.

Barriers: SEKN’s work pays particular attention to the obstacles that stand in the way of maximizing the potential of the LIS in the economic value chain. For example, a tile producer in Colombia did not have a distribution channel to reach LIS and so had to develop one in collaboration with community organizations and residents. Mexico’s largest cement company had to develop new marketing methods to service migrants in the United States wishing to support family construction projects back home. A Venezuelan health care provider had to overcome the cash scarcity of LIS in the design of a health care insurance. The Costa Rican butterfly company conquered the market access barrier by linking poor farmers to the export market.

Organizational Forms: The existence of barriers raises the issue of whether there are particular organizational forms that are better suited than others to overcome them. Most existing research has focused on multinational corporations, but the SEKN research is exploring the role of other types of social enterprises, for example, a cooperative for trash recycling in a low income barrio in Buenos Aires, a civil society organization in a poor region in Chile organizing a community to gather and market wild produce, a small butterfly exporting enterprise, and a large group of national palm oil producers involved in developing small farmer suppliers.

Ecosystems: The business enterprises in LIS exist within political, economic and social systems that comprise the organizational ecosystem within which they must operate. By examining particular cases, SEKN seeks to understand the key dynamics that affect success. Among these are the intertwining roles of government, civil society organizations and other social actors in the life span of business enterprises in LIS, from their launch to their eventual maturity. This is the focus of the research on the network of used clothes recyclers in Spain, as well as the collaborative relationships between the palm growers and the processing companies in Peru and Brazil. The role of the public sector is examined with particular reference to public utilities.

Creation and Destruction of Value: At its most basic, any LIS business must be evaluated in terms of its economic performance. Is it profitable to operate in LIS? Does it meet the normal return criteria for activities of similar risk? Is it a rational economic choice? If the answer to these questions is positive, then the operation will be economically sustainable, but will it also create high social value? Businesses that exploit LIS might be economically profitable but socially negative. Similarly, other economic activities with LIS might create social value and be unprofitable but subsidized by a corporation as part of their corporate social responsibility activities. In either case, the dual conditions for successful LIS engagement of simultaneous creation of economic and social value would not have been met.

Where new social value takes place, the activity breaks the status quo and hence is likely to also be a disruptive process. Accordingly, a companion to understanding the creation of social value is the analysis of the destruction that may be an integral part of the same process. New distribution networks may be forged, but old ones are rendered obsolete; there may be new opportunities for LIS labor but it may come at the expense of other jobs; goods and services may reach LIS more efficiently but it may put certain LIS producers out of business. LIS consumers may have new access to consumer goods but will these increase their quality of life? Regardless of a product’s practical utility, how important is self-esteem that emanates from its consumption? What ensures that in time successful LIS businesses will continue maintaining a surplus of positive contributions over the negative ones? What will the final net effect be for the LIS community, and for society as a whole? MBPI is not a panacea; it is embedded with complexities and controversy. How is the social value defined and quantified? Who should participate in that process? These questions do not have obvious answers and constitute a key area of inquiry for research in this field.

What is at Stake

Beyond intellectual capital, understanding business in LIS has practical ramifications of significant proportions. It is a search to remedy the omissions that have made prior efforts incomplete in their efforts to resolve global poverty. Private and public philanthropy at its best has made signal contributions to the birth of innovative and far-reaching initiatives, but has been unable to guarantee the scaling or the permanence of those efforts. The public sector has been able to mobilize massive efforts for extended periods but has been unable to guarantee the choice of models that incorporate and maintain efficiency and efficacy, without which the long term capability of the effort is compromised. These philanthropic and public sector contributions have been and will remain important but insufficient. Business, if able to provide commercial returns while delivering goods and services that materially rectify society’s ills, promises to harness scale, permanence, efficiency and efficacy in the fight against poverty. Along the way, success in this dual value generation approach carries theoretical and practical implications for the very nature, purpose, and means of business and its role in society.

How powerful MBPI can be is demonstrated by commercial microfinance. In thirty years, this MBPI dramatically expanded the access to credit for the LIS population of the world. By 2004 more than $9 billion in microcredit a year was being delivered to more than 28 million active clients by highly profitable financial institutions. SEKN’s research is a contribution to understanding whether such success is a singular phenomenon or the result of processes that can be replicated time and again. In the answer may lie a key that can unlock the transformation of our societies.

The following articles in this issue of ReVista will serve as windows onto this emerging area of research and practice. Definitive answers will remain elusive but a deepening of our understanding of the right questions and a beginning grasp of the phenomenon are possible.

James E. Austin is the Elliot I. Snider and Family Professor of Business Administration, Emeritus at the Harvard Business School, where he was co-founder of the Social Enterprise Initiative and one of the co-founders of the Social Enterprise Knowledge Network.

Michael Chu is Senior Lecturer of Business Administration at the Harvard Business School and former president & CEO of ACCION International.