Social Enterprise
Making a DifferenceFall 2006
Market Initiatives with Low-Income Sectors
Troubling to Start, Tough to BuildHenry Gómez and Patricia Márquez
Angela, a power inspection crew member at AES-Electricidad de Caracas (AES-EDC), was inspecting an energy tower installed near a Caracas barrio. Nearby dwellers tapped the tower to get free power. Suddenly she heard gunshots and saw other crew members run for cover. She knew she could not catch up, and tried to remain calm. Noting her AES-EDC helmet, a woman pulled Angela into her shack. Waiting for the gunshots to cease, Angela reflected on the danger of working in the barrios.
Angela’s experience illustrates why firms engaging in business with Low Income Sector (LIS) communities, such as Caracas’ barrios, face a heap of complex challenges. One is to get company staff to feel comfortable about stepping into these poor and often dangerous neighborhoods. Another is to set in motion the kind of profound changes that will enable the organization to build a sustainable business venture with these communities. AES-EDC employees tread carefully when first entering a barrio, hoping to turn free-riding power users into paying customers. However, building an enduring relationship with LIS such as these Caracas neighborhoods—a relationship that generates ongoing value for both company and consumer—is many times more difficult, requiring a degree of commitment that not all companies are able or even willing to try.
Organizations engage LIS in market-driven business ventures in any of three ways: as consumers, suppliers and partners. Launching such ventures sets in motion powerful forces that promote social change and hold the promise of mitigating poverty. Articles in this issue of ReVista, based on studies made in Iberoamerica by the Social Enterprise Management Network (SEKN), show how multinationals, small- and medium-sized firms, cooperatives, and civil society organizations that focus decisively on low income groups can market goods and services to consumers previously considered too poor to afford them. They can teach subsistence farmers how to become efficient suppliers of goods destined for world markets, and partner with low-income service providers such as informal economy truck drivers, transforming them from passive players to go-getting entrepreneurs.
Knowledge of how organizations can achieve success as they undertake to develop business with the poorer in Latin America is embryonic. Emerging insights from scattered experiences have uncovered a world of obstacles that stand in the way. Barriers that are easiest to overcome relate to the kind of inadequate infrastructure typical of low income communities. For example, poor roads make for difficult transport; lack of technology hinders communications; and deficient public services, including police protection, often facilitate guerrilla control in rural areas and, in urban barrios, domination by youth gangs or underworld mafias.
Barriers to doing business with LIS that are far more difficult to overcome stem from social prejudices built up over decades, fostering cleavages between the region’s better educated middle- and upper-income groups and impoverished masses that have gradually evolved an informal economy of their own. In some countries more than others, political movements have bred followers by exploiting economic differences in the local society, thus exacerbating social prejudices. In Latin America, managers seeking to explore a market initiative with low-income communities are generally drawn from favored income groups; many have never set foot in a slum or developed personal bonds with people outside their limited social circle. Not surprisingly, LIS groups view outsiders with equal mistrust.
Studies of emerging experience in LIS business development in Latin America invite a critical revision of traditional ways of understanding poverty and development, as well as a need for innovative measures to promote sustainable interactions between business and society. Despite their small number, experiences hitherto examined offer an open book for learning about creative business engagement, uncovering a world of possibilities, instead of the usual diatribe signaling decay, chaos and hopelessness.
Getting started
Inserting low-income sectors into modern economy value-chains is no easy task. Three experiences studied by SEKN researchers illustrate the challenges involved in launching market-driven initiatives with low-income sectors, highlighting the start-up strategies deployed.
In Venezuela, AES—EDC is the sole power and light provider to the Caracas metropolitan area. More than one-half of the population lives in barrios, where illegal connections to access free power are common. Power losses (not always caused by LIS consumers) threatened to reach 18 percent in 2004, entailing millions of dollars in lost revenue. People in the barrios suffered as the burden placed by growing illegal connections made for brownouts and power charges, causing damage to their appliances. Poor street lighting favored crime. The company had little knowledge of such hardships, for it had chiefly served middle and upper income customers. It first sought to turn LIS power users into paying customers by means of a pilot project; 300 pre-paid electricity meters were installed in La Morán, a hillside barrio close to downtown Caracas, with a population of about 20,000. The barrio had no sewage, no running water, and no roads wide enough for vehicles; access to dwellings – some as high up as the equivalent of 40 stories – was on foot. AES-EDC made a start to engage with LIS consumers by means of its pilot project, but there was much the company had yet to learn before it could serve them effectively.
In Peru, Palmas del Espino operated a palm oil plantation and processing plant in an area that for years had battled drug cartels, Shining Path guerillas, and the military. The company sought to convert poor farmers from growing coca to palm oil, offering them an assured market. To improve relations with the community, build trust and improve living conditions, Palmas also significantly increased traditional corporate philanthropy. Together with community leaders, local needs and priorities were defined, and investments made in housing, schools, teacher training and the local health post.
In Colombia, Colceramica sought to market its lower-priced line of tile through new distribution channels to reach LIS consumers. By partnering with a social entrepreneur connected with Ashoka, a privately funded civil society organization, Colceramica was able to link with community leaders in Usme, a poor neighborhood in Bogotá. The link helped the company recruit salespeople, gain valuable marketing insights and generate consumer acceptance for its product.
The above experiences show that simply getting started was challenging in itself. All three companies learned from their start-up step, and found it made good business sense—for all opted to continue investing management attention and financial resources to build a lasting relationship with low-income communities.
The difficulties entailed in launching a venture with the poor are not just about urban topography or dispersed rural communities. Each such community features its own characteristics, regardless of whether it happens to be based in a Caracas barrio, an outlying area in rural Peru or a favela in Rio de Janeiro. Starting a viable business relationship requires crafting approaches that take into account LIS obstacles to participate in a modern economy. Downright creativity is required from managers as they seek to overcome cultural, social, geographical and economic distances. Building a sustainable business with population groups that have long been subject to scorn—or simply ignored—entails understanding their concerns, expectations, family dynamics, social networks, earning and spending patterns and much more. Only then can companies that seek to insert LIS in modern economy value-chains address such issues as how to deal with such realities as cash scarcity, insufficient infrastructure, lack of access to public services, everyday crime and political conflict.
A vast majority of Latin Americans—both urban and rural—are classified as poor. Standard market measures or national statistical data can provide useful indicators of prevailing earnings, household composition, or education levels, but are hardly sufficient to convey the economic and social dynamics of specific population groups. Traditional marketing tools do not reflect the pulse of the comings and goings of an informal economy that is today the chief source of income for the region’s low-income communities. How can organizations obtain a better grasp of who the LIS are, in order to effectively engage them as consumers, suppliers, or partners? How can corporate business shed long held beliefs in order to build value chains that take into account factors that influence LIS behavior vis-à-vis the modern economy?
Building an enduring relationship with Low-Income Sectors
Developing a sustainable market initiative with low-income sectors requires organizations to deal with a wide range of issues in areas such as distribution, payments and financing. Although these issues represent traditional business concerns, they are colored by the harsh living conditions that prevail in poor communities. Once again, building an enduring relationship requires deep understanding of LIS everyday concerns and dynamics, as well as taking into account forces that have kept them excluded from mainstream society.
In any organization, changing old ways of doing things encounters resistance. Take the case of AES-EDC, where bill collection had long been made either through a local bank or at company offices. After the company signed up its first batch of paying customers in a barrio where lamp-posts had long been tapped for free power, it faced a dilemma. The government-regulated tariff for minimal use of electricity in poor communities was US $0.80; but in that barrio and many others, the cost of public transport for dwellers to reach the nearest EDC-AES office and pay their bill was US $3.50! Unless the company came up with an alternative payment scheme, few of the new customers (of which few dealt with banks) were likely to keep making payments.
Venezuela’s Cruzsalud provides another example. Getting started to sign up its first low-income customers for prepaid health care services was not overly difficult; but getting them to keep up monthly payments over time for a contingent service they might or might not come to need, proved to be a challenge. After six months, only one-third of those who initially signed up continued payments. To encourage former customers to pay overdue charges, the company accepted emergency service calls—and handed them a past due bill once the emergency was over.
A key question is how to implement market initiatives that reconcile the “formal” world of companies that deploy conventional business practices with “informal” practices generally employed by Latin America’s poor. One path is to listen to the LIS community spokespeople themselves. When Colceramica proposed to the Usme community in Bogotá that a local co-op be set up to market its product, community leaders explained they already had their own organizations. Subsequent use of these organizations to sell tile worked effectively. Developing a value chain with LIS might entail processes that are commonly employed by the poor, but may as yet be untried by the organization leading the market initiative. In LIS communities, fairly complex market transactions—such as those involved in drug-trafficking—operate through word-of-mouth and social networks, never on paper. Can mechanisms such as LIS social networks be tapped by corporate-led market initiatives?
Cemex provides another example in which distribution and billing arrangements had to be designed from scratch. Here the company made use of a traditional Mexican LIS savings plan, known as tanda, whereby a group of ten persons contribute a weekly amount for ten weeks to a communal pool. Every week, using a random method, a different person may draw the accumulated amount to spend at their discretion. Companies can learn valuable insights from long-standing customs and institutions employed by the poor—indeed, such customs facilitated the growth of Latin America’s flourishing informal economy in catering to LIS. Companies that rely on unfriendly, often intimidating business practices when dealing with LIS, pass up an opportunity for promising market growth.
For instance, an ordinarily reliable LIS customer may justify not paying a bill on the grounds that a family member has been killed by a youth gang, and money is needed for the funeral. Organizations must take into account how low purchasing power and lack of disposable income have an impact commitments made by LIS consumers. New procedures may have to be set up to adapt to LIS income streams. Banks have long relied on trust in extending a line of credit to an established business; but no bank and few companies are likely to extend credit to an informal economy supplier. How can managers develop trust with an LIS supplier if they seldom set foot in a poor community, or when doing so tend to keep their distance?
By operating in the heart of LIS communities, Cruzsalud learned to innovate in health care service delivery. Teams of physicians and nurses on staff often visit nearby slums to promote their service; goodwill generated by the practice shields staff from threats to their safety. Similarly, a fleet of compact, fully equipped ‘ambulettes’ helped attract potential customers as they maneuvered the narrow alleyways of Caracas’ LIS communities.
There is no doubt that organizing LIS suppliers presents a special challenge to companies that seek to do business with them, owing to the small size of individual operations. Starbucks faced such a challenge when it sought out poor coffee growers in Chiapas,Mexico. A 1992 Harvard Business School case, authored by James E. Austin and Cate Reavis, describes how Starbucks negotiated long-term agreements with a few, carefully selected growers organized as cooperatives to reach the required volume of coffee.,. If the volume had not been increased, the operation would have been impossible to run.
Cooperatives in Latin America, however, don’t always work out when the goal is to build reliable export supply. To be sure, successful examples of cooperatives may be found, including some that group rural farmers and others that operate in global markets; but the operating culture of cooperatives does not always fit well in a business environment. The social as well as productive nature of “co-ops” often breeds interpersonal rivalries.
Regardless of the challenges inherent in building new value chains, solutions cannot be engineered top down. Experiences in developing new markets, such as that of Colceramica, show that their key to success was actually proposed by the Usme community. Cemex found its passkey to market development by adapting a long established local custom in poor communities. AES-EDC in Caracas also drew on suggestions by community leaders as it deepened its involvement with LIS power consumers. For companies such as these, the greater the involvement, the more they stand to learn.
Opportunities abound for companies, civil society organizations and cooperatives to engage productively with low income groups as consumers, suppliers and partners; and by doing so, induce social change. Yet developing socially minded market initiatives requires a holistic understanding of why and how low income groups have long remained out of sight or unattended, in some cases even exploited, ignoring their productive potential. Organizations need to turn to what anthropologist Clifford Geertz describes as “thick description.” As Jean Paul Rivas, president of Cruzsalud, puts it: “to make this [operation] work…we cannot look at the poor from the expressways.” Given a fresh management approach and a good dose of courage, new value chains that generate significant business and social value can be put in place. Should this not happen, however, business and society in much of Latin America may, sadly enough, continue to drift apart.
Henry Gómez is Professor Emeritus at IESA in Caracas, Venezuela. He has written widely on management innovation in public and private organizations, including the strategic objectives of corporate social initiatives. He holds a Ph.D. from New York University (1965).
Patricia Márquez is Professor at the Center for Leadership and Organizations at IESA. She leads IESA´s participation in the Social Enterprise Knowledge Network (SEKN) and currently coordinates SEKN’s research project “Constructing Socially Inclusive Markets in Iberoamerica” (2005-2008).