But the private sector must go beyond basic buyer and seller relationships so it can reach out to the poor with affordable and viable value propositions. Michael Porter's "generic value chain" provides a framework for accomplishing this by going beyond merely adding value. More important, it provides new ways to improve participating businesses' performance and competitive advantage.
In Porter's words, "Every firm is a collection of activities that are performed to design, produce, market, deliver, and support its product. All these activities can be represented using a value chain. A firm's value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves . . . Creating value for buyers that exceeds the cost of doing so is the goal of any generic [business] strategy." (Competitive Advantage: Creating and Sustaining Superior Performance, New York 1998).
The Cemex, Aurolab, and solar energy business strategies have turned this notion on its head. By building "hybrid value-chains" where for-profit and social impact goals are mutually supporting, these businesses create new markets and serve millions of low-income consumers.
Reaching Out to Underserved Markets
The many ways of forming a relationship between businesses and the poor can be classified by the two main roles played by the poor: they are either 1) producers of goods and providers of services or they 2) consume goods and services. Most attempts to form partnerships between businesses and the social sector have focused on supporting (directly or indirectly) development of micro- and small enterprises.
This creates three roles for small producers: 1) buying technology and inputs, 2) selling pre-processed raw materials, and, (3) selling finished products and services. Social entrepreneurs support small producers in these three roles by delivering financial services, providing training, establishing producers' associations, building new marketing linkages and other similar interventions.
Large companies that establish partnerships with micro- and small producers do so because they find that these new – and often unlikely – partners can produce value for them by gaining access to new market segments with a higher value offer or by improving the company's productivity as a whole. Examples of this include businesses that sell organic coffee, rare essential oils, ecotourism services and many handmade products. More and more commercial partnerships like this, between small producers and private sector firms, are emerging as individual social sector institutions and the informal business sector become stronger.
By its very nature, the informal sector is decentralized and consists primarily of micro- and small processing units, but the formal sector operates on the basis of large- or medium-scale markets and branded products that have with fairly uniform quality standards. It is no surprise, therefore, that one of the core competencies required to make these partnerships work is the ability to aggregate either the demand or the supply side of the micro- and small-scale operations.
Although it takes time for this process to mature and reach significant scale, experience demonstrates that it can be accomplished through the introduction of effective distribution networks and by giving all parties involved economic incentives to adjust their production practices.
However, the results have been mixed. More often than not, these partnerships have failed to reach a significant scale because the key players lack the commitment and determination needed to make this new way of doing business a common and sound business practice.
Revisiting Low-Income Markets
Only very recently, a few large private sector firms have started focusing on the poor as consumers and not simply as recipients of aid. Business schools and corporate strategists such as C.K. Prahalad are challenging businesses to revisit how they traditionally perceive low-income people as consumers of finished goods.
The poor are now becoming visible as an attractive market segment that can contribute to companies' profitability when they are willing to take the risk. It is important to note that major segments of the poor have always been consumers of products such as Coca Cola, Bata shoes, or branded construction materials. But now the new business-social sector partnerships are learning how to reach these consumers on a massive scale so that they represent a significant value proposition as a newly tapped market segment.
It takes a certain amount of sophistication and greater intellect to ably survive in these markets, according to C.K. Prahalad. The strategy for success is simultaneously matching low cost of goods and services with quality, sustainability, and decent profit margins in diverse markets – such as primary education and financial services.
This is precisely the type of innovation that social entrepreneurs have been creatively pursuing as they support small producers and deliver social services to the poor. The poor no longer are doomed to remain an underserved market as social sector distribution mechanisms expand, whether they are organized small producers or health education networks. By working together, private sector entrepreneurs and social innovators can create new hybrid market linkages and deliver affordable products and services that transform the poor into full-economic citizens.
The availability of cost-effective distribution networks that specialize in satisfying low-income consumers' demand is essential. Street vendors around the world have demonstrated their ability to deliver value to their retail clients by selling in locations, price and amounts that are competitive with formal retailers.
In Brazil, hundreds of thousands of "Avon ladies" sell cosmetics to urban and rural consumers, even in the middle of the Amazonian jungle. In India, Hindustan Lever learned that delivering value to rural consumers required going beyond the traditional practices of multinationals. They had to design affordable soap and detergents that respond to the needs of these consumers and are promoted by face-to-face interactions rather than by mass media.
Changemakers' story about Cemex, the third largest cement manufacturing in the world, focuses on how it is developing a product offer that is designed to serve the needs of hundreds of thousands low-income consumers in Mexico. Already in its third year and serving more than 30,000 families, Cemex's Patrimonio Hoy (Assets Now) program is a powerful illustration of how a global business can deliver social impact while generating profits.
As it scales up, Cemex is exploring ways to leverage the skills and distribution infrastructure of citizen-based organizations in order to take its innovation one step further. The program is positioned to grow nationally with the aim of reaching 1 million families within five years. This major undertaking is possible because Cemex has recognized that the poor can be a profitable and fairly stable market segment when served by appropriate product offers and effective distribution strategies.
Changemakers' story about David Green gives a detailed account of how he discovered and explored what he calls "compassionate capitalism," culminating in the creation of Aurolab in India. This nonprofit manufacturer of surgically implanted artificial lenses for cataract patients has become the world's second manufacturer of these lenses.
Aurolab is a profitable venture and has found a way to sell its products for 20 to 30 times less than the regular price. According to David Green: "We sell . . . for less, not only because our costs are lower but because we chose to prince them lower. Our goal is maximizing service rather than maximizing profit."
Aurolab's business model was designed with a humanitarian goal in mind: to reach out to the largest possible number of people who, without this service, would otherwise remain blind. Green is already demonstrating the applicability of this concept to hearing aids and other high-profit margin medical products.
Social entrepreneurs like Fabio Rosa are inventing new markets by designing services based on how much low-income families can pay. Rural electrification technologies have been available for decades, but Fabio's innovation the introduction of a "rental system" that brings the promise of affordability to millions of people.
Cemex, Aurolab and Rosa's work with solar energy are three powerful illustrations of an emerging trend toward dissolving the boundaries between profit and non-profit endeavors so they are no longer constraining the creativity of entrepreneurs. Billions of people currently underserved by traditional capitalism need to be integrated into national economies, and to do so requires new business models. A hybrid value chain approach allows business/social entrepreneurs to create new value for greater social impact.
Valeria Budinich is the director of the Full Economic Citizenship Initiative of Ashoka. Budinich was COO for Enterprise Works Worldwide where she helped develop thinking on small producers. She has worked in many international organizations specializing in small enterprise development. Budinich is an industrial engineer by training.
