An introduction to inclusive business models

ADB-IDB Inclusive Business Workshop

Tokyo, Feb-Mar 2013

DRAFT - WORK IN PROGRESS

DRAFT - WORK IN PROGRESS

What is an inclusive business?

Are these inclusive businesses?

COCA COLA
Coca Cola is a major consumer of water resources in Vietnam, leaving it open to criticism, consumer boycotts and brand risk Coca Cola invested USD 100,000 in the Clean Water for Communities project to provide clean water access to schools and communities in 3 Vietnamese districts The project resulted in a more positive brand image for Coke, and broadly positive press coverage The project also provided access to clean drinking water to 10,500 students and 1,000 families

NIKE
Nike experienced hyper competition and falling demand, causing significant pressure to increase margins through cost savings As a result, Nike decided to sub-contract product manufacturing to secondary manufacturers in emerging markets such as Cambodia and Vietnam Benefits to Nike included cost savings due to reduced wages, as well as reduced capital expenditures Low-income workers receive employment, and small businesses get integrated into a global supply chain, resulting in higher quality and standards

NESTLE
25% of Nestles global revenues are generated from coffee exports from Vietnam; investing in capacitating coffee farmers is imperative to secure a steady and robust supply of beans

DRAFT - WORK IN PROGRESS

Nestle directly purchases coffee beans from farmers; additionally, to increase farmer retention, Nestle provides important technical training and assistance to promote sustainable agriculture Nestle was able to expand its supplier base, and secured the supply of high quality beans Benefits to the farmers included higher yields, better prices, and increased access to training and finance

Now with the clean water project, we benefit from clean qualified water. We are so happy; we can use it directly for cooking and drinking. There are two fountains, one for cooking and drinking and another one for cleaning.

The facts on the ground suggest there are still enormous problems with these supply chains and factories ... what is Nike doing to change the picture and give workers more rights?.

Nestles plans, [of] improving post-harvesting techniques like drying, are a good step in promoting economic stability. If these are addressed successfully, then the investment could be very positive for Vietnamese coffee producers.

Beneficiary villager in Dao Xa Village

Michael Posner, Human Rights First

Pablo Dubois, International Coffee Organization

How can we tell?

Source: Coca Cola case study from the Global Compact Network and Kennan Institute Asia; Nike case study courtesy internet media reports; Nestle case study courtesy ADB market scoping; Dalberg research

What are inclusive businesses?

DRAFT - WORK IN PROGRESS

DEFINITION PROFIT-MAKING BUSINESSES THAT ENGAGE THE BASE OF THE PYRAMID (BOP) AS
SUPPLIERS, EMPLOYEES, DISTRIBUTORS AND CONSUMERS, IN A MANNER THAT RESULTS IN A MEASURABLE IMPROVEMENT IN LIVING STANDARDS OF THOSE POPULATIONS, CONTRIBUTING TO A SYSTEMIC REDUCTION OF POVERTY.

Source: 1ADB definition of BoP; Dalberg research

Who are inclusive businesses attempting to include?

BASE OF THE PYRAMID BOP IS DEFINED1 AS THE LARGEST, BUT ALSO THE POOREST SOCIO-ECONOMIC GROUP IN THE WORLD, COMPRISING INDIVIDUALS EARNING USD 4/DAY OR LESS.
DRAFT - WORK IN PROGRESS

TOP-TIER

USD 4/day or less

B OP

Source:

1ADB

definition of BoP; Dalberg research

What does it mean to be inclusive?

Inclusive models seek to engage BoP actors across the business value chain in a manner that generates positive financial and social returns
VALUE CHAIN 1 SUPPLIERS FOR THE BUSINESS FOR THE BOP

DRAFT - WORK IN PROGRESS

Transparent, reliable supply chains Cost savings due to local sourcing

Jobs and income Stable prices for products Training and skill development

EMPLOYEES

Supply of talent at lower cost than exists in developed wage markets

Secure, safe jobs and income Opportunity for social mobility, where possible
Secure jobs, increased income, better livelihood opportunities

3 DISTRIBUTORS

Cheaper, more flexible, more responsive distribution chains

4 CONSUMERS

Additional markets and revenue streams

Increased access to safe, innovative and affordable products

Source: Dalberg research and analysis

How do you make businesses inclusive?

Can we buy directly from local BoP suppliers? Can we help increase vendor capacity by investing in training? Can we provide/facilitate access to finance to vendors?

Are there non-traditional actors that can help in raising awareness generation and marketing efforts (E.g. government, civil sector, NGOs, etc.)?

How do we use technology to provide better aftersales support to the BoP? Can we work with BoP entrepreneurs to help with aftersales support and consumer feedback?

DRAFT - WORK IN PROGRESS

PROCUREMENT

MANUFACTURING / PRODUCTION

LOGISTICS AND DISTRIBUTION

MARKETING / AWARENESS

CONSUMERS

AFTER SALES

How can we optimize energy usage? How can we build employee capacity by investing in training and professional development? How can we customize benefits to suit low income employees?

How can we minimize any negative impact on the environment? How do we provide access to information to our logistics partners to help them become more efficient? Are there local networks that we can tap into and develop for transportation and distribution? Can we reorganise the business to enable work with small orders/inventory sizes?

How do we make products more affordable? How do we provide financing to BoP consumers who cannot afford high up front payments? How do I ensure effective tailoring of products to suit the BoP needs?

Source: Icons from www.thenounproject.com

Inclusive businesses are different from existing businesses

COMPARING DIFFERENT TYPES OF BUSINESSES ACROSS MARKET AND SOCIAL RETURNS Market returns on the X-axis; Social returns on the Y-axis
Businesses can generate profit and impact poverty by accessing new markets, adapting products for BoP & reconfiguring to an ethical, greener, more efficient supply chain

DRAFT - WORK IN PROGRESS

Above market returns

Mainstream business

Inclusive business

Market returns
Social enterprises seeking longer term and scalable impact can better attract capital and grow with a focus on financial sustainability

Social enterprise
Below market Low
1Positive

Positive externalities 1

High
8

externalities encompass impact measure along Human Development Indicators Source: Dalberg analysis and research

and also differ from CSR initiatives

CORPORATE SOCIAL RESPONSIBILITY INCLUSIVE BUSINESS

PURPOSE

Effective management of economic, social and environmental impact Brand-building and risk management Employee and customer engagement Investor relations

Profitability and long-term sustainability, taking into account social and environmental concerns Engaging in new markets with a license to operate

DRAFT - WORK IN PROGRESS

FINANCIAL RETURNS

Does not generate any direct financial returns Requires consistent on-going funding

Inclusive businesses aim to meet or exceed cost of capital

SOCIAL RETURNS

Each activity is specifically designed to generate social impact Impact is limited by scale of investments and donations

Social impact may be the objective, or simply an outcome of the business activity, but must be explicitly measured Impact is achieved by scale which is directly related to the success of the business A pharmaceutical company selling medicines in affordable unit sizes, utilizing community health workers to reach BoP populations

EXAMPLE

A pharmaceutical company that donates medicines to the government for free/subsidized distribution to BoP communities

Source: Dalberg research and analysis

DRAFT - WORK IN PROGRESS

Why should large companies change their business model to become more inclusive?

10

BECAUSE being inclusive means working with approximately 60% (~3.5B people) of the worlds population that otherwise remains poorly engaged
The Base of the Pyramid populations identified here earn USD 4/day or less PRESENCE OF BASE OF THE PYRAMID POPULATIONS1 IN THE WORLD IN 2012 Population in millions; Top-two countries in each region; Poverty line in 2005 PPP
BoP
Turkey: 13m Russia: 8m

Non - BoP

DRAFT - WORK IN PROGRESS

EUROPE AND CENTRAL ASIA (BOP: 54M)

Egypt: 59m Iraq: 22.7m
12%

88%

EAST ASIA AND PACIFIC (BOP: 1251M)

35%
65%

MIDDLE EAST AND N.AFRICA (BOP: 175M)

35%
65%

SOUTH ASIA (BOP: 1544M)

6%

China: 831m Indonesia: 217m

LATIN AMERICA AND THE CARIBBEAN (BOP: 196M)

32%

94%

SUB-SAHARAN AFRICA (BOP: 778M)

10% 90%

68%

India: 1180m Pakistan: 165m

Brazil: 56m Mexico: 29m Nigeria: 159m Ethiopia: 80m

11

Source: World Bank PovCalNet analysis tool accessed on 11 February, 2013; Dalberg research

BECAUSE these low-income markets have substantial spending power and are growing rapidly
REGIONAL MARKET SIZES AND BOP MARKET SHARE Market sizes in USD billion
MARKET SHARE BY INCOME SEGMENTS
USD 8/day and more USD 4/day - USD 8/day +79% USD 4/day and less

GROWTH IN CONSUMER SPENDING

DRAFT - WORK IN PROGRESS

2,085B

4.3B 2.4B

CHINA

45% 21% 34%

+67% 1,421B 15% 36% 49% 1.5B 0.9B

INDIA

+18% 528B 1.6B 1.9B

BRAZIL

66%
13% 21%

+25% 319B 0.8B 1.0B

MEXICO

60%
11%
29%

2012

2016

Source: Regional market sizes from The Bottom 4 Billion, World Resources Institute (2008); Consumer spending numbers from Credit Suisses Emerging Consumer Survey 2012; Dalberg research

12

BECAUSE there are large opportunities in several BoP markets that businesses can invest in and capitalize
POTENTIAL INVESTED CAPITAL REQUIRED TO FUND SELECTED BOP BUSINESSES OVER THE NEXT 10 YEARS All amounts in Billion USD

INDICATIVE NOT EXHAUSTIVE

POTENTIAL INVESTED CAPITAL REQUIRED (BILLION USD) 0 Housing

USD 214B-USD 786B

POTENTIAL PROFIT OPPORTUNITY (BILLION USD)

DRAFT - WORK IN PROGRESS

10

180 190 200 210

790

10

180 190 200 210

790

USD 177B-USD 648B

Finance

Not measured
USD 176B

Water and Sanitation

USD 5.4B-USD 13B USD 2.9B-USD 7B

Education
USD 4.8B-USD 10B USD 2.6B-USD 11B

Health
USD 0.4B-USD 2B USD 0.1B-USD 1B

NOTE: Measures here are not comprehensive. Sizing the entire BoP market for impact investments is very difficult; thus only selected businesses within five sub-sectors were analyzed in the JP Morgan report Source: Survey of global impact investors and funds, Impact Investments: An Emerging Asset Class, JP Morgan (2010); Dalberg research

13

BECAUSE traditional markets are getting saturated and forwardlooking companies are already shifting their focus
EMERGING MARKET SHARE OF TOTAL REVENUES OVER TIME FOR SELECTED COMPANIES Percentage share of total revenues Unilever
Emerging markets Developed markets

ILLUSTRATIVE PRELIMINARY

Toyota
Emerging markets Developed markets

DRAFT - WORK IN PROGRESS

28% Share of total revenues 42% Share of total revenues 40% 44%

28%

32%

36%

47%

38%

49%

42%

53%

72%

72%

60%

68%

58%

56%

64%

53%

62%

51%

58%

47%

2005

2006

2007

2008

2009

2010

2005

2006

2007

2008

2009

2010

14

Source: Company annual reports; Internet research; Dalberg research

BECAUSE engaging the BoP can spark innovation that not only overcomes emerging market barriers
SELECTED EXAMPLES OF INNOVATION AT THE BOP

PRODUCTS
Problem: Electricity is expensive for BoP Supply of electricity is unreliable for majority of the BoP population Innovation: Products and appliances that are not dependent on grid connectivity to operate Products and appliances that emphasize energy efficiency, and entail minimal running costs Examples include low-voltage tablets (Aakash), LED lights (Nokero 200), and refrigerators (Godrejs Chotu kool)

SERVICES
Problem: Up front ability to pay is low Access to financial services is limited or non-existent Innovation: Pay-per-use models that prioritize increased access over asset ownership. E.g. Sarvajal for drinking water, Ecotact for sanitation Mobile money platforms that use local networks and mobile technology to provide basic banking services (deposits, withdrawals, loan payments, transfers, etc.) to under-covered BoP. E.g. Safaricoms mPesa in Kenya

DRAFT - WORK IN PROGRESS

15

Source: Images from company websites; Dalberg research

BUT ALSO drives development of products with significant potential in richer markets
SELECTED EXAMPLES OF REVERSE INNOVATION

LOW-COST ECG MACHINE BY GE

MICRO-LOANS IN AMERICA BY GRAMEEN BANK DRAFT - WORK IN PROGRESS

GE Medical Systems developed an affordable, portable EKG machine specifically for rural India to overcome infrastructure and access challenges The machine costs $2,500, compared to $10,000 for standard machines in developed markets The new product has now been successfully marketed in developed markets

Grameen Bank pioneered the concept of providing group-based micro-loans to low-income households in rural Bangladesh The group-lending model for small loans was replicated in urban America by Grameen America, in 2008 Grameen America has reached 12,500 families and disbursed over USD 60m in micro-loans

16

Source: www.gehealthcare.com; www.grameenamerica.com; Dalberg research

BECAUSE there is increasing agreement that IBs need not sacrifice earnings for impact
TRADEOFF BETWEEN IMPACT AND FINANCIAL RETURNS GIIN/JP Morgan survey of impact investors(2011); N=52

ILLUSTRATIVE

GENERALLY SPEAKING, DO YOU THINK A TRADE-OFF BETWEEN FINANCIAL RETURNS AND IMPACT IS NECESSARY WHEN MAKING IMPACT INVESTMENTS?

DRAFT - WORK IN PROGRESS

40%

Yes

No

60%

17

Source: Insight into the impact investment market, (JP Morgan, 2011); Dalberg research

ILLUSTRATIVE BECAUSE IBs are also increasingly perceived as no more risky than traditional companies, and expected to perform at par or better than them LEVEL OF RISK ASSOCIATED WITH INCLUSIVE BUSINESS INVESTMENTS GIIN/JP Morgan survey of impact investors (2011); N=52 EXPECTED RETURNS1 FROM IMPACT INVESTMENTS IN EMERGING MARKETS
COMPARED TO REALIZED RETURNS FROM TRADITIONAL BUSINESSES2

GIIN/JP Morgan survey of impact investors (2011) Similar to comparable traditional businesses Higher than comparable traditional businesses Lower than comparable traditional businesses Real returns from traditional businesses Expected returns from Inclusive Business investments

25 Annual internal rate of return (%)

9%

20

18%

15 11% 10 9% 9%

31%

60%

0 Emerging market equity Emerging market debt

1.The number of investments in the sample respectively are: EM Equity = 105, and EM Debt = 724 2.Returns from traditional businesses are average returns for: Cambridge Associates Emerging Markets Venture Capital and Private Equity Index, (1989-2008) and JP Morgans Corporate Emerging Market Bond Index (2002-2011). Source: Insight into the Impact Investment Market, JO Morgan and GIIN (2011); Dalberg research

18

AND FINALLY, BECAUSE for many large multinational companies, being inclusive is not a choice, its simply good business
Protests and instability in the market hurts business; by taking substantive voluntary steps to invest in the local environment and community companies can reduce reputational risks and persuade governments and the wider public to allow business operations without interference or obstruction

LICENSE TO OPERATE

DRAFT - WORK IN PROGRESS

COST SAVINGS

Companies operating in developing markets can generate significant cost savings through hiring relatively lowcost local labor; this also allows companies to pursue additional revenue opportunities that wouldnt be profitable if handled by higher-cost employees
Developing economies offer cost savings in materials procurement; estimates suggest that a 1% reduction in costs, achieved through a sophisticated, local and low-cost supply chain is equivalent to a 10% increase in sales1

EMPLOYEE RETENTION

The pool of qualified talent in developing markets is shallow there is strong demand and weak supply of capable and skilled employees; losing talent is bad for business as recruiting (to refill existing positions) and retraining are expensive Businesses that increase the value proposition for their employees offering technical training, formal professional development, perks such as subsidized housing, etc. as a part of core strategy are likely to better retain employees and cut costs TBD

POSITIVE FEEDBACK
EFFECTS

Ernst and Young (www.ey.com) Source: McKinsey Quarterly; www.wikipedia .com; Dalberg research

19

DRAFT - WORK IN PROGRESS

What are the challenges to inclusivity?

20

Companies face two important sets of challenges when trying to engage with the BoP
EXTERNAL CHALLENGES

EXTERNAL CHALLENGES DRAFT - WORK IN PROGRESS External factors including inadequate infrastructure and transportation, dispersed consumers, poor access to information, products and finance, and lack of market information affect business growth and scale.

INTERNAL CHALLENGES
Developing an inclusive business can challenge the existing operations, capacities and processes within a business. This may lead to internal tension and opposition to change.

21

There are five critical market-based challenges that limit business growth and scale
CHALLENGE Limited purchasing power, no financial access IMPLICATIONS FOR BUSINESSES

EXTERNAL

Even inexpensive products and services may be unaffordable for the average BoP consumer BoP businesses find it difficult to increase capacity or achieve scale (including as suppliers to other businesses) Consumer willingness to pay suffers as they there is limited access to product information, including availability, quality, usability, prices, etc Suppliers, distributors and retailers may lack the knowledge and skills to deliver quality products and services, consistently, and cost effectively Standard distribution models are very costly and ineffective in reaching BoP populations

DRAFT - WORK IN PROGRESS

Low education, awareness and skills

Hard to reach

Disaggregated, low-quality supply chains

Poor market data and information

Procurement is inefficient, with presence of several intermediaries Procurement is unreliable given poor infrastructure and limited capacity of SMEs
Businesses know very little about poor peoplewhat they prefer, what they can afford, and what products and capabilities they have to offer as employees, producers and entrepreneurs

22

Source: Dalberg research

Innovative inclusive business models have tried to address market barriers (1/2)
CHALLENGES BUSINESS MODELS Purchase finance DESCRIPTION Focus on lowering transaction costs of consumer finance and provide micro-loans to individuals/groups for smallticket purchases EXAMPLES

EXTERNAL

Limited purchasing power, no financial access

Pay-per-use

DRAFT - WORK IN PROGRESS

Implement alternate payment models in which customers pay for each use of the product, instead of owning it Sell product in smaller unit sizes and lower prices

Sachet model Supplier finance

Incorporate B2B financing within IB models that engage the BoP as suppliers, including trade finance, partnering with commercial banks, etc. Partner/co-invest with government bodies, donors, local bodies to implement awareness and education campaigns Invest in technical training / professional development to fill staffing needs Disaggregate operations into discrete tasks that can be performed by low or un-skilled BoP populations

MEKONG BAMBOO

Marketing / awareness Low education, awareness and skills Up-skilling

De-skilling

23

Source: Internet research; Company websites; Dalberg research

Innovative inclusive business models have tried to address market barriers (2/2)
CHALLENGES BUSINESS MODELS DESCRIPTION EXAMPLES

EXTERNAL

Micro-entrepreneur/ Increase points-of-sale in hard-to-reach areas by hiring and micro-franchise developing the BoP as micro-level entrepreneurs and franchisees
Hard to reach Partnerships Build linkages with SMEs, rural NGOs and other businesses etc. that are local to the target market, to leverage proven networks and systems and reach BoP consumers

DRAFT - WORK IN PROGRESS

Direct purchase

Purchase directly from BoP producers, and develop their capacity through training and investment
Purchase from cooperatives or other apex organizations of BoP producers, and collaborate with them to improve / increase production capacity Purchase from intermediaries that aggregate supply from BoP producers

Disaggregated, low-quality supply chains

BoP-owned cooperative

Third-party aggregator

Poor market data and information

Various

Emphasize establishing linkages and relationships with local individuals and organizations in the business model, in order to gain context and key market information.

24

Source: Internet research; Company websites; Dalberg research

Sarvajal uses a PAY-PER-USE model to provide low-income and rural communities access to safe and clean drinking water
WHAT WAS THE PROBLEM? Rural access to clean drinking water is very poor, leading to a vast majority of all diseases in India; Sarvajal wanted to develop a low-cost, market-based solution to increase access.

DRAFT - WORK IN PROGRESS

HOW WAS IT SOLVED? Sarvajal used a franchisee-based model in which village-level entrepreneurs operated solar-powered water purifiers for community access to clean drinking water Community members used a pre-paid card to buy water from the entrepreneur; the card is re-chargeable via the mobile phone WHAT WERE THE OUTCOMES? Sarvajal supplies clean drinking water to more than 150 cities, towns and villages in India at Rs. 0.25 0.50 per liter Sarvajal has provided employment and income-generation opportunities to water entrepreneurs in Indian villages WHAT WAS LEARNT? Challenges of operating in rural environments can be overcome by innovatively and effectively incorporating technology into the business model, e.g. for cashless payment and re-charge, for aftersales servicing and quality monitoring, etc. Identifying high-capacity entrepreneurs/franchisees is difficult and can often make or break the business
25

Photo courtesy www.images.google.com

Guangsha Construction invested in UP-SKILLING its workers in China

WHAT WAS THE PROBLEM? Guangshas construction workers were poorly trained, which led to a number of costly on-site accidents
DRAFT - WORK IN PROGRESS HOW WAS IT SOLVED? Guangsha created free-tuition vocational schools at each construction site of more than 50,000 meters Semi-permanent day laborers are required to pass four training exams in order to get official Guangsha contracts Training certificates are only valid for one year and must be renewed annually or at the start of each project, whichever is sooner WHAT WERE THE OUTCOMES? In 2005, Guangsha had net profits of $19 million and an output value of $670.7 million 90% of students receive training certificate on their first attempt

WHAT WAS LEARNT? Providing training for BoP employees can reduce costs, mitigate risks, and improve employee retention Training programs for BoP employees often require large upfront investments (e.g. Guangsha invested $3.65 billion to start schools)
26

Photo courtesy www.images.google.com

Nestle established a network of MICRO-DISTRIBUTOR FRANCHISEES to expand their reach among the urban poor in Brazil

WHAT WAS THE PROBLEM? Nestl could not reach BoP consumers because its typical distribution model using a full truck would not work in favelas with narrow streets

DRAFT - WORK IN PROGRESS

HOW WAS IT SOLVED? Nestl identified a network of distributors and micro-distributors who would buy products and assemble assortments appropriate for distribution to micro-retailers in favelas Distributors also assembled pre-packaged kits for direct sales to families in their homes, using trusted direct sales agents from local communities WHAT WERE THE OUTCOMES? Nestl increased sales among BoP consumers in favelas Nestl created jobs by recruiting informal workers to become direct sales agents and micro-distributors WHAT WAS LEARNT? BoP can be effective distributor of products to Hiring local staff (e.g. direct sales agents) with relationships of trust within the community can increase direct sales to BoP consumers
27

Photo courtesy www.images.google.com

Intel partnered with the Government of Vietnam to SPREAD AWARENESS AND EFFECTIVELY MARKET its affordable laptops within target populations
WHAT WAS THE PROBLEM? Intel wanted to increase penetration of its low-cost laptops within low-income households in Vietnam Poor awareness of IT and IT products among low-income households in Vietnam HOW WAS IT SOLVED? Intel worked with the Vietnamese Government to increase awareness of information technology through programs on digital literacy, and by working directly with schools, hospitals and offices, and by targeting small businesses and farmers in rural areas

DRAFT - WORK IN PROGRESS

WHAT WERE THE OUTCOMES? Intel provided more than 100,000 affordable PCs to young Vietnamese people via a government program Increased technology access and IT awareness in more than 200 community centers Adoption of Intel provided laptops in schools, hostpitals and government offices WHAT WAS LEARNT? Working with the Govt can be an effective means of encouraging product adoption, while increasing awareness of potential benefits Working with the Govt can open new doors to working with local product/service providers, banks, etc .
28

Photo courtesy www.images.google.com

Starbucks secured its supply of quality coffee beans in Latin America by PURCHASING DIRECTLY from smallholder farmers, and by investing in training
WHAT WAS THE PROBLEM? Consumers demand coffee with various combinations of the following characteristics: high quality, sustainable production, fair trade, traceability, and improved social conditions in farming communities.

DRAFT - WORK IN PROGRESS

HOW WAS IT SOLVED? Starbucks created the C.A.F.E. practices, which guide farmers to produce higher-quality, environmentally friendly, sustainable coffee Conservation International and other agencies help farmers implement C.A.F.E. practices Starbucks commits to purchase coffee from farmers who have a sufficiently high C.A.F.E. score WHAT WERE THE OUTCOMES? By fiscal year 2007, Starbucks made 65% of its purchases from C.A.F.E. approved suppliers and hopes to increase that percentage to 80% by 2013 WHAT WAS LEARNT? Even without greater interaction, a commitment to purchase can serve as a powerful way to engage BoP suppliers Consumers in developed countries are increasingly interested in products that engage the BoP in sustainable ways
29

Photo courtesy www.images.google.com

Case studies show that inclusive businesses deploy some key strategies to overcome market barriers
MARKET STRATEGIES MATRIX TO OVERCOME EXTERNAL MARKET CHALLENGES STRATEGIES
Low to high relevance

EXTERNAL

Invest in developing capacity

Leverage nontraditional assets

Invest in local partnerships

Adapt products and processes

DRAFT - WORK IN PROGRESS

Limited purchasing power & financial access Low awareness and skills

Hard to reach

Supply chains

Market data and information

Engaging in local partnerships is central to overcoming challenges to inclusive businesses

30

Source: Dalberg research and analysis

Companies face two important sets of challenges when trying to engage with the BoP

EXTERNAL CHALLENGES DRAFT - WORK IN PROGRESS External factors including inadequate infrastructure and transportation, dispersed consumers, poor access to information, products and finance, and lack of market information affect business growth and scale.

INTERNAL CHALLENGES
Developing an inclusive business can challenge the existing operations, capacities and processes within a business. This may lead to internal tension and opposition to change.

31

Companies need to be internally aligned around key elements of the inclusive business opportunity

INTERNAL

Leadership DRAFT - WORK IN PROGRESS

Business opportunity

Inclusive Business

Resources and capacity

Business case

Risk analysis and mitigation

32

There are some critical questions companies should ask themselves before engaging with BoP markets
1 Leadership

INTERNAL

Is the senior management fully invested in the inclusive business opportunity, including support for innovation and long-term view on profitability? DRAFT - WORK IN PROGRESS

2 Business opportunity 3 Resources and capacity

What are the core capabilities of the existing business that match to important BoP needs and gaps?

Can we partner with the right organizations/networks to gain market knowledge and expertise and to develop any additional skills, capacity necessary to operate the IB?

4 Business case

Does the business plan incorporate a long-term view on profitability and include new performance metrics and incentive structures aligned to the IB?

5 Risk analysis and mitigation

Are there any risks to the existing business (brand, reputation, product cannibalization) arising from the inclusive business opportunity?

33

Source: Dalberg research

Annex

34

DIRECTIONAL

Which inclusive business sectors have attracted the most funding?

SECTOR DISTRIBUTION OF INCLUSIVE BUSINESSES Survey of 2213 total investments (2011); Value of investments in billion USD

Water & Sanitation Education Healthcare Housing Other Clean energy and tech Cross sector Food & Agriculture

2,213 2% 3% 7%
12% 13%

4B
1%

0%

2%

3%

100%

21%

10% 6%

13% 15% 15% 6%

Microfinance

34%

37%

Number

Value

35

Source: JP Morgan/ GIIN survey of impact investors in Insight into the impact investment market, (JP Morgan, 2011); Dalberg research

36

Companies need to be internally aligned around the inclusive business opportunity in order for it to succeed
AREAS OF INTERNAL
ALIGNMENT

INTERNAL BARRIERS

CONSIDERATIONS

Leadership

Is there sufficient buy-in within the companys leadership to go ahead with the IB effort? Is there sufficient top-management support for innovation and risks? Does the leadership have a long-term view on profitability? What business core capabilities can be leveraged / extended into establishing an IB? What societal needs exists that intersect with the business core capabilities? Based on the above two, what is the inclusive business opportunity? What are the objectives, and targets of the IB? What is a timeline for success? What has been tried out previously that has worked/failed? Why? Is there a clear understanding of the business eco system, including understanding of relevant legal and regulatory issues?

DRAFT - WORK IN PROGRESS

Business opportunity and environment

Resources and capacity Is there clarity on resources and investment needed for the IB? Does the business already possess the necessary skills and expertise in-house? Are there partners available with supplementary/complementary skill/experience sets? Does the business possess the ability to continuously monitor and assess business outcomes, and adapt the business model if needed? Business case Is the expected return on the cost of capital lower/the same/ higher than the existing business? Is there a longer timeline on returns, specifically, a longer term view on profitability and establishing breakeven? How will performance be measured? (E.g. Revenues, profitability, social impact, intangibles) How will the performance metrics impact your business incentive structures? What is the optimal organization structure? Is there need to change the existing structure? How will partnerships be incorporated into this structure?

Risk analysis and mitigation

Is there an understanding of the main risks related to business reputation and brand image? Is there a risk of cannibalization of existing customer base?
37