Red Mantra

From CSR to Inclusive Business?

Exploring Japans New Promise to Emerging Markets
Tokyo, Japan
February 28, 2013

Workshop on Investing in Inclusive Business in Developing Asia and Latin America: New Opportunities for Japanese Companies Red Mantra
The Red Mantra Group, 2013.

The Japanese Experience: Testing the Waters

Preliminary Assessment of Japanese corporate engagement in Inclusive Business with caveats: Not exhaustive, scope and time were limited Confined to literature review Findings and analysis are preliminary Further analysis and a broader scope would substantiate findings

From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

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Overview
The Key Drivers for Japan to Pursue Inclusive Business Key Opportunities for Japanese Companies in Emerging Markets Examples of Current Japanese Inclusive Business-like investments in Emerging Markets The Way Forward: Accelerating Impact

From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

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Key Drivers: New Markets for Growth

By 2015, less than 50% of global output will come from developed markets BoP consists of 4.7 billion people, US$5 trillion PPP and will grow to 5.5 billion people and US$70 trillion by 2030 (MoP) BoP Consumers (in $2-8/day) increasingly spend their income on food (41%), other essentials (28% fuel, housing, education, medicine) and on consumer goods (32%)

Source: Blackrock 2012.

Can a business strategy focused strictly on the developed world and Source: Nomura Research Institute (NRI) 2012. in the ToP sustain a companys long-term From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets growth?R e d M a n t r a 4

Key Drivers: New Opportunities for Growth

Source: J.P. Morgan 2010.

By 2015, less than 50% of global output will come from developed markets BoP consists of 4.7 billion people, US$5 trillion PPP and will grow to 5.5 billion people and US$70 trillion by 2030 (MoP) BoP Consumers (in $2-8/day) increasingly spend their income on food (41%), other essentials (28% fuel, housing, education, medicine) and on consumer goods (32%) Market opportunity today estimated at US$ 2.9 trillion for food, $20 billion for water, 51 billion for ICT, $158 billion for health, $179 billion for transportation, $332 billion for housing, $433 billion for energy, and $932 for other services

Source: PWC Analysis, 2012.

Can a business strategy focused strictly on the developed world and in the ToP sustain a companys longterm growth?
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From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

Key Drivers: Changes in Consumer Preferences

According to Edelman Marketing Research (2012), consumer preferences have shifted dramatically toward a notion of profit with purpose There has been a 33% increase globally in profit with purpose consumer preferences, and in Japan, 100% growth since 2010 in consumer focus on the importance of social purpose during a purchasing decision

Source: Edelman 2012.

Rather than merely exercising their license to operate, leading brands and corporations must move beyond operational imperatives and social add-ons to establish their license to lead
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Source: Edelman 2012.

From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

The Japanese Context: Key Drivers for IB

Japan v. EM Growth 2000 - 2015
8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0%

2000

2002

2004

2006

2008

2010

2012

2014

Japan

EM

Source: Edelman Red Mantra Analysis, Japan METI, OECD, NRI, 2012).

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The Japanese IB Experience: Baby Steps

EMBEDDED BoP BUSINESS CULTURE ALIGNMENT: Long-term outlook, high quality, affordable products, innovative, value-based, gemba, kotozukuri POLICY INCENTIVES: JICA, JETRO, METI, MOFA providing incentives to promote inclusive business development in target emerging markets KNOWLEDGE BASE: Systematized research from academia, government, research institutes, and multiple IB focused events targeting private sector in last 24 months (i.e. IFC, UNDP, etc) PRELIMINARY CORPORATE ENGAGEMENT: Market scoping pilots underway, primarily in Asian markets to test IB viability and potential

BUT QUESTIONS REMAIN CSR v. INCLUSIVE BUSINESS: Is there a stronger focus on CSR, with a bias on environmental issues, particularly climate change vs. social considerations? SCALE: Given the experimental nature of BoP investments to date, how can a view toward scale and disruptive innovation be further embedded in concept design? EMERGING MARKET DIVERSIFICATION: What are the right incentives to more rapidly accelerate Japanese diversification into frontier emerging markets? Is there sufficient understanding of the BoP market opportunities? RATIONALE: What is the right rationale for Japanese IB development and how can it be effectively integrated into Japanese corporate culture?

From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

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IB thru Value Chain Localization

What was the Opportunity?
Leverage preventive medicine through intestinal tract health by introducing probiotic products and consumer education at affordable prices (based on Shirotaism preventive medicine, affordable prices, intestinal tract health) While demand for these products is universal, there is greater need in emerging markets due to the greater incidence of malnutrition and diarrea (2.5 billion cases each year, 1.5 million deaths among children under 5/year 2nd leading cause of death after pneumonia) Yakult made a conscious decision to focus on emerging markets Lower income populations in these countries did not have access to affordable products that would improve intestinal health

How was it solved?

Develop a market diversification strategy to target emerging markets with weak medical care and the lower income segment in those countries in particular accompanied by proactive consumer education (Taiwan 1964) Develop a BoP centered distribution network leveraging local Yakult Ladies for direct sales and consumer education (focused on explaining the nutritional properties of the products)

What were the Outcomes?

Local BoP employment and increased income (40,800 Yakult ladies outside Japan) and 14,500 employees outside Japan PLUS nutritional value created among millions of people Yakult Ladies model trademark (adopted by Danone, Unilever) Increased sales and rapid geographic expansion to more than 10 emerging markets+; 32 million people served every day dairy products , 28 million bottles of Yakult consumed daily in 31 countries, revenues US$ 3.4 billion (30x what it was 30 years ago)

What were the Lessons?

Not all emerging market are the same intelligent adaptation of localization model critical for long term success Investing in lower income segments provides long term growth strategy as consumer segments move upmarket over time consumer can grow with you adapted this approach to developed markets as well (i.e. USA hispanic communities) Localization of value chain model has been a founding principle that was key to company growth and market penetration Red Mantra From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

IB thru Value Chain Localization

What was the Opportunity?
Indonesia is the worlds 3rd largest exporter of coffee beans, 87% robusta which is used in the food processing industry but historically the country received low value for their products due to variable quality; Indonesia exports limited volumes of higher value (2-3x) Arabica After steep decline in coffee prices, there was a need to create value addition to hedge against the commoditization of coffee Demand for specialty coffee was growing in Japan and there was an opportunity to introduce more specialty coffee amongst producers however, logistics, access to finance, technology, quality control, increasing the number of coffee producers, were primary obstacles Integrate more coffee farmers into the specialty coffee scheme to increase sales and market share leveraging their assets in Indonesia Develop a supplier training program with strict quality controls to improve productivity, post-harvest processing and quality of coffee; address logistical challenges by leveraging existing network of local collectors and informal links, including access to credit, in supply chain Offer premium prices for coffee through incentive schemes for quality and quantity; provide seedlings and processing equipment for free to increase farmer loyalty and increase productivity

How was it solved?

What were the Outcomes?

Toarco Jaya now exports 200-500 tons of coffee beans per year, benefitting 7,000 farmers + 900 temporary workers Arabica has become a reliable source of income for farmers and Sulawesi has become well known for its coffee Key Coffee No. 2 in Japan (16% market share) has grown to 74 branches across Japan; 1,300 staff; 4 roasting facilities; US$ 629 million in sales; BUT, 15 years for Toarco to be profitable (now 3% of global sales)

What were the Lessons?

Needed to overcome significant logistical obstacles to assure supply chain efficiency, minimize risks, and assure quality Need to invest in the capacity of local farmers and create trusted networks with local stakeholders and build on traditional informal links in the existing supply chain (i.e. collectors) Strict quality control measures improved famer compliance with new standards, increased productivity, and farmer income Source: UNDP, 2011. Red Mantra From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets 10

IB through Employment in EMs

What was the Opportunity?
Increasing niche for unique, high-end fashion products from emerging markets in target developed markets Highly skilled labor force in select emerging markets (in this case Bangladesh and Nepal) with poor conditions, informality, low wages race to the bottom Possibility to introduce a new fashion label that would source its materials and manufacture its high-end product line in emerging markets by employing the BoP and using jute, environmentally friendly fiber

How was it solved?

Develop a unique product line of high-end bags for upscale women in target developed markets (Japan and Taiwan initially) wih USP focused on the originality of the design but also Made by BoP brand attributes Ensure high labor standards, fair wages (pays double average wages), quality production, high-end product and leverage marketing to create a unique BoP centered brand identity

What were the Outcomes?

Employed 60 employees from the BoP in Bangladesh; Sold over 100,000 bags to 70,000 customers in Japan and Taiwan Sales have surpassed US$ 3 million after year 5; expected to grow to US$12 million in 2014; prospects to create 140 new jobs in Bangladesh and Nepal and expand retail efforts to Singapore, Hong Kong and and China

What were the Lessons?

Social enterprises can grow into successful inclusive businesses what they lack in scope and scale they make up through product innovation and design MOTHERHOUSE is a good example Inclusion can be commercialized as a luxury good provided quality, reliability, and transparency of production process are embedded within the companys value proposition

From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

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Diverse Japanese Companies Exploring IB

Note: Not exhaustive listing

From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

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Preliminary Considerations
DRIVEN BY CSR MANDATE OR PHILANTHROPY: Japanese companies have a strong track-record integrating CSR including ISO 26000, but represent a stronger bias toward environmental (v. social) responsibility, and modest commitments to corporate philanthropy unrelated to core business CRITICAL MASS REQUIRED FOR ACCELERATED GROWTH: There is yet a core group of Japanese leading companies with demonstrable and internationally publicized proof of concept and measurable results to catalyze critical mass HOW TO INTEGRATE IB INTO JAPANESE BUSINESS ACUMEN: Considering the innovation, quality, value and customer orientation of Japanese business, long-tern view and localization tendencies, it was surprising not to see more of these principles applied to the BoP segment where relevance is even greater NASCENT JAPANESE IMPACT INVESTMENT: According to the Social Investment Forum in Japan, the sector is still nascent and has not yet made the leap toward inclusive business type investing curtailing the ability to spur innovation in the space CLARITY ON CONCEPTS AND METRICS: There still appears to be confusion between social enterprise, CSR, inclusive business and the metrics that are intended to accompany each of them (GRI, PULSE, etc). Important to reach consensus on terminology and adopt reporting standards for IB to increase transparency and accountability
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From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

The Way Forward: where we are?

Global Practice 2013

Uncoordinated Innovation

Marketplace Building
Japanese Practice 2013

Capturing the value of the marketplace

Maturity

Japanese Marketplace Building

Analysis and Categorization of Inclusive Business Models Leveraging CSR practice toward inclusive business Assessment of models, existing practice, knowledge development Debate on the concept shared value Defining the preconditions the inclusive business ecosystem (policies, subsidies, incentives, capacities, capital) Increased and shared understanding of risks and needs Pilot investments and adaptive management

From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets

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The Way Forward

New Value Propositions

Aspiration Trade-Offs: understand the different aspirations, influencers and trade-offs of the BoP and MoP Beyond Low Cost: Position products and services beyond cost, pricing beyond functional considerations Platform Adaptation: Design product and services with a few features, but tailor it to diversity Ecosystem Alignment: Extract value by creating an ecosystem, find and leverage ethical agents Progressive Scale: Think about scale from the start and develop a modular, progressive roll-out (that will be adapted) Smart Reach: Cluster marketing and distribution, create local financing mechanisms, enable where possible through technology (online and off-line) Trusted Endorsements: Build the brand with the aspiration in mind, but use word of mouth to drive awareness Disruptive Innovation: Seek disruptive innovation and leapfrog solutions tailored uniquely to segment needs focus on adaptation Values and Metrics: Drive with broader corporate values, execute with targeted and customized metrics
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Innovative Business Models

Shift in Mindset

Source: Adapted from PWC, 2012.

From CSR to Inclusive Business? Exploring Japans New Promise to Emerging Markets