There are numerous examples worldwide from companies of all sizes, including many WBCSD members, actively testing and rolling out inclusive business models. But relatively few of these ventures have achieved the potential for scale. This holds true even for models developed by large multinational corporations, which might have been considered the ideal vehicles given their vast resources, efficient systems, and global reach.
What do we mean by “scale"?
From our perspective, scale is a combination of reach, geographic footprint, and sales or procurement volume, depending on their industries and the nature of their inclusive business models. Seen from the business perspective, scale is also very much related to break-even and return on investment, as only commercially viable ventures will become truly scalable.
What are the barriers?
The barriers are numerous. To date, most of the discussion has focused on external market barriers like insufficient market information, inadequate infrastructure, ineffective regulation, uneven cash flows, limited knowledge, skills, and access to finance in low-income markets. Leading institutions like the International Finance Corporation (IFC) have dissected challenges (such as expanding reach, facilitating access to finance, changing mindsets and behaviors, designing appropriate products and services, pricing and payment) and laid out viable sets of solutions that companies are applying to overcome them.
However, companies also face a host of internal organizational barriers to scale that have so far been less commonly acknowledged or discussed. Yet from what emerges in discussions with WBCSD members and other companies active in this domain, these internal barriers are just as, if not more, important.
Of course, many companies find it a challenge just to get off the starting block and get to break even. Then again, most large companies won’t even step up to the starting blocks unless there are prospects for scale. And fortunately, a number of companies are already succeeding at the base of the pyramid. While the sample size is small, there is much to learn from their experience.
What did our analysis come up with?
With the above in mind, over the past few months we have been working on a short brief identifying some of the most common internal barriers and, equally important, the solutions that leading companies are using to tackle them. We relied on the hands-on experience of businesses active in this space and the valuable insights of experts, and came up with three clusters to classify the numerous and interdependent issues at play.
They are described below in “sneak preview” format, pending the editing of the final version of our issue brief, which will also include highlights on specific solutions implemented by companies. You can also see the image on the right for a schematic depiction of the issues.
Barrier 1: Opportunity cost of investment
When companies consider investing in starting or scaling inclusive business models, they compare the expected rates of return with those of alternative investments they could make. Inclusive business investments may have lower expected rates of return because the cost or risk of doing business in base of the pyramid markets is high, anticipated margins are low, and/or a long time horizon is needed to break even. Base of the pyramid markets may also be so new and unfamiliar that expected rates of return cannot be calculated with enough certainty. Both of these circumstances make it difficult for corporate decision-makers to justify the opportunity cost of investing in starting or scaling inclusive business models when other investments with higher, more certain rates of return are available.
Solutions identified to tackle this barrier:
- Obtain senior leadership support – Senior leadership support can help unlock investment in inclusive business opportunities. Senior leaders can be the only ones empowered to make longer-term strategic bets. They can also create the space for their reports – who might lack the authority, or be constrained by short-term performance targets and incentives – to invest.
- Find outside investors – When it is difficult to make the case for an inclusive business investment internally, a company can look for outside investors to share the cost and risk. Of course, outside investors will also want to share the return. Donors and some development finance institutions can be attractive investors because they can accept lower financial rates of return in exchange for the socio-economic impact created. Such concessions can make the financial rates of return for companies more competitive with alternative investments they have available. However, evidence of socio-economic impact can take time to generate and fuel confusion within a company about the relative importance of commercial and social objectives, thereby increasing the risk of strategic and operational misalignment.
- Adopt a portfolio approach – Inclusive business opportunities can be found all along the risk-return spectrum. They can be segmented according to the size of the investment required, how long it will take to recoup, and what rate of return to expect. It helps to understand where an inclusive business opportunity falls, and how it fits in to the overall investment portfolio. Companies can also take a portfolio approach within the subset of inclusive business investments, balancing radical innovations with more incremental plays that are easier to implement – and yet can create considerable business value, learning, and confidence.
- Quantify total value created – To make the case for inclusive business investments toward the far end of the risk-return spectrum, it can help to take non-financial benefits into account. These can include establishing brand awareness and loyalty, enhancing corporate reputation, building goodwill, developing key stakeholder relationships, lifting employee morale, and improving employee recruitment and retention. Of course, these benefits do affect the bottom line – and it helps to quantify them wherever possible, making them more actionable for investment decision-makers and implementing managers alike. However, it is important to recognize that while total non-financial value created may be large, it may also be too dispersed to affect individuals’ incentives or behaviors to the extent required.
Barrier 2: Strategic and operational misalignment
Like any other type of business, inclusive business is a matter of procuring, manufacturing, distributing, marketing, and selling products and services. Key functional teams across the company need to be involved, especially to do it at scale. However, an inclusive business model may be so different from a company’s existing business model that existing operating structures and processes cannot easily be leveraged. Lower expected rates of return – and/or simple lack of clarity about the relative importance of commercial and social objectives of inclusive business models – can also cause strategic and operational misalignment. Managers’ performance targets and incentives simply point their time and resources in other directions.
Solutions identified to tackle this barrier:
- Start with the business plan – Companies report that it is easiest to avoid strategic and operational misalignment in the first place by understanding their country priorities and growth strategies and pursuing inclusive business initiatives that support them. If doing business with base of the pyramid suppliers, distributors, retailers, and/or consumers helps a company achieve existing goals, then it automatically aligns with existing operating structures, processes, performance targets and incentives set up to drive progress toward those goals.
- Get out of the corporate greenhouse – Many inclusive business models get started in protected environments of one form or another. These “corporate greenhouses” may include special innovation units and CSR or sustainability departments. The protection they offer can be essential for inclusive business models that are very experimental. But models that show promise need to be integrated in order to scale. Those that remain protected for too long risk growing disconnected from core business goals and strategies, or being pigeonholed as CSR.
- Adjust performance targets – As companies begin to scale their inclusive business models and it becomes apparent where in the system incentives are misaligned, one approach is to change them. This solution has a very high degree of difficulty, since departments and staff ranging from procurement to manufacturing to distribution to sales and marketing may all be involved – and all have to be aligned. Organizational change of this magnitude requires senior leadership support from across the company.
- Establish a separate company – If strategic and operational misalignment is too great, a final option is to develop an inclusive business model through a separate company – such as a subsidiary or joint venture set up for that purpose. That company could eventually be spun off or sold. Alternatively, if the business model evolves and becomes closer to that of the parent, the company could be reintegrated.
Barrier 3: Capability gaps
Companies’ capabilities drive their performance. The extent to which capabilities need to be adapted or built from scratch is a critical factor in companies’ ability to scale their inclusive business models. When inclusive business models are very different from existing business models, there will be gaps. These can include the ability to implement any of the solutions outlined below, from managing informal distribution channels to providing inventory on credit to processing hundreds of thousands of small transactions. It is often possible to acquire the capabilities necessary to pilot an inclusive business model successfully. But to scale, those capabilities need to be widespread.
Solutions identified to tackle this barrier:
- Establish centers of excellence – Some companies grappling with the question of how to build capabilities more widely have opted to establish dedicated, central teams in charge of raising awareness, developing and sharing knowledge and tools, facilitating internal and external networking, and transferring technology. These centers of excellence can serve both functional and regional units. They can provide support on a push basis when inclusive business is a relatively new or longer-term strategic proposition or on a pull basis when the return on a particular approach has been proven.
- Utilize external partners – Companies can fill capability gaps by partnering with organizations with complementary assets, resources, skills, and expertise. Those organizations can include other companies, civil society groups, donors, development finance institutions, and governments. “Partnering” can be as simple as contracting services on a fee basis or as complex as sharing costs, risks, and rewards on the basis of complementary objectives.
- Support professional development – When it is clear what core capabilities a company needs to build in order to bring an inclusive business model to scale – or when a company would like to encourage inclusive business solutions to emerge in other parts of the business or other parts of the world – one approach is to create professional development experiences for staff. “Learning-by-doing” experiences, like special stretch projects and immersion in base of the pyramid markets, may be preferred, though not many formal education or training programs exist as alternatives. How to make such experiences more widely available is an open question.
- Bring core capabilities in-house – While external partnership can be a good way to fill capability gaps, it is critical to know when to bring some capabilities in-house. As an inclusive business model moves from start-up to scale, issues like efficiency, quality control, and competitive advantage become more important. Can these issues be addressed working through partners, or does the task of scaling require the company to internalize some core capabilities?
What is the road ahead?
The bottom line is: inclusive business models will not scale without a solid understanding of what works and what doesn’t – and with the issue brief that we will release later this year, we aim to frame and catalyze greater and more open dialogue on these barriers, and on solutions companies can use to tackle them.
Through our upcoming brief, we also want to paint a picture of the intrapreneurial challenge facing managers working to start and scale inclusive business models within large companies. These individuals are playing vital roles in harnessing the resources, capabilities, skills, and sheer reach of their employers to develop profitable, scalable solutions. Yet their roles are all too often unsung and unsupported.