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Monday, May 23, 2011

Reflections on Sankalp 2011: The Curious Case of Economic vs. Social Value

By Tilak Mishra

Attendees at Sankalp 2011

Much has been said (deservedly so) about the number of challenges facing innovative companies and social enterprises seeking to operate at the base of the economic pyramid. Due to the unintended, but nevertheless real cultural distance and lack of engagement between corporate decision makers and the low-income households residing primarily in rural pockets of developing countries, companies often overlook crucial business opportunities when they do not proactively transform their organizational culture and business strategy.

Additionally, a lack of essential infrastructure in developing countries and poor markets makes operating at the BoP a difficult and potentially costly undertaking for many of the innovative and passionate social enterprises. Add to this the challenge of replicating, scaling and creating sustainability within the time frames dictated by traditional corporate targets and commercial impact investors funding these social enterprises, and we have a perfect recipe for an enormous hurdle to realizing inclusive growth for low-income households and social enterprises.

These are exactly some of the issues that participants debated and sought answers for during Sankalp 2011.

"Small young entrepreneurs from rural areas need local solutions, localtalent, connectivity and resources in local languages," said Sam Pitroda, chairman of the National Innovation Council (NInC) of India and ICT champion, in his keynote address to open the conference. "So, while there is a great deal of innovation here, one is unable to scale these innovations due to lack of public information infrastructure. "

This sentiment decrying a lack of information infrastructure reverberated across most many of the panel discussions that followed, where investors, entrepreneurs, corporate heads and government officials noted that to be truly inclusive to low-income household clients, both social enterprises and corporate firms must strengthen bottom-up market intelligence and outreach, and must promote a tone of openness and engagement from the top. There was a sort of unanimity in the belief that making this change required a shift in the world view and hard-wiring sensitivity to low-income household clients throughout the business. The major conclusion that emerged from various discussions was that companies and social enterprises that worked successfully with the BoP typically have organizational cultures that are entrepreneurial. At the same time, they frequently possess leadership that sets the vision externally while internally reinforcing the openness and patience needed to support new, sometimes risky, ventures.

In addition to showcasing innovative enterprises working to address existing supply chain gaps in the education; clean energy; agriculture, food and rural businesses; and, health, water and sanitation sectors, the choice of panel discussions put together for Sankalp 2011 demonstrated maturity in thought leadership. It's clear these leaders are attempting create infrastructure and the right kind of ecosystem for innovation that would enable institutions to realize inclusive growth and development.

For example, a couple of the panels I attended discussed the relationship between economic and social value creation at the BoP. Social value casts a broad net and can be measured by an array of variables, including improved quality of life, empowerment, security and income. The panel discussions centred on critical questions, such as under which situations can companies maximize both types of value? Or, are financial returns for investors and social returns for low-income household consumer/producer ever at odds? Or, whether certain types of ventures yield significant more social value to the low-income households than others?

While debating these questions, many panelists expressed the view that companies must first rigorously examine the smallest unit model of their businesses to evaluate whether they are really creating economic gains for low-income households, and must carefully account for the full-range of income and productivity effects produced by their interactions with the low-income household communities. At the same time, the thought leaders observed that even when enterprises carefully consider the economic and social impacts of their products on the low-income households, they may still feel reputational threats if their social enterprises are seen as "excessively profitable." The practitioners of course argued that without this profit enterprise targeting the low-income households will not attract the level of funding necessary to be sustainable or scalable across the entire BoP. According to this view, the investors felt, above-average profitability should be seen as a sign of success, one that will no doubt invite competition and thereby bring down prices, ultimately benefitting the low-income households. But, there was concurrence among the panel members that to minimize negative public perception, entities that seemingly are "profiting from the poor" both social enterprises and impact investors, must be willing to publicly address the profit debate, work collaboratively with civil society organizations and governments, and also measure and report on the social value they are creating for the low-income households. (These social reports could in the process create a 'social credit' scheme, similar to carbon credits, which could ultimately help the 'chronically undercapitalized' civil society sector).

In conclusion, after hearing practitioners, investors and thought leaders brainstorm the challenges facing enterprises operating at the BoP, I can fairly conclude that companies should not look to the low-income households merely to exploit their untapped purchasing power or dip into low-cost labor pools. Over the long run, such an extractive approach will only draw the attention of the government and civil society organizations (many of whom already question the legitimacy of the private sector's involvement in the BoP operations, as evidenced in the recent microfinance crisis in Andhra Pradesh, India). To succeed in this market, companies must strike a delicate balance, keeping in mind both their legal obligation to return profits to their investors, as well as their social obligation to the societies and communities in which they operate - and on which their long-term success depends. And, only those companies that identify and cultivate their internal capacities and gain the collaboration of other interested parties in the ecosystem (including both inside and outside their sectors) are most likely to to succeed.

Long story short, there isn't a fortune at the base of the economic pyramid, but huge opportunities that may be converted to value for all concerned through the hard work of market development.

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