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Wednesday, September 21, 2005

MNC.org - Meet NGO Inc

By John Paul

All Paths Lead to the BOP, by Jeb Brugmann originally appeared in the September issue of Alliance Magazine.

While the media and public discourse has been accentuating the divide between the private sector and civil society, the trend in practice has been towards convergence. NGOs and communities are now more enterprising, while business is more socially innovative. This convergence opens opportunities for breakthroughs in development practice that have evaded the international community for decades. If the trend holds, it will have important implications for international development initiatives like the Millennium Development Goals (MDGs).With his recent book, The Fortune at the Bottom of the Pyramid, C K Prahalad challenged the dominant thinking of both the international community and organized civil society about the best way of reducing global poverty. As a lifelong NGO professional, I thought his book would be incendiary. It was one thing to attack NGO sacred cows: to claim, for instance, that markets and large corporations, not government, are the best vehicle for justice, access and transparency; or that consumerism could be more empowering than citizenship. It was quite another thing ? after a decade of failed corporate promises about the trickle-down benefits of foreign direct investment ? to propose that multinational companies (MNCs) should lead a campaign to ?eliminate poverty through profits?.

Yet the ?Bottom of the Pyramid? (BOP) thesis has been received as refreshing provocation by many career development practitioners. In particular, many NGO practitioners seem to have already come more than halfway to Prahalad?s point of view. While he was studying opportunities for large corporations to ?do well by doing good? and while media and general opinion were supposing a growing gulf between corporate and third sectors, many grassroots NGOs were starting their own experiments in enterprise-led development.

Surprising results of liberalization

Neo-liberalism changed everything, but not in the way that either MNCs or NGOs predicted. The large corporations and multilateral development banks that championed it saw liberalization as a route to lucrative growth markets and to new, permanent flows of private investment. In contrast, many NGOs felt neo-liberal global economic integration would further marginalize the poor, transforming them into indebted consumers of substandard products, and reducing the ability of civil society organizations to represent their interests. In many respects, the opposite occurred.

The sudden reduction of the state?s regulatory reach, whether through wholesale deregulation of entire markets, the introduction of voluntary regulation schemes, or the simple slashing of enforcement budgets, seems to have instigated a more virulent form of social regulation. Seeing less hope for regulatory relief through policy advocacy, NGOs shifted to a more direct approach. Media-savvy and globally connected NGO campaigns emerged, with wide consumer and citizen acceptance, to fill the regulatory vacuum created by government retrenchment. Globally coordinated attacks on leading brands ? called ?smart mobs? by some business strategists ? provided NGOs with a new mechanism to influence not just the regulatory compliance of single companies, but the practices of whole industries.

For large corporations, in other words, neo-liberal reform often resulted in a less predictable, less accessible and higher-risk regulatory process. Their response was a new field of business practice, corporate social responsibility (CSR). While many question its effectiveness, what CSR has achieved is the forging of closer dialogue and relationships between corporate managers and NGO professionals than had previously existed. Large corporations, in other words, became sensitized to the workings and opportunities of civil society.

The limits of traditional business models

Meanwhile, MNCs discovered that coveted large new markets were often out of reach. The business models developed for OECD markets did not transfer well to low-price, BOP environments. Even industries like food retailing and financial services, which traditionally serve lower-income consumers in Western markets, have failed to establish substantial market share in large developing country markets. A study by CIES, the world trade organization for major food retailers, showed that 91 per cent of the stores of international companies are in high-income countries, serving less than 1 billion people. Their internationalization has focused on upper middle income countries and on the rich segments of lower middle income countries. Even there, the industry operates only one store for every 374,000 people. In the low-income group of countries, that figure falls to only one store for every 3.4 million people, compared to one store per 5,800 people in high-income countries.

The irony of this is that low-income people spend a substantial part of their household budget on food. The real innovators and profit-makers in the BOP market are street vendors? collectives, farmers? cooperatives, and neighbourhood storekeepers who provide access to other services besides food, such as phones and finance. This other world food industry stands as much to gain from the systems and efficiencies of the big players as the big players stand to gain from the local access, intelligence and service capabilities of their informal sector counterparts.

It comes as no surprise, therefore, that many corporate breakthroughs in BOP markets have been secured either by copying the models developed by civil society organizations (CSOs) or by establishing business partnerships with CSOs. Many of the successful BOP business cases presented in C K Prahalad?s book directly involved non-profit organizations. ICICI, the Indian banking pioneer in the BOP market, acquired its micro-banking business from a local bank, the Bank of Madurai, which in turn developed its model with a local microcredit NGO. ICICI?s primary scaling strategy is through MFI intermediaries. The insurance industry is following suit, with the big global names ? Allianz, Chubb, Prudential ? now courting women?s self-help NGOs to serve as their rural business agents.

What all this means is that we have a private sector that is now much more open, interested and able to develop innovative business models with entrepreneurial, low-income communities and their civil society partners.

Changes in the civil society outlook

For its part, neo-liberal reform also radically altered the strategies of many CSOs. Reductions in public social welfare spending forced many NGOs and their constituents into increased entrepreneurial efforts for subsistence. One result was an explosion of community-based enterprise experimentation worldwide, from the growth of the large microcredit sector in South Asia to the renewal of agricultural cooperatives in Africa to the solid waste microenterprises of South America. By the turn of the century, NGOs were generating substantial portions of their budgets from business revenues, recruiting experienced business professionals, sourcing from traditional business suppliers, raising investment from capital markets, and consulting and developing business partnerships with corporations.

Misgivings about neo-liberalism aside, today?s NGOs may have more market influence and independence, both as quasi-regulators and as economic agents, than ever before.

MNC.org meets NGO Inc

The strategies of many corporations and NGOs and of the poor themselves are now focusing, as never before, on the same entrepreneurial challenge: how to create value, and how to grow business, in the large BOP markets. The convergence of the two previously ?opposing camps? around the idea of market-led development means that development is increasingly a space for entrepreneurship. Tomorrow?s great development breakthroughs are as likely to be led by an MNC.org or an NGO Inc as by an intergovernmental agency.

This entrepreneurial imperative can be harnessed to help achieve the MDGs. In order for it to do so, governments will need to join and support the new convergence, creating the right environment for enterprise-led development. First, they need to remove debilitating subsidies which confound entrepreneurs and undermine innovation from the micro- to the global company. They also need to create a level playing field for all forms of enterprise, from community enterprise to transnational companies. Many countries maintain piecemeal incentives for one form of business that puts others at a disadvantage. Selective corporate welfare schemes skew the whole process of business model innovation ? in fact they often subsidize archaic, off-the-shelf approaches.

Finally, development institutions and large corporations might reconsider the lessons of their earlier views on regulation. Regulation can enable markets when it creates predictability and transparency. A lack of regulation or weak regulation, we have learned, can breed inconsistency and bias. The opportunity for enterprise-led development, in other words, offers renewed and not reduced significance to government and its international institutions. It is time for them to step out of the shadows of neo-liberal self-deprecation.

Jeb Brugmann has worked with local communities for more than 20 years as they responded to the challenges and opportunities of globalization. He is currently a partner with C K Prahalad in the business strategy firm, The Next Practice. He can be contacted at jeb.brugmann@thenextpractice.com


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