NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, August 30, 2010

We are witnessing a sea change in the way society’s problems are solved, work is performed, and businesses grow. Collaborations between corporations and social entrepreneurs can create and expand markets on a scale not seen since the Industrial Revolution. These markets will reach everyone, but especially the 4 billion people who are not yet part of the world’s formal economy. They will offer new and remarkable products and services in sectors as diverse as education, transportation, and finance.

You may be skeptical of this claim, and with good reason. The citizen sector-the term we use to define the millions of groups established and run by mission-minded individuals across the globe who are attempting to address critical social needs-has long been regarded as understaffed and inefficient. But that has changed. We work with some 3,000 social entrepreneurs worldwide, and over the past 30 years we’ve seen the citizen sector catch up with business as it has increased its productivity, size, and reach. Its organizations are attracting talented and creative leaders, and their work is changing the game in critical industries and areas such as energy and health care.

For-profit organizations today have an opportunity to collaborate with citizen-sector organizations (CSOs) on large-scale problems that neither group has been able to solve on its own. The power of such partnerships lies in the complementary strengths of the participants: Businesses offer scale, expertise in manufacturing and operations, and financing. Social entrepreneurs and organizations contribute lower costs, strong social networks, and deep insights into customers and communities.

But to work together effectively, they must focus on creating real economic as well as social value. We believe they can do so by forming what we call hybrid value chains (HVCs), which capitalize on those complementary strengths to increase benefits and lower costs.

This trend has been developing for years, and we’ve participated in pilot projects that have delivered impressive results and promise extraordinary growth. HVCs can now be found in many industries all over the world. Collaboration between corporations and CSOs has reached a tipping point: It is becoming standard operating procedure. Indeed, we believe that if you’re not thinking about such collaboration, you’ll soon be guilty of strategy malpractice.

The Vibrancy of the Citizen Sector

Before we explore the inner workings of hybrid value chains, it may be helpful to look at how we got here. In the 1700s business became entrepreneurial. Upstarts devising faster and more-efficient ways to produce goods ushered in the Industrial Revolution. They introduced innovation after innovation, ultimately changing the world. After remaining flat for a millennium, per capita income in the West rose by an average of 20% in the 1700s, 200% in the 1800s, and 740% in the past century. But while the for-profit sector enjoyed sweeping progress, the citizen sector languished. It faced little outside market pressure and relied heavily on funding from governments that, as monopolies, feared competition. CSOs felt little push to innovate; as a result, they fell far behind in productivity, performance, pay rates, confidence, and reputation.

By 1980 the imbalance between the business and social sectors of society had become intolerable. (We had great TVs but lousy education.) New opportunities emerged across the world (except where governments got in the way), and the citizen sector restructured itself to become entrepreneurial and competitive. It rapidly increased productivity and scale, lowering the cost of goods and services it provided relative to business’s offerings.