Socially Inclusive Networks for Building BOP Markets

School of Business Administration - University of San Diego Working Paper _________________________________________________________ Socially Inclusive Networks for Building BOP Markets Abstract The idea that business can play a role in alleviating poverty has caught the imagination of academics and practitioners alike. An emerging consensus points to the critical importance of partnerships in market initiatives addressed to the base of the pyramid (BOP). But despite the calls for cross sector partnerships in BOP initiatives, our collective understanding of how these actually work has not advanced proportionally. This study attempts to address this issue by examining the dynamics at play in nine networks that integrated the BOP with mainstream markets in nine developing nations. The paper is structured in three broad issue-areas: alliance formation (drivers that compelled companies to engage in strategic partnerships); alliance implementation (choice of governance mechanisms, resources for enhancing trust and reciprocity between partners, and conflict-resolution mechanisms); and performance outcome (the extent to which an organization’s commitment to an alliance impacted its performance and its societal context). * * * * * * * Authors’ contact information Ezequiel Reficco Harvard Business School [email protected] Patricia Marquez School of Business Administration - University of San Diego [email protected] 1 Electronic copy available at: http://ssrn.com/abstract=1112969 School of Business Administration University of San Diego Working Paper Socially Inclusive Networks for Building BOP Markets The idea that business can play a role in alleviating poverty has caught the imagination of development officers, social entrepreneurs, managers, and academics. Published case studies suggest that bringing the world’s poor closer to mainstream markets as consumers, producers, or business partners can make a difference in their living conditions. Nonetheless, despite a growing number of noteworthy market experiences with low income sectors, a myriad of questions remain unanswered on how these initiatives actually work. Key among them is how sophisticated organizations—companies and nonprofits alike—should operate in a context hampered by limited opportunity, untold hurdles—even exploitation. Little is known about the collaborative arrangements required to fairly and effectively employ market mechanisms to link the “base-of-the-pyramid” (BOP) with the disparate worlds of companies—especially large firms and multinational companies. Most studies agree that, in order to succeed in market initiatives with the BOP, partnerships are crucial. Weiser et al.’s made this point forcefully: “if you remember only one thing about this book, it should be: the correct partnership is everything”-- Italics in the original. (Weiser, Kahane, Rochlin, & Landis, 2006, p. 6). In his seminal work Fortune at the Bottom of the Pyramid, CK Prahalad notes that the eradication of poverty through profit is a process that extends beyond the boundaries of the firm: “the need for building an ecosystem for wealth creation and social development at the BOP is obvious.” But despite frequent calls for partnerships, our collective understanding of what is distinctive about these collaborative arrangements, how to structure them and how they evolve overtime has not advanced proportionately. Prahalad grants that “there have been few attempts to focus on the symbiotic nature of the relationships between various private sector and social institutional players that can lead to a rapid development of markets at the BOP” (Prahalad, 2005, p. 63). This paper attempts to address this issue by examining the dynamics at play in a number of collaborative arrangements that engaged the poor in different capacities. These arrangements constitute networks, which proved effective in making viable market transactions involving the poor. We contend that untangling the dynamics of these socially inclusive networks hold the key to understanding how market based initiatives at the BOP can be established and sustained over time. We focus on the three broad issue-areas that emerge from the literature on alliances and networks. The first is alliance formation, structured around the all-embracing question of what compels organizations to engage in strategic partnerships; the second is alliance implementation, which includes a choice of governance mechanisms, enhancing trust and reciprocity between partners, and means for resolving conflicts; and third, performance outcome: the extent to which an organization’s commitment to an alliance impacts its performance as well as its societal context. Nine experiences of socially inclusive networks, undertaken in nine Latin American countries served as a basis to examine BOP initiatives in Latin America (Table 1) selected for 2 Electronic copy available at: http://ssrn.com/abstract=1112969 Working Paper School of Business Administration University of San Diego field research by members of the Social Enterprise Knowledge Network (SEKN).1 These are a subset of a broader sample of initiatives that engaged BOP in different capacities, generating both economic and social value.2 We begin this paper with a brief discussion of key concepts that deal with collaborative arrangements employed in the BOP literature; and then examine the dynamics at play in networks analyzed in terms of alliance formation, alliance implementation, and alliance performance. Table 1: Selected cases of socially inclusive networks Network leader Location Role of the BOP Agropalma Amanco Brazil Mexico Cativen Colcerámica Venezuela Colombia Corporación Supermercados Unidos Costa Rica Entomological Supply Gas Natural Irupana Palmas del Espino Costa Rica & Nicaragua Large palm oil producer, engaged BOP farmers as suppliers of palm fiber Large water management company, engaged BOP farmers as customers for its irrigation systems Large retailer, engaged BOP farmers as suppliers of perishable products Large industrial company, engaged BOP as customers of ad-hoc product line of tiles Large retailer, engaged BOP farmers as suppliers of perishable products Costa Rica Entrepreneur, engaged BOP farmers as supplier of butterfly cocoons Argentina Bolivia Peru Public utility, engaged BOP as consumers of its piped natural gas Entrepreneur, engaged BOP farmers as supplier or organic produce Large palm oil producer, engaged BOP farmers as suppliers of palm fiber A word on terminology The terminology used to describe these collaborative arrangements in the context of BOP-centered initiatives has not been consistent. CK Prahalad popularized the term “ecosystem” in the context of marked based initiatives targeting BOP, which he defined as a “framework that allows private sector and social actors (…) to act together and create wealth in a symbiotic relationship,” (Prahalad, 2005, p. 65) without elaborating much on it. Earlier on, Moore (Moore, 1996) had been among the first to develop the idea of business ecosystems, pointing out that organizations cannot evolve isolated from their environment. Much as it happens with individual species within biological ecosystems, organizations that are isolated, become fragile and vulnerable. To become strong, companies need to integrate and evolve with their environment, in an “endless reciprocal cycle”. Competitive advantage, he claims, does not stem any longer from products or services, but rather from cooperative, coevolving relationships. At a general level, the idea of ecosystem captures well the dynamics at play in market initiatives aimed at the BOP. Based on Moore, a socially inclusive market ecosystem can be 1 The Social Enterprise Knowledge Network (SEKN) is a research partnership encompassing 10 leading management schools, 8 in Latin America (EGADE, INCAE, IESA, Pontificia Universidad Católica de Chile, Universidad del Pacífico, Universidad de los Andes, Universidad de San Andrés, Universidad de Sao Paulo) , 1 in Spain (ESADE), and the Harvard Business School, with a demonstrated capacity to produce high quality, original, field-based research in Iberoamerica. 2 The total SEKN case sample is constituted by 36 case studies, and has been developed as part of a three year research project, currently underway. 3 Electronic copy available at: http://ssrn.com/abstract=1112969 School of Business Administration University of San Diego Working Paper defined as an economic community comprised of interacting organizations, which incorporates low income groups as economic agents in different capacities, and whose members co-evolve overtime. However, this may be too broad a term for our study, as it encompasses widely disparate arrangements. For example, a company may decide to serve commercially the needs of the poor, without the need for building a network in the process. Activo Humano, a Chilean company that targets BOP as an employment agency (“the headhunter of the poor”) simply relies on some individuals who come from low income sectors, and worked for the company on commission, to bypass the cultural barriers found in dealing with the poor. On the other hand, members of an ecosystem may decide to formalize their relationships and work closer, establishing common goals and procedures. They may explicitly set up collaborative arrangements, such as collective governance bodies, agreed upon rules, and conflict-resolution mechanisms. Their stakes are intertwined: they either succeed collectively or fail collectively. This paper focuses on the latter: socially inclusive networks. This concept is compatible with the idea of “Sustainable Local Enterprise Networks” (SLEN), which Wheeler et al. define as "organizational arrangements that deliver economic and other benefits for all participants” (Wheeler et al., 2005, p. 38). These address the traditional objectives of sustainable development and poverty alleviation through wealth creation, but they also create value in other forms as members may define value in different ways. Another widely used term to describe collaborative arrangements in BOP market initiatives is the idea of “hybrid value chains” (Budinich, Reott, & Schmidt, 2005) in which NGOs and private business work closely, as equals, for mutual benefit. This concept is consistent with the idea of “integrative alliances,” which had been advanced by earlier studies of cross-sector partnerships (J. Austin et al., 2004; J. Austin, 2000). The use of the “valuechain” terminology is also useful to think about these collaborative arrangements, as it stresses the fact that the ultimate goal of the actors involved in the alliance is to create value for customers—an important point, which separates these experiences from philanthropic activities. That is, firms and non profits establish partnerships to create value as part of a business value chain. However, the picture that emerges from our sample suggests that it may be too narrow a concept. These cases featured the presence of organizations that did not perform any direct role in the production of goods of services (“operators”), but which were nonetheless crucial in the viability of the enterprise: “supporters” and “regulators”. Their contributions to the networks in most-cases were short-lived, transitional, but made the difference between make and break. The first group is composed by socially-oriented organizations that provided the initiatives with seed capital, broadly speaking (financial, social, or other), which allowed them to flourish. The second includes organizations such as government agencies, trade unions, consumers associations, or any other body with the capacity to create workable “rules of the game”. This group is of particular importance in ventures involving BOP. These initiatives often extend across established boundaries and redefine the way a certain economic activity is carried out, for which clearance is required. Thus due to the inherent asymmetry in power and influence, as well as ethical conundrums linked to servicing the poor through markets, those operating with low income groups need to secure a “license to operate” –legal or societal—that requires engaging those in position to issue it. 4 Working Paper School of Business Administration University of San Diego Figure 1. Initiatives targeted to the BOP Business ecosystems Socially inclusive networks Hybrid value chains In sum, this paper will focus on socially inclusive networks, defined as horizontal arrangements in which all parties share responsibility for performance outcomes, without any one party exercising authority or control over others. Actions are coordinated through negotiated agreements and the alignment of incentives among all participants. Some tasks and roles may be repeated over time--such as operators, supporters and regulators-- contributing to partner interdependence. All organizations who engage the BOP operate within a shared ecosystem, but not all of them necessarily build formal networks to work effectively within it. We term the studied networks as “socially inclusive” on account of three attributes: (1) the capacity to engage effectively groups hitherto disconnected from mainstream markets, in winwin exchanges, as perceived by the protagonists; (2) the social construction of markets through the leverage of preexisting practices and social dynamics; and (3) the capacity to deal effectively with information and power asymmetries through decision-making bodies that allow for some degree of joint decision-making and co-governance. These traits are developed in the following sections. Alliance formation: the social construction of markets in the BOP This section looks at the question of why companies engaging the poor in their valuechains may seek to build socially-inclusive networks. Moore’s point, to the effect that the environment is not altogether “external” to the company, is particularly true in communities where low income segments encompass a large swath of the population:3 the larger the percentage of low income sectors, the smaller conventional market tends to be. The companies we analyzed have come to follow Moore’s advice: “understand the economic systems evolving around you, and find ways to contribute” (Moore, 1996, p. 8). Consider the experience of CSU, a Costa Rica retail leader. When the supermarket chain tried to scale up its purchases of 3 For example, the population of Bogotá, Colombia, is divided in six strata, with 1 being the poorest and 6 the wealthiest. Strata 1 to 3 make for 86.48% of Bogotá’s population. According to Colombia’s government, Bogotá’s income distribution pyramid looks like this: S-1 encompasses 7.05% of its population, S-2: 36.95%, S-3: 42.48%, S-4: 7.3%, S-5: 3.07% and S-6% 2.1. (Recorriendo Bogotá, D. C.: una aproximación desde las localidades del distrito, 2006) 5 School of Business Administration University of San Diego Working Paper perishables, in order to respond to increasing demand, it found that to be extremely difficult. Farm producers lived in precarious conditions—with the nearest phone line a mile away, by foot. As Jorge Cavallini, Director of Agricultural Development put it, “we said ‘this is it,’ we need a different type of supplier. We began to work with them to improve their storage facilities and demand that they had a telephone line and running water.” The organizations studied embarked in alliance formation with actors from their business ecosystems in order to build a business-enabling context, by means of actions that better conditions for sustained market transactions. a. Channeling information and resources Traditional economic theory assumes that economic incentives will suffice to make markets work, but BOP environments are usually fractured by multiple barriers that prevent markets from flourishing. In the case studies examined, socially inclusive networks functioned as connecting channels, easing the flow of information, skills and resources, which made possible the linking of supply and demand. The situation of poor farmers in Bolivia exemplifies this point. Traditionally, funding entities (government and NGOs) transferred resources to local peasants through implementing entities (both for profit and not-for-profit) in technical training and infrastructure. Storage and processing companies were not engaged, nor were distributors or retailers. The unstated assumption was that once peasants improved the quality of their produce, the market’s invisible hand would take over, and economic agents would demand that output. The model did not work. On the one hand, the implementing agencies were not aware of the quality the market was demanding; on the other hand, processors, distributors and retailers had not made the required investments that would allow them to handle the peasants’ increased output. That shortcoming in the flow of information was overcome through a socially inclusive network led by a small company. Irupana, a firm dedicated to storage, processing and retail, devised a collaborative scheme to work with peasant farmers and develop their technical skills, in partnership with ProRural, a local NGO. Irupana committed to buying pre-established quantities of grain at a price premium, provided that its quality standards were met. Irupana was able to bridge the information gap and close the market loop, communicating the attributes that its customers were demanding to both the implementing entities and the peasants. Changing the conditions under which low income communities operate may require investing in new skills, operating procedures and assets. But these decisions cannot be made unilaterally, as they are interdependent with other members of the business ecosystem. To act in tandem with its partners, Irupana coordinated with them its own investment decisions, making sure the soft funds coming from development agencies reached the farmers in time, and allowed all network members to move forward in unison. As noted by Moore, “There can be a tremendous economic advantage in coordination when it comes to shaping the future—in terms of focusing investment, avoiding dead-ends, and finding a role in the center of a powerful community” (Moore, 1996, p. 61). Operating in BOP environments may imply a tour de force towards institutionalization; that is, towards the construction of structured system of conventions shared by all participants. Socially inclusive networks serve a useful function by giving partners a sense of predictability. When successful, such systems can bring about in months what the invisible hand had failed to 6 School of Business Administration University of San Diego Working Paper deliver in decades. By “markets” we do not mean a point of convergence between supply and demand, but rather a setting where successive interactions between participating individuals, organizations, and companies spark economic activity. As the Irupana examples showcases, these networks form a landmark for those integrated in uncertain environments, and stabilize them through the creation of agreed upon norms and conventions. In environments marked by deep skepticism and distrust, those ad-hoc institutional arrangements are confidence-builders. A Colombian interviewee –who later joined Colcerámica’s led network-- considered that “companies have come and gone, promises have been made and undone; we’re still here, and nothing much has changed.” Another interviewee described Colombia’s low income population as being “immunized against promises by the private sector.” To sum up, by channeling information and skills, socially inclusive networks can stabilize uncertain environments, lower coordination costs and enhance trust. On the other hand, the usefulness of networks may wane as the environment become stabilized and better known to the corporation, as we review later on. b. Leveraging social capital In most cases examined, the social construction of markets leveraged the “goodwill that is engendered by the fabric of social relations and that can be mobilized to facilitate action”— that is, the social capital available in BOP communities (Adler & Kwon, 2002). In that way, the goodwill that community members had toward each other –their “bonding” social capital--4 became an asset, which compensated for other weaknesses, such as lack of collateral or lack of credit history. As Coleman indicated (Adler & Kwon, 2002), social ties of one kind--such as kinship--can be used for other purposes--such as material support. Social relations, in which the basic exchange is constituted by favors, become the foundation for market relations, in which products and services are exchanged for money. This simple, but long-standing concept is perhaps among the most important innovations in the field of social enterprise, as it enabled micro-finance lenders to provide group loans to individuals lacking collateral, building on the strong links among group-members. The flow of goods and services in BOP communities entails the construction of social ties between companies, NGOs, and local players. One reason cited for Nike’s failure with the World Shoe Project related to its inability to work in partnership with unusual actors. The firm operated effectively through established alliances with high-end retailers in China’s largest city, but reaching the rural majority entailed working closely with mom and pop rural retailers (Hart & London, 2005). Nike failed to connect effectively with the untapped BOP Chinese market. The experiences studied here suggest that a socially inclusive network could have filled that gap. As the experience of Nike suggests, organizations seeking to develop BOP market initiatives must find ways to leverage that social capital –bonds, traditions, leaderships-available in poor communities. To that end, Hart and London propose that large corporations seeking to succeed in their market efforts with BOP need to learn how to become “indigenous,” admitting voices previously excluded from corporate dynamics. Developing 4 “Bonding social capital is good for undergirding specific reciprocity and mobilizing solidarity” (Putnam, 2000, p. 22). 7 School of Business Administration University of San Diego Working Paper what they call “native capabilities” allows companies to generate contextualized solutions that respect culture and the environment, while allowing companies to become truly embedded in the local context (Hart & London, 2005, p. 30). Irupana’s CEO realized that the ancestral respect for nature that Bolivia’s farmers had traditionally shown could be turned into a competitive advantage for the production of organic produce. What appeared a priori as a handicap –Bolivia’s farmers’ isolation and little familiarity with fertilizers or pesticides—was turned into an asset. c. Becoming “business friends” Building socially inclusive networks implies a willingness to go beyond a transactional model (“one-time deal”), and project the relationship into the future, educating, empowering, and accompanying the BOP partner along the journey. In most cases it also implies a readiness to invest resources in developing the alliance. This occurred in all the initiatives examined in our study, including those led by non-governmental organizations (NGOs), cooperatives, midsized companies or even large multinational corporations (MNCs), which engaged the BOP as consumers, partners or producers. An existing literature has researched the emergence of interfirm networks around closely knit value chains, in which exchanges between partners depart from the ones prevalent in market relations--characterized by impersonal ties, motivated purely by self-interest, with actors ready to switch to new buyers or sellers to capitalize on new price opportunities—and rely instead on embedded ties. In embedded relationships, the economic component is only part of the exchange among partners, who sometimes become “business friends” (Uzzi, 1997, p. 35). Socially inclusive networks appear to be founded upon embedded relationships. As the CEO of Irupana, Javier Hurtado, put it, “in our vision, our low income suppliers are partners; our relationship with them is both commercial and human”. Or, in the words of a manager from Construmex, a CEMEX housing initiative targeted at the BOP: “we seek to become friends with our clients.” Some readers may legitimately wonder whether it may not be too naive to expect “friendships” to emerge in contexts marked by deep inequalities. The point being made here is that BOP markets initiatives require building a new kind of relationship, one that looks beyond a purely commercial dynamic. Take the case of Gas Natural BAN, a public utility that distributes piped natural gas in the northern outskirts of Buenos Aires, Argentina. Since 2003, Gas Natural has been developing an ad-hoc model that seeks to engage the BOP as viable customers. The ad-hoc model differs from its standards procedures in various regards (Table 2), but the thrust of the model is that it entails partnering with the community from the outset. The first thing the company does when it approaches a community is to seek for local leaders, private or public, who might be interested in partnering in a consensus building exercise. The dialogue may include grass roots organizations, churches, NGOs or local governments. Interestingly enough, when Gas Ban disembarks on a poor community, it is not only with their sales team; they also bring along their community relations people, who roll out a battery of training programs around the concept of responsible and sustainable energy consumption. 8 School of Business Administration University of San Diego Working Paper Table 2: Gas Natural BAN: traditional processes versus the ad-hoc, targeted towards One may be tempted to ask: Why would a private company bother to lead consensusbuilding exercises or to train disadvantaged citizens in sustainable consumption? Those are tasks that we traditionally associate with not-for-profit organizations. The reason why Gas Natural undertakes those activities has little to do with charity, and a lot to do with managerial experience. A few years earlier Gas Ban had launched another initiative, Gas for Everybody (Gas para todos), which sought to create a purely commercial relation with the BOP. Gas for Everybody did succeed in adding substantial numbers of new customers: between 1997 and 2001 it enrolled about 100,000 of them. However, a substantial portion of those enrollments were short lived: after a few months, the new customers stopped honoring their bills. After some research, the company discovered the roots of the problem. Gas for Everybody did not bother to invest time or resources to build a relationship with the poor. That interface was delegated in independent installers, who cared little about the long interests of the new BOP customers, or those of the company. They were simply seeking short term financial gains; thus, they maximized the installation of new outlets. Houses that had done well with 1 or 2 so far were given 5 or 6. The increase in consumption was such that the monthly bill ended up the same despite having a product that was seven times cheaper. Many of these BOP customers could not cover the costs of installation and defaulted. The company realized that it had sought growth as an end in itself, without giving it any direction. It was all about quantity, not quality. The company kept the strategic decision to expand in BOP markets, but realized that it could not do so only from a commercial perspective: the relation had to be broader. Adding a customer who will default in 6 months is bad business. Gas Natural decided to build an ad-hoc process what would allow to initiate a long-term relationship with the BOP, one that will be rewarding for both ends and sustainable. They concluded that the BOP was a viable profitable segment, but only long term—not a “quick buck”. The construction of this long-term relationship in their case entailed helping to think long term to individuals that lived hand to mouth, in unstable conditions. 9 School of Business Administration University of San Diego Working Paper At times, developing and embedded relation may imply refraining from short term profit maximization. Previous research on the subject has established embedded partners tend to “satisfice” (“satisfy” + “suffice”) rather than maximize, on price, and they shift their focus from short term gains, and exploiting dependency, to cultivating long-term, cooperative ties (Uzzi, 1997). This feature is present in socially inclusive networks, as the commercial drive almost always coexists, on different levels, with other motivations. Network leaders seek to device win-win arrangements that create value for all partners. Irupana pays its suppliers 20 to 25% over the prevailing market price. Although part of that premium has to do with the value added to the produce purchased, the price is higher than what a purely power-based negotiation would have granted. Irupana is in that business to make a profit, but its founders are also cognizant that their long-term well-being is inextricably linked to that of its BOP suppliers. Alliance implementation: connecting the unconnected The fragile institutional setting that surrounds marginalized populations, where neither the market nor the state have strong presence, is certainly a hindrance when it comes to value creation. Unclear rules and weak contract enforcement, coupled with sub-par human and physical infrastructure have historically had a deterrent effect on the private sector. Such a barrier has prevented the invisible hand from serving those needs or leveraging those productive capabilities efficiently. This section examines ways in which socially inclusive networks connect previously decoupled groups in BOP initiatives and the role played by key actors in market development and exchange. a. Value creation through networks The case of the Venezuelan retail company Cativen shows how a socially inclusive network can be instrumental in creating a new value chain that effectively engages the poor as producers. In the early 2000s that company realized that its fresh produce it was procuring was not up to par, both in terms of quality and quantity. Its research showed that the agricultural sector was poor and underdeveloped. Farmers lacked the institutional infrastructure required to deal directly with retailers; they had to go through intermediaries who aggregated production and distributed it. No strategic thinking or planning was involved: each farmer cultivated “by instinct” and tradition, without knowing what worked best in terms of soil or season—not to mention demand by retailers. To overcome that barrier, Cativen undertook a major effort to organize farmers and their production, in order to bypass intermediaries and improve its procurement. It established a network of multi-functional “proximity platforms” in each of the producing regions, were their production was aggregated, stockpiled, sold and distributed. Each of these centers served as community nucleus, where producers congregated and exchanged best practices between them, and received training from company technicians. Cativen committed to purchase quantities and prices as long as farmers met its quality standards, and helped them get there. Trading was not “spot” but rather focused on the long-term. To build this network, Cativen was able to leverage a previous experience of cooperativism during the 1970s, which had shown farmers the benefits of organizing and remained as vivid memory in the community, as a form of “bonding social capital”. 10 School of Business Administration University of San Diego Working Paper The impact of a weak institutional setting in value chains that integrated the BOP is apparent in cases where the same company carried out similar experiences in different countries. Cativen’s controlling group, Casino, had left the business of developing agro industries in France after farmers reached a critical size and sophistication in the early 1990s. In the words of Jean Marie Hilaire, Cativen’s CEO: “once a given country has developed enough, we go back to our business and focus on retail, letting producers mind the quality of produce. By the time we left the French agricultural cooperatives they knew about the agrobusiness industry much more than our people.” Costa Rica’s CSU launched a similar initiative, called “Hortifruti” in different Central American nations. In Costa Rica, the company was able to deal directly with farmers; in Nicaragua on the other hand, it had to develop a socially inclusive network which relied heavily on the work of NGOs as “supporters”. The agricultural farmer in Nicaragua is poorer and weaker than its Costa Rican counterpart; incorporating the former into a modern market-based value chain took a longer-term view, intense mentoring and training, and financial support. Nicaraguan farmers had operated through rudimentary processes, based on monoculture and two yearly harvests, and no planning. To qualify as a Hortifruti partner, they were asked to change to diversified seeding and year-long scaled harvesting, using modern inputs (fertilizers and pesticides), and meeting pre-established quality standards. While most Costa Rica’s farmers had completed their primary education, only a few of their Nicaraguan counterparts had gone to school. Becoming the hub of these networks at times implied redefining the contours of the business and the development of new skills. Cativen’s decision to deal directly with producers was no small change: it implied moving from a B-to-B model in which it dealt with specialists selling finished products, to a model in which it assumed the role of developer. To carry it out successfully, it had to develop internally the technical expertise to nurture agro-businesses, in partnership with the School of Agronomy of the Universidad Central de Venezuela. As part of the training offered, Cativen taught farmers to add value to their produce through packaging and other services. Colombia’s Colcerámica was forced to develop a financial arm, which would offer credit to BOP customers and facilitate purchases. This is something that it had never felt compelled to do dealing with clients from mainstream markets, whose financial needs were well served by banks. b. Presence of a pivotal player Very often, these networks rely on key organizations able to span the gaps among diverse constituencies who work on a complex issue, “bridging the social cleavages that separate the poor in order to promote constructive and sustainable change” (Brown, 1991, p. 808). Bridging organizations are key to stabilize turbulent environments and develop the institutional bases needed for working with the poor; they are “a conduit for ideas and innovations, a source of information, a broker of resources, a negotiator for deals, a conceptualizer of strategies, a mediator of conflicts” (Brown, 1991, p. 812). The work of these organizations usually spans the gap that exists between the formal/developed sectors of the economy with those informal/underdeveloped. They tend to link the for-profit world with the non-profit, the large corporation with the small and medium enterprise, the cooperative or the social entrepreneur. All too often they connect supply (producers) with demand (consumers), as well as the local dimension with the global. By connecting those disparate worlds, they 11 School of Business Administration University of San Diego Working Paper strengthen the institutional and management capabilities of the LIS they work with. While they bridge these diverse worlds they must be prepared to cope with diversity, working towards the alignment of usually divergent agendas. Both MNCs (Sharma & Westley, 1994; Westley & Vredenburg, 1991) and NGOs (Brown, 1991) can perform the role of a bridging organization. While SEKN’s large sample found cases of networks led by both types of organization, in this paper we shall focus on those led by large companies. Any company seeking to engage the BOP has to acknowledge that for the most part, they operate in the informal economy --which in Latin America, accounts for as much as 54 percent of total regional urban employment (Perry et al., May 2007, p. 4). Some of these networks have made possible for the BOP to leave behind at least some particular aspect of their informality. In the Peruvian Amazonia, oil producer Palmas del Espino led an initiative to integrate subsistence farmers, who lived in precarious conditions in one of Peru's poorest regions, into its value chain. It helped them to gain legal rights over the lands they had occupied for decades, which were company property, and offered assistance as they organized in cooperatives. Cooperatives were fully incorporated for legal and taxing purposes, and articulated under the umbrella of a local producers' association. It then facilitated access to financial aid through the Banco de Crédito de Perú, which used their production as collateral. It subsidized the initial supply of inputs, which was given out to farmers at cost. The initiative has allowed the company to expand 12% its supply of palm fiber at very low cost, and boosted income for participating families. c. Sound business, not charity Despite the pervasive presence of social sector organizations, these networks are not about disinterested donations; they are meant to become the foundation of profit-seeking businesses. As opposed to philanthropic relations—where benefits flows are sporadic and mostly unidirectional, from to the giver to the receptor--in socially inclusive networks, benefits flow in an ongoing basis, to all participants involved. Everyone gives and takes on a balanced fashion, much as it happens on any value chain: participants are summoned to join the network because they have something valuable to contribute to the enterprise, and are rewarded for it. Where LIS are integrated as producers, insofar as they increase their income, they have to gain that through their own efforts. That apparently simple concept is not always easy to be agreed upon. Irupana managers recount that, after so many years of working with development NGOs, Bolivian farmers had grown accustomed to receiving donations, not investments. Irupana’s owners were determined to make a positive impact on the life of those peasants, but considered that giving away something for nothing “would only prolong dependency”. Social sensitivity is very much at play in most of these networks. However, these partnerships are vibrant value-chains that deliver products in open markets, at competitive price and quality. Insofar as low income groups receive higher incomes that they would otherwise, it is because they are empowered to add value to their products or services. Irupana is able to pay its farmers premiums of 20% over prevailing commodity prices because they meet stringent requirements for organic production. BOP farmers agreed to uphold those standards in return for technical assistance, geared towards process optimization, and financial assistance to improve their infrastructure. At the same time, Irupana’s relation with its BOP 12 School of Business Administration University of San Diego Working Paper suppliers allowed it to serve demanding export markets in the United States, Europe, and Latin America. The discipline instilled by market competition serves to show that the social dimension in these networks is no excuse for inefficiency. The “business-friend” relationship is simultaneously about generating new personal ties and developing a sustainable market based initiative. This may entail some dose of “tough love” for under-performers, enforced by the network leader. Costa Rica Entomological Supplies (CRES) works with a network of poor farmers, of which it procures the cocoons that it later exports, subject to its own specifications. When a provider fails to reach those standards, it is given a warning; after three warnings, it is suspended. All members have come to understand that keeping high quality standards and delivering value to customers is the key-pass to better living conditions. d. Governance Assuring effective collaboration in BOP initiatives sometimes involve designing ad-hoc governance structures, which will take into account the interests of all relevant stakeholders and facilitate cooperation at the strategic level. In this context, governance refers to combinations of legal and social control mechanisms for coordinating and safeguarding partner resource contributions, administrative responsibilities, and division of rewards from joint activities (Todeva & Knoke, May 2001). Previous research suggests that “functional fragmentation [in the value chain] requires securing technological compatibility and complementarity… in an effort to co-ordinate for quasi-reintegration and effective production on a now decentralized basis… Effective action is not feasible unless governed by a coordination mechanism that can deal with increased complexity.”5 Governance in the context of BOP initiatives presents particular challenges, given the essential asymmetry between the parties. How to ensure long term commitments? Who gets to decide what? In SEKN’s case studies sample, those organizations that interacted with their ecosystem and engaged the BOP without establishing a network, maintained a hierarchical control over decisions, both at the strategic and operational levels.6 An example would be Construmex, a housing initiative by CEMEX aimed at US immigrants, who are given to possibility of funding the construction of a house in their kinsmen hometowns. In order to reach its clients effectively, Construmex leverages a dense network of organizations (including local and stage governments, Mexican consulates, immigrant associations, etc), but retains control over all aspect of the business. On the other hand, those initiatives that did establish formal networks approached the BOP in a more horizontal spirit, in most cases relinquishing some measure of control over decisions, at least on the operational level, and coordinating action through incentives. In the most “horizontal” and participatory schemes, a “neutral” decision-making forum was created with the assistance of an “honest-broker” respected by all parties (NGO or social entrepreneur). Two reasons appear to help understand this fact. The first is the need to build confidence 5 The statement was made for markets that depend on Net-based technologies, in which structural factors create incentives for collaboration. Interestingly, it seems to fit well the emerging field of market initiatives targeted at LIS. (Elsner, 2004, p. 1031) 6 Some companies partnered with other companies, in B-to-B relations, without involved the BOP publics being served. For the sake of our analysis, those initiatives were not considered socially inclusive networks. 13 School of Business Administration University of San Diego Working Paper through transparency, which later resulted in commitment by all parties involved. The second would be the need to capture “tacit knowledge,” which only the community possesses, for the scheme to work. A good example of this approach is “Your house like new, step by step,” an initiative by the Colombian company Colcerámica aimed at making tiles available to BOP. From the outset the company decided it would not manage the initiative hierarchically. Instead of going it alone, the company sought the advice of Haidy Duque, a social entrepreneur and an Ashoka fellow. The company was clear in the need to capture “tacit knowledge” from its partners. As they put it to Haidy, “we both have a lot to learn: we know little about community dynamics and you know little about how to run a successful business.” Colcerámica also engaged a number of selected “community organizations”; these were grass-roots organizations with the mission of delivering social services and improving the infrastructure of poor neighborhoods. Interestingly enough, Colcerámica first choice had not been to work with community organizations, but rather to establish new cooperatives. When community leaders were sounded with the idea by the company, they swiftly rejected it. Why reinvent the wheel, they said, when they had tested institutions that worked just fine? Community organizations were characterized by their strong local leadership, their highcredibility vis-à-vis their constituencies, their team-orientation and their culture of collective decision-making. Carlos Espinal, Marketing Manager and leader of Colcerámica’s BOP initiative, recalls that he left the meeting thinking “Who is the expert here? We should have been more humble and valued their perspectives more.’” The company, the social entrepreneur and the community organizations joined to establish the Community Organizational Nucleus (CON). The CON served as a forum to design collectively the modus-operandi of the value-chain, and for community organizations to learn from each other. It was also charged with mediating and resolving disputes. The economic compensation for each component of the network was established by negotiations, in an open and transparent manner. Community organizations operated following the guidelines established by consensus in the CON, and were compensated on commission (3% of profits). Community organization also administered sale revenues, supervised sales personnel and showcased Colcerámica product line. Finally, the network’s sale force was composed by “promoters”, hired among female community members. They sold products door to door, provided technical assistance, and alternative payment plans to consumers. As they enjoyed the trust of their peers, they had unfettered access to their houses. Colcerámica was operating with a sales force that was not a formal part of the company, which required accommodating to certain loss of control. Where BOP citizens were engaged as producers, the network leader in different cases encouraged the creation of producers’ associations or cooperatives, which could function as a valid interlocutor in the negotiation table. The Agropalma Group is Latin America’s most important oil producer. In 2001, the company led the creation of a sophisticated network, the Family Agricultural Project, in the country’s Northeast, its poorest region. This initiative engaged a number of public agencies at the federal, state and local levels, the company, and the local BOP farmers, so as to integrate the later as viable partners in the company’s value chain. In this network, decisions are taken by consensus among all participants: the state government (Pará), the local government (Moju), the bank that financed the enterprise (Banco da 14 School of Business Administration University of San Diego Working Paper Amazônia), the company (Agropalma), and the BOP farmers. But for the workers to have a real voice in the decision-making process, they needed an institutional framework that could articulate and channel their interests in the multilateral forum. Thus, the company encouraged and supported the creation of the Association of Community Development Arauí. This was a forum in which all BOP farmers shared their views on the benefits of the alliance, monitored results, and exchanged best practices. Articulating their demands behind a clearly stated agenda, vigorously defended by a single voice, increased their bargaining power, and allowed for real dialogue with other interlocutors. The multilateral decision-making meets monthly to take on strategic issues. Day-to-day issues are handled bilaterally by the company and the farmers association. While the company does not stand in complete parity with its partner, it constantly strives to reach consensus in all decisions made. To sum up, the drivers to create structures of shared governance are: (a) the need to break the cycle of indifference and mistrust, through structures that facilitate a deep connection between partners; (b) the need to secure commitment and buy-in through active participation; and (c) the need to capture “tacit knowledge” from the community—that non-written body of knowledge that is often a make or break factor in the success of the initiative. However, those drivers depreciate over time: once commitments are respected, trust is built, and most important, once the BOP becomes a familiar terrain for the company, the incentives to operate through a horizontal network will probably tend to wane. Colcerámica’s experience confirms this view. The network described above was put in place in Usme, a region from Bogotá city, where the company implemented its first pilot. A year and a half later, the company felt confident enough to replicate and scale up the experience in other regions: it launched similar experiences in regions of Cali and Medellín, major Colombian cities. But this time around, the company had other priorities. For Colcerámica, the BOP was not altogether unknown terrain. Thus, the emphasis was not in building trust, transparency and consensus: the success of the Usme pilot, which had received plenty of attention nationwide, preceded them. Instead, the company focused on capturing economies of time, lowering costs, and gaining scale. In short, applying a business rationality to the enterprise. This was no accident: all along the Usme experience, Colcerámica had sought to learn through trial and error, identify best practices and systematize the new ad-hoc processes. Thus, the networks built in the new cities had no Community Organizational Nucleus. The horizontal components were scaled down, in favor of a more vertical, command-and-control style of decision-making. Alliance performance This section looks at the impact that the alliance membership has had on its members’ performance, with particular emphasis on the network’s leader. a. Risk taking and investment Being embedded in these networks appears to have contributed to the stabilization of environments that appeared turbulent or uncertain. For some of the companies studied in this sample, these partnerships were groundbreaking experiences that they are currently seeking to replicate. In Cuartel V, near Buenos Aires, Gas Natural BAN joined in a partnership with the nonprofits Fundación Pro-Vivienda Social (FPVS) and Mutual El Colmenar. These NGOs 15 School of Business Administration University of San Diego Working Paper helped organized around 45 various grass-root organizations in an umbrella council called “Organized Community”, which served as a forum to build consensus around priorities for local development. This council established a fiduciary trust that funded the extension of piped natural gas to the underprivileged neighborhood of Cuartel V. The fiduciary fund aligned the interests of the community with those of the company. Each neighbor had incentives to bring other community members into the fund—the more participants, the lesser the cost each one of them would bear. All community members knew that by defaulting on their financial commitments they would be placing an extra burden on their fellow neighbors. According to a company employee, “in Cuartel V we did well incorporating the community as co-manager of the initiative. It was a radical change. From a commercial perspective, it was a real headache in the beginning. We had to let community members do the talking and persuade fellow neighbors to join in. It took us longer to get things done, but the end result was much better, because of the trust that this methodology built in the community.” The company has drawn an important lesson. Partners like FPVS and El Colmenar may not be available in all BOP communities it will do business with. However, the company will always seek to leverage the existing social capital in the community, and build on it taking into account the specific characteristics of each community: “you need to identify the organization able to span across the entire community. These organizations aren’t that hard to find; the question is how do you activate this social tissue? You really need that web”. Stabilizing an environment may enable investments that would otherwise appear too risky. It can also contribute to bring down the “governing costs” of the initiative down to manageable levels. According to the same company spokesman, “Cuartel V was almost an idyllic situation. FPVS secured new customers and did the selling. For us, it was like having a spontaneous new client.” Embeddedness increases expectations that noncontractual, nonbinding exchanges will be reciprocated. In risky investment situations, these factors increase an actor’s capacity to access resources and take risks. As in the case of socially inclusive networks, previous research has established that the expectations of reciprocity and cooperative resource sharing generate investments that cannot be achieved through arms-length ties that are based on immediate gains (Uzzi, 1997). b. Competitive advantage These networks appear to have improved the competitive position of its members. The experiences analyzed showed that socially inclusive networks consume time and resources to be built, but once in place, they create synergies that expand the limits for each of the participating organizations. This appears to be true for initiatives that integrated the BOP both as consumers and producers, as Colcerámica’s case highlights. By pioneering in the large scale commercialization of tiles to low income consumers, it has created an ad-hoc channel that will not be easy to replicate. The resources upon which this channel was built are not available “off the shelf”, in the open market, for others to access. Competitors would need to go through their own process of trial and error in building a similar network, and that would leave Colcerámica with a first-mover advantage. Something similar appears in the companies that created networks of BOP suppliers. Turning a subsistence farmer into a competitive microentrepreneur takes time, resources and effort, as well as the alignment of many public and private actors. True enough, after new skills are acquired these entrepreneurs can always defect to a competitor. However, participants in CSU’s Hortifruti initiative with low income farmers, 16 School of Business Administration University of San Diego Working Paper consider that the empathy generated by these embedded relationships generate a loyalty which will prevent them from defecting. At the same time, there are limits to that empathy. For instance, when BOP suppliers see the prices of their products go down, loyalty will not always prevail above short term gains. Costa Rica’s CRES has faced this situation: butterfly producers have multiplied driving down the prices of pupae in the global market. Some CRES suppliers have begun to sell wherever they can. Some network members are supplying “under the table” to competitors less concerned with quality, who ask less questions. c. Broader information exchange Information exchange in embedded relationships goes beyond price, quantity and quality data, and tends to include information that is difficult to obtain otherwise, such as tacit information acquired through learning by doing. Trust has the effect of giving access to difficult-to-price resources such as information that enhance competitiveness and are difficult to get in arms-length exchanges (Uzzi, 1997). The availability of information stemming from interconnected actors is crucial, as there are difficulties in obtaining useful knowledge about the BOP (J. Austin et al., 2007). In BOP markets standard consumer research may not offer reliable information about poor consumers. Store audits, for example, may not survey retail outlets in low income communities such as the barrio or the favela. Having direct access to information through strong ties could mean an increase in efficiency and productivity. The experience of Gas Natural BAN also exemplifies this point. According to a company spokesman, “the information we handle is, so to say, ‘from the gas meter out’; what happens ‘from the gas meter in’ is handled by the Organized Community and FVPS. We know how much each family owe us, how much it consumes, how many gas appliances they have; what we do not know is what happens inside their house walls: why they owe us money. This is the type of information that they provide us with.” That type of information can be crucially important in environments were institutionalization is low, and contract enforcement is weak. d. Joint learning through problem-solving Instead of the exit-or-stay response of the market, members of socially inclusive networks set routines of negotiation and mutual adjustment that flexibly resolve problems. As mentioned earlier, Colombia’s Colcerámica initially sought to organize individual from poor communities in cooperatives so as to turn them into a viable sales force. However, through honest and open discussions in the Community Organizational Nucleus, the company learned that there were grass root organizations in place that could do the job just fine. Overtime, dialogue forums such as the CON promote joint-learning, innovations and the discovery of new combinations of resources. Informal problem-solving mechanisms enable actors to coordinate functions and work out problems “on the fly”. The existence of a “business friendship” create expectations of “going the extra mile” for network members. e. Economies of time Earlier research had established that membership in socially inclusive networks promotes economies of time (Uzzi, 1997). The finding appears to be relevant for socially inclusive networks, where the BOP is a relevant actor. The multidimensional, concerted effort of private, nonprofit and public organizations, aligning their agendas to produce change, does seem to bring about changes that would have take much longer in traditional, arms-length 17 School of Business Administration University of San Diego Working Paper market relations. In the words of Javier Hurtado, Irupana’s CEO: “the supplier development program has allowed us to reach in two years an exports volume that took other companies 10 to 15 years.” f. Possible downsides On the other hand, membership in socially inclusive networks is far from a panacea. Possible downsides include: ƒ Non-market burdens. When your business partner becomes a “business friend”, nonmarket considerations are to be factored-in. That is precisely what makes the relation “deeper” than a standard market-type exchange among business partners. While this may offer some advantages, it clearly has some risks associated to it. In the context of socially inclusive networks, where non-traditional partners occupy important roles, that may entail dealing with problems that historically have not been “the business of business”. What if the community leaders become fractionalized by jealousy and rivalry? Superimposing an economic logic on a social organization or a community of new customers, may create problems. It may be akin to partnering with your block neighbors: some of them may be hard-working partners, and others may be chronic under-achievers, but insofar as they live in the block they have a legitimate right to be heard. You cannot simply fire them and move on. Another risk inherent in socially based relationships among different groups is opportunism by local leaders, who could eventually use their role in the network as a way to further an individual agenda, regardless of its juxtaposition to that of the collectivity. An entrepreneurial individual and respected community leader can be an effective informal sales agent for the electricity company. However, she can also use her enhanced stature with the community for her own ends, to the point of jeopardizing the success of the initiative. ƒ ƒ Over-dependency. As our examples show, some of these networks rely on nontraditional partners for vital portions of their value chains. This can render the networks fragile, when market conditions are unfavorable to some network members. What if some among them, who usually live hand to mouth, have personal difficulties and renege from their commitments? What if they join a competitor? Unfulfilled expectations can create a backlash, and maybe a defection. Cooperatives can go bankrupt, community leaders may change. In most of the examples analyzed, this scenario created only short term problems, as the bridging organization retained all core processes and skills, and had alternatives to explore. However, it remains a distinct possibility. This can also happen to companies if the initiative is not yielding the expected returns or the challenges are more daunting than anticipated. Killing the goose that lays the golden eggs. It is no secret that the BOP is a politically charged terrain. Being accused of “getting rich off the backs of the poor” is an ever present possibility, particularly in regions where profits are under suspicion, as it is the case in Latin America. Such a risk may lead some companies to “moderate their gains”, and refrain from maximizing profits. While this may be an enabling factor in some 18 School of Business Administration University of San Diego Working Paper cases, in the short run, it may be turn out to be counterproductive. If profits are not substantial, these initiatives may be relegated to the “well-intended-but-irrelevant” pile, thus putting off the interest of dynamic organizations. The micro-finance industry has seen some of this. Is it a good idea to charge a 60% interest rate to the poor? While some would argue that this is an abusive practice, it is hard to deny that those returns have succeeded in mobilizing the interest of unsuspected players to BOP markets. Concluding remarks Within the universe of market initiatives targeted towards the BOP, there is an emerging literature focused on the experiences that relied on structured networks. A number of published studies suggest that these collaborative arrangements are called upon to play an important role in any major effort to tackle poverty through market-based initiatives. This particular piece of research sought to clarify how these networks actually work and the role they might play in developing market initiatives with the BOP. We began by looking at the drivers prompting companies to venture themselves in these non-traditional partnerships. We found that socially inclusive networks can help remedy the fractured nature of the BOP environments, where the presence of both state and market is weak. By building shared conventions, it facilitates the flow of information, skills and resources, thereby reducing perceived uncertainty and allowing for collective action. Socially inclusive networks can also build on existing social structures, turning those into assets that can be leveraged by the poor. These include local leaderships, strong kinship or friendship bonds, and traditions. By leveraging those existing social assets, the poor can overcome as a community their vulnerabilities as individual producers or consumers. An intelligent leverage of the BOP social capital can turn weaknesses into strengths. Finally, we showed how building a long-term bond with the BOP usually entails going beyond a purely commercial exchange, in fact becoming “business-friends” within an embedded relationship. We then moved to analyze how these schemes actually operate. Socially inclusive networks often require the building of structures that allow for the construction of long-time working relationships, which often entails education, empowerment and skills transfer. Very often, these collaborations revolve around one key pivotal player, which organizes and leads. In many cases, these value chains cut across the boundaries of established businesses, bundling together the exchange and goods services (financial assistance, training, etc) in an integrated value proposition. Although these networks usually generate some level of human bonding and commitment, they are essentially about business. This means that they exist primarily to create value for their ultimate customers as well as the firm’s shareholders. When a partner does not live up to that standard, some dose of tough love is usually administered by the network leader, in the form of sanctions, or ultimately expulsion. Some socially inclusive networks relied on decision-making bodies which allowed for varying degrees of horizontality and co-governance. Among the reasons that led companies to take this step was the need to secure long-term commitments, build confidence, encourage buyin and loyalty among the BOP, and the need to capture “tacit knowledge” only available to communities, and difficult to capture by hiring individual members. 19 School of Business Administration University of San Diego Working Paper Finally, we examined the impact that these networks had on the performance of its members, and particularly of the organization leading the alliance. They appear to have encouraged investment, by lowering perceived risks and uncertainty. The organizations studied also show that socially inclusive network can strengthen the competitive position of its members, creating or strengthening key capabilities. They also appear to have captured economies of time, by speeding up processes that would have been harder or impossible to reach through the pure dynamics of the invisible hand of market forces. As stated earlier, socially inclusive networks can provide companies to “tacit knowledge”, which would be otherwise difficult or impossible to access. Finally, networks structured in embedded relations provide a platform for joint-learning, experimentation and innovation. In discussing previously unexplored aspects of the dynamics at play in networks -termed here as “socially inclusive”-- that made possible engagement with the BOP through the market, we sought to advance our collective understanding of these important collaborative tools. At the same time, this research unveils a whole set of new questions that merit further exploration. Chief among them is the conditions that call for the creation of a horizontal network to engage the BOP members of a business ecosystem. Under which conditions does it make sense to relinquish control of a business value chain? Another topic that remains largely unexplored is the characterization of the nodes that constitute these networks: What are the recurrent functions that need to be fulfilled, and what type of organization is best suited to carry them out? It is our expectation that future investigations will contribute to further our understanding of this emerging field. __________________________________________________________________________ Adler, P. S., & Kwon, S.-W. (2002). Social Capital: Prospects for a New Concept. Academy of Management Review 27(1), 17-40. Austin, J., Márquez, P., Reficco, E., Berger, G., Fedato, C., Fischer, R. M., et al. (2007). Building New Business Value Chains with Low Income Sectors in Latin America. In K. Rangan, J. Quelch, G. Herrero & B. Barton. (Eds.), Business Solutions for the Global Poor: Creating Social and Economic Value. San Francisco, CA: Jossey-Bass. 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