In this interview, we talked to Marcos Athias Neto, the Director of the Istanbul International Center for Private Sector in Development of the United nations Development Programme (UNDP) how to tackle the most difficult challenge of reaching scale.
What is your opinion on scale?
First of all, I think reaching scale is the most critical challenge for inclusive business. If we can’t achieve scale we will not be able to fundamentally transform the economy. Neither will we be able to tranform the way how businesses are striving to achieve the Sustainable Development Goals (SDGs).
What are the requirements that need to be in place to ensure that more inclusive businesses can reach scale?
I think there are four market failures that need to be addressed and that are holding back the scaling up of inclusive businesses (IB).
The first is lack of information and knowledge. This applies for information about the market as a whole. At the same time, entrepreneurs often lack information about people at the base of the pyramid (BoP). The second barrier is access to finance. Again there are two sides to it: access to finance for the inclusive business and access to finance for people at the BoP, who either produce products or who are IB customers. The third one is rules, regulations, incentives and legal structures. In most parts of the world, if you don’t maximize profit, you don’t have a legalising framework for a business to operate. The fourth one has to do with capacity. We need better systems inside the various companies that allow a better understanding of the BOP. We also need a clearly defined value proposition of inclusive business for middle size management.
These four barriers are equally important. Depending on the situation in the different countries, the importance to address those barriers might vary, but collectively the four tend to be the major barriers. Also depending on the sector, if you are working in housing or for financial inclusion, one might be more important than the other one.
Do you have an example of a company that successfully works with people at the BoP and that has achieved scale?
I think there are many examples: Jain Irrigation, Unilever to some degree… The question is not how single companies can achieve scale. The question is how can we establish an ecosystem that provides a conducive environment for businesses to reach scale? If we achieve this, any company could reach scale. If the whole IB ecosystem addresses those four gaps any business could move from start-up phase to a medium sized enterprise and finally become a large cooperation with an IB model.
Could you mention a sector or a country that has been really leading in that?
No, I think it is different. You have sectors that are simply not conducive for scale like for example agriculture, health or low-income housing solutions. Then it also depends on the national context. There are some countries that have started to do more and that are trying to address those elements systematically, like the Philippines or. The Philippines for example have for example introduced tax incentives to address those issues.
Do you think there are also certain qualities of the entrepreneurs themselves that are necessary when they want to scale their businesses?
I think there are two important elements: One thing is the perseverance and the desire of the entrepreneur to stick to his vision. The second thing is the vision and support from senior leadership. This is especially important when you are trying to establish an inclusive business initiative in a large or multinational cooperation. If you don’t have those two, it’ll be very difficult to succeed, even if the ecosystem is there. But also to have those two without the system won’t help.
What do you think about digitalization? Everybody talks about it nowadays.
I think that digitalization should be regarded as a tool. It is not the silver bullet to solve all problems and should not become the reason why you are doing business with the BoP. But technology and the use of digitalization makes it easier to reach the BoP. I think the health sector and financial inclusion are very good examples how you can create a business model that uses technology to deliver a service to remote villages.
When you compare the situation of inclusive business today and ten years ago, was there a greater push for inclusive business in the past?
I have to say that inclusive business has not moved to the mainstream as fast as all of us have expected. If you compare the concept of inclusive business to the concepts of either corporate social responsibility (CSR) or microfinance, it has not taken off. One reason for this are the gaps that I mentioned earlier. It is much easier to change only small parts of your business using CSR than to change your core business. In microfinance, it was easier because it was almost a new asset class. Now with inclusive business, we ask for coherent change of the entire business model of a company. This is more difficult, but the opportunities are there. The BoP represents half of the world’s population and it is a consumer market of five trillion dollars a year. I think any cooperation that wants to have a future should not ignore that.
Why are the Philippines now on the forefront of inclusive business? Is it because there were many entrepreneurs that engaged with policy makers or was it political will to increase the livelihoods of people at the BoP?
In the Philippines, you have a concerted effort of many years. You have a combination of government leadership, a lot of advocacy work for IB and the engagement of key players, like the Asian Development Bank, the Inclusive Business Action Network or the United Nations Development Programme (UNDP). Secondly, you have a business network in the Philippines that is committed to inclusive business. This network received investment and support from the beginning and we were part of designing it. All of that has helped significantly to tackle the gaps and barriers that I mentioned earlier. It took a long time and it is hard work.
What recommendation would you give to entrepreneurs that are striving for scale? What would you recommend to somebody who might be stuck in this or facing difficulties?
The key element for me are partnerships. Anyone that wants to get into this business will need to have other companies around him and partners across the ecosystem. My advice to any entrepreneur is this: Do find your partners, do find supporters and finally find your community that will keep you sane while supporting you find a way to break through the scaling barriers.
This blog post is part of the February 2018 edition of the ‘THEME’ that reflects on scaling inclusive business.
What motivated entrepreneurs to stay focused while scaling their business? How did they overcome hard times trying to reach scale? What navigated them through this process? Read the full series to see what thought leaders and practitioners think about these questions.