Targeting the base of the pyramid at scale: Easier said than done!
“When companies consider investing in starting or scaling inclusive business models, they compare the expected rates of return with those of alternative investments they could make.”
“Partnering” can be as simple as contracting services on a fee basis or as complex as sharing costs, risks, and rewards on the basis of complementary objectives.
There are numerous examples worldwide from companies of all sizes actively testing and rolling out inclusive business models. But as with any business solution targeting a specific sustainability challenge, the discussion quickly turns to the concept of scale.
From a business perspective, scale is a combination of reach, geographic footprint, and sales or procurement volume, depending on their industries and the nature of their inclusive business models targeting the base of the pyramid. Scale is also very much related to break-even and return on investment, as only commercially viable ventures would become truly scalable.
That being said, as many practitioners and analysts active in this space will readily acknowledge, relatively few of these ventures have achieved the potential for scale. This holds true even for models developed by large multinational corporations, which might have been considered the ideal vehicles given their vast resources, efficient systems, and global reach.
Thus, the word scale is often accompanied by references to words such as “barriers”, “roadblocks”, “challenges” – both internal (i.e., within a given business) and/or external (i.e., at the level of external market barriers). The barriers are numerous. To date, most of the discussion has focused on external market barriers like insufficient market information, inadequate infrastructure, ineffective regulation, uneven cash flows, limited knowledge, skills, and access to finance in low-income markets. Leading institutions like the International Finance Corporation (IFC) have dissected challenges (such as expanding reach, facilitating access to finance, changing mindsets and behaviors, designing appropriate products and services, pricing and payment) and laid out viable sets of solutions that companies are applying to overcome them.
However, companies also face a host of internal organizational barriers to scale that have so far been less commonly acknowledged or discussed. Yet from what emerges in discussions with World Business Council for Sustainable Development (WBCSD) members and other companies active in this domain, these internal barriers are just as, if not more, important across industry sectors. Moreover, they lie within direct control of the companies themselves.
WBCSD has worked with representatives of leading companies (CEMEX, Grundfos, Grupo Corona, ITC, Lafarge, Masisa, Nestlé, Novartis, Novozymes, SABMiller, Schneider Electric, The Coca-Cola Company, and Vodafone) and BOP experts toward dissecting one particular area: the internal barriers faced by large companies when they want to scale up inclusive business ventures. But we did not want to limit ourselves to highlighting problems; rather, we opted to couple each barrier to a set of proven solutions (a dozen in total) that leading companies in this space have adopted. While some of the examples featured are success stories, the majority are ongoing efforts of sets of ideas and practical strategies.
The end result of our analysis is the following table, which also points to company examples being featured in our report. We came up with three clusters to classify the numerous and interdependent issues at play:
First barrier: Opportunity cost of investment
When companies consider investing in starting or scaling inclusive business models, they compare the expected rates of return with those of alternative investments they could make. Inclusive business investments may have lower expected rates of return because the cost or risk of doing business in base of the pyramid markets is high, anticipated margins are low, and/or a long time horizon is needed to break even. Base of the pyramid markets may also be so new and unfamiliar that expected rates of return cannot be calculated with enough certainty. Both of these circumstances make it difficult for corporate decision-makers to justify the opportunity cost of investing in starting or scaling inclusive business models when other investments with higher, more certain rates of return are available.
What are the solutions we identified to tackle this barrier around the opportunity cost of investment?
Adopt a portfolio approach
Inclusive business opportunities can be found all along the risk-return spectrum. They can be segmented according to the size of the investment required, how long it will take to recoup, and what rate of return to expect. It helps to understand where an inclusive business opportunity falls, and how it fits in to the overall investment portfolio. Companies can take a portfolio approach within the subset of inclusive business investments, balancing radical innovations with more incremental plays that are easier to implement – and yet can create considerable business value, learning, and confidence. A portfolio of business models that collectively target the “whole pyramid” can help to reduce risk.
Obtain senior leadership support
Senior leadership support can help unlock investment in inclusive business opportunities. Senior leaders and directors can be the only ones empowered to make longer-term strategic bets. They can also create the space for their reports – who might lack the authority, or be constrained by short-term performance targets and incentives – to invest. Senior leaders can also support the core business integration and mainstreaming necessary for long-term sustainability and scale.
Quantify total value created for the firm
To make the case for inclusive business investments toward the far end of the risk-return spectrum, it can help to take non-financial benefits to the firm into account. These can include establishing brand awareness and loyalty, enhancing corporate reputation, building goodwill, developing key stakeholder relationships, lifting employee morale, and improving employee recruitment and retention. Of course, these benefits do affect the bottom line – and it helps to quantify them wherever possible, making them more actionable for investment decision-makers and implementing managers alike. However, it is important to recognize that while total non-financial value created for the firm may be large, it may also be too dispersed to affect individuals’ incentives or behaviors to the extent required.
Find outside investors
When it is difficult to make the case for an inclusive business investment internally, a company can look for outside investors to share the cost and risk. Of course, outside investors will also want to share the return. Donors and some development finance institutions can be attractive investors because they can accept lower financial rates of return in exchange for the socio-economic impact created. Such concessions can make the financial rates of return for companies more competitive with alternative investments they have available.
Second barrier: Strategic and operational misalignment
Like any other type of business, inclusive business is a matter of procuring, manufacturing, distributing, marketing, and selling products and services. Inclusive business models cannot be run out of the public affairs department: key functional teams across the company need to be involved, especially to do it at scale. However, an inclusive business model may be so different from a company’s existing business model that existing operating structures and processes cannot easily be leveraged. Lower expected rates of return – and/or lack of clarity about the relative importance of commercial and social objectives of inclusive business models – can also cause strategic and operational misalignment. Managers’ performance targets and incentives simply point their time and resources in other directions. Simple lack of internal communication and “not invented here” syndrome can also factor in.
Here is what we came up with in terms of solutions that can overcome the barrier around strategic and operational misalignment:
Start with the business plan
Companies report that it is easiest to avoid strategic and operational misalignment in the first place by understanding their country priorities and growth strategies and pursuing inclusive business initiatives that support them. If doing business with base of the pyramid suppliers, distributors, retailers, and/or consumers helps a company achieve existing goals, then it automatically aligns with existing operating structures, processes, performance targets and incentives set up to drive progress toward those goals.
Get out of the corporate greenhouse
Many inclusive business models get started in protected environments of one form or another. These “corporate greenhouses” may include special innovation units and CSR or sustainability departments. The protection they offer can be essential for inclusive business models that are very experimental. But protection typically comes with limited resources, and models that show promise need to be integrated in order to scale. Those that remain protected for too long risk growing disconnected from core business goals and strategies, falling prey to “not invented here” syndrome, or being pigeonholed as CSR.
Adjust performance targets
As companies begin to scale their inclusive business models and it becomes apparent where in the system incentives are misaligned, one approach is to change them. Some companies may wish to introduce impact related performance targets as part of the process of changing incentives. This solution has a very high degree of difficulty, since departments and staff ranging from procurement to manufacturing to distribution to sales and marketing may all be involved – and all have to be aligned. Organizational change of this magnitude requires senior leadership support from across the company.
Establish a separate company
If strategic and operational misalignment is too great, a final option is to develop an inclusive business model through a separate company – such as a subsidiary or joint venture set up for that purpose. That company could eventually be spun off or sold. Alternatively, if the business model evolves and becomes closer to that of the parent, the company could be reintegrated.
Third barrier: Capability gaps
Companies’ capabilities drive their performance. The extent to which capabilities need to be adapted or built from scratch is a critical factor in companies’ ability to scale their inclusive business models. When inclusive business models are very different from existing business models, there will be gaps. These can include the ability to implement any of the solutions outlined below, from managing informal distribution channels to providing inventory on credit to processing hundreds of thousands of small transactions. It is often possible to acquire the capabilities necessary to pilot an inclusive business model successfully. But to scale, those capabilities need to be widespread.
These are the four solutions we identified to tackle the capabilities barrier:
Utilize external partners
Companies can fill capability gaps by partnering with organizations with complementary assets, resources, skills, and expertise. Those organizations can include other companies, civil society groups, donors, development finance institutions, and governments. “Partnering” can be as simple as contracting services on a fee basis or as complex as sharing costs, risks, and rewards on the basis of complementary objectives.
Bring core capabilities in-house
While external partnership can be a good way to fill capability gaps, it is critical to know when to bring some capabilities in-house. As an inclusive business model moves from start-up to scale, issues like efficiency, quality control, and competitive advantage become more important. Can these issues be addressed working through partners, or does the task of scaling require the company to internalize some core capabilities?
Support professional development
When it is clear what core capabilities a company needs to build in order to bring an inclusive business model to scale – or when a company would like to encourage inclusive business solutions to emerge in other parts of the business or other parts of the world – one approach is to create professional development experiences for staff. “Learning-by-doing” experiences, like special stretch projects and immersion in base of the pyramid markets, may be preferred, though not many formal education or training programs exist as alternatives. How to make such experiences more widely available is an open question.
Establish centers of excellence
Some companies grappling with the question of how to build capabilities more widely have opted to establish dedicated, central teams in charge of raising awareness, developing and sharing knowledge and tools, facilitating internal and external networking, and transferring technology. These centers of excellence can serve both functional and regional units. They can provide support on a push basis when inclusive business is a relatively new or longer-term strategic proposition or on a pull basis when the return on a particular approach has been proven.
Inclusive business models will not scale without a solid understanding of what works and what doesn’t – and when it comes to addressing the internal barriers companies face, we are aware that our analysis above is just the beginning. We hope it frames and catalyzes greater and more open dialogue on these barriers, and on solutions companies can use to tackle them.
We also hope out analysis paints a picture of the intrapreneurial challenge facing managers working to start and scale inclusive business models within large companies. These individuals are playing vital roles in harnessing the resources, capabilities, skills, and sheer reach of their employers to develop profitable, scalable solutions to some of the world’s most pressing problems, from health to education to the environment. Yet their roles are all too often unsung and unsupported.
Outside inspiration and allies are also essential to start and scale inclusive business solutions. First, they are important sources of moral support and persuasive capacity for tackling the internal barriers described in this brief. And second, outside allies are critical when it comes to the more entrepreneurial challenge of aligning and strengthening the “ecosystems” of interconnected, interdependent players whose actions determine whether or not the company’s inclusive business model will succeed. These players typically include other companies, governments, intermediaries, NGOs, public and private donors, the media, and others.
 See the full picture by accessing Scaling up Inclusive Business – Solutions to overcome internal barriers (WBCSD, 2013).