Towards Social Inclusion

Do Strategic Networks Work?

by | Oct 15, 2006

Can social inclusion be achieved through market-based initiatives? The consensus seems to be that companies cannot achieve this goal alone. Partnering is of critical importance, recent articles and case-studies published on the subject agree. A recently published book, Untapped, Overlooked Profits from Underserved Markets (John Weiser et al. San Francisco, CA: Berrett-Koehler Publishers, 2006) makes this point forcefully, “If you remember only one thing about this book, it should be: the correct partnership is everything.” Indeed, it is relatively uncommon to find cases of market initiatives targeted at low-income sectors (LIS) with companies acting solo, in a “business as usual” mode.

Business historians suggest that particular organizational arrangements are best suited for certain environments. If the massive middle-class post-war consumer markets were dominated by vertically-integrated corporations, it may be that the market initiatives targeted at LIS in the early 21st century will become the domain of collaborative, horizontal arrangements. Engagement with the poor requires the construction of a new interface between the corporation and its social environment, one that may contribute to bridging previously decoupled social groups. This is clear even to those companies that decided to engage LIS unilaterally. For example, CEMEX’s well-known Patrimonio Hoy initiative relies on “promotoras”: low-income individuals who developed a strong sales network within their communities to sell various products. Although Patrimonio Hoy does not rely on any formal partnership, its value-chain depends on the cooperation of a group of individuals embedded in the communities CEMEX is trying to engage, and the company does not have direct control over these promotoras (See Arthur Segel, Michael Chu, and Gustavo Herrero. “Patrimonio Hoy.” HBS Case N9-805-064, Boston, MA: Harvard Business School Publishing, November 2004).

“SOCIALLY INCLUSIVE STRATEGIC NETWORKS”: WHAT DO THEY LOOK LIKE?

Market-based initiatives have the potential of making a dent on the elusive quest for poverty-alleviation, as the other articles in this issue of ReVista make clear. To make that happen, they will need to succeed where too many others had failed. Market-based initiatives targeted at LIS will have to create the conditions for market forces to flourish in environments where they have previously floundered. Such a goal is often too ambitious for any single organization to tackle individually: it implies a tour de force towards institutionalization, creating trust-based stable relations among reliable partners in highly vulnerable socio-economic environments.

The preliminary results of our collective research suggest that this is best accomplished through socially inclusive strategic networks that seek to bring the market closer to low-income sectors. These partnerships usually achieve that goal through the removal of barriers that had prevented the poor from engaging in mutually beneficial exchanges with the economic mainstream. Strategic networks are horizontal arrangements in which all parties share responsibility for performance outcomes but lack authority with vertical control of the whole. Actions are coordinated through negotiated agreements and the alignment of incentives among all participants. The main traits of socially inclusive strategic networks are summarized below:

Heterogeneous membership. The movement to leverage the market in the fight against poverty began as a call to action to multinational corporations. For example, business professor and diplomat George C. Lodge’s seminal article “The Corporate Key: Using Big Business to Fight Global Poverty” (Foreign Affairs, July 2002) made an eloquent argument for this strategy. Our research, however, shows that despite their undeniable importance, corporations are but one player in this field. These networks tend to be constituted by a number of non-traditional partners, from non-profits to social entrepreneurs, and from grass-root organizations to universities or cooperatives. Moreover, in some cases, these non-traditional actors are not just participating in these initiatives: they are leading them. The accompanying boxes review the dynamics at play in three cases: one led by a large corporation (Colcerámica), one by a cooperative (ARB) and another by a non-profit (APAEB).

Win-win. Despite the pervasive presence of social sector organizations, these networks are not about disinterested donations; they are about business. In philanthropic relations, benefits flow sporadically—through, say, yearly donations of time or money—and mostly unidirectionally, from the giver to the receptor. In contrast, in strategic networks, benefits flow in an ongoing way, to all participants involved, as the diagrams in the accompanying boxes demonstrate. Everyone gives and takes in a balanced fashion, much as happens with any value chain: participants are summoned to join the network because they have something valuable to contribute to the enterprise and, in return, are rewarded.

Efficiency. Social sensitivity is very much at play in most of these experiences, although the specific motivations that bring organizations to participate in socially inclusive networks vary from case to case. Some of them approach LIS with the legitimate goal of tapping new markets and creating value for shareholders (see Box 1: Colcerámica), while for others, the market is just a means to empower a vulnerable group (see Box 3: APAEB). However, all are vibrant value-chains that deliver products in open markets at a competitive price and quality. In the eyes of the protagonists, the social dimension in these networks is no excuse for inefficiency. That idea is reinforced constantly by the discipline instilled by market competition. In most of these cases, the network leader is constantly trying to explore, identify and disseminate throughout the network technical innovations and best practices to operate efficiently and improve the network’s bottom line.

Strategic dimension. These initiatives are usually not part of an ad-hoc program to build reputation, but rather, inserted within the core value-chain of each of the players involved. This does not mean that LIS initiatives are necessarily the organization’s most important program. As a matter of fact, that is usually not the case; most companies (especially large multinational corporations) are only timidly testing the waters when it comes to engaging the poor in their value chains. What this does mean is that strategic networks link organizations in undertaking what is central to their mission, thus justifying their existence, even if the LIS-oriented program is only one among many. In some cases, the stakes at play can be high: constructing these networks can require substantial upfront investments, which may take a long time to yield returns. Getting good publicity is fine, but companies tend to demand tangible returns for their investment.

Presence of a pivotal player. These networks often revolve around one key organization, which bridges the whole system. “Bridging organizations” are conveners, who lead others to cooperate towards the shared goal of creating an economically viable and socially-inclusive value-chain. They mobilize others by “walking their talk,” committing their resources in support of their vision. They channel innovative ideas, catalyzing the implementation of new solutions to old problems. The work of these organizations usually spans the gap that exists between the formal/developed sectors of the economy and informal/underdeveloped sectors. The organizations tend to link the for-profit world with the non-profit, and the large corporation with the small- and medium-sized enterprise, the cooperative or the social entrepreneur. They connect supply (producers) with demand (consumers), and the local dimension with the global. By connecting those disparate worlds, they strengthen the institutional and management capabilities of the LIS they work with. They must be prepared to cope with diversity, working towards the alignment of usually divergent agendas.

Presence of market-builders. These networks are not about charity, but philanthropy does often play a critical role, particularly in the early stages. The construction of socially inclusive strategic networks usually entails working from scratch: for example, appraising unsatisfied demand or productive capacities; creating organizations or strengthening and formalizing existing ones; teaching accounting or tax regulations to individuals with little or no education. These are tasks that private companies may not be ready to take on themselves, leaving bottlenecks that block the potential of the poor. Targeted philanthropic investments therefore aim to jumpstart a synergistic cycle of economic-value creation and social empowerment. Once the bottleneck is overcome, as the accompanying boxes show, market-builders retreat and let the virtuous dynamic of the market take over.

WHY IS THIS HAPPENING?

If the emergence of these networks is pervasive, there must be powerful reasons for it. Our study has not reached the point in which definitive conclusions can be drawn. However, even at this early stage, some underlying trends appear within sight. Not all of these apply to all types of networks: the dynamics at play in a company-driven network may differ from those at play in one led by a cooperative. Nevertheless, most of the analyzed networks share some common features:

Reduction of uncertainty. The successful integration of LIS into viable value chains certainly requires adaptability to highly unstable environments. Researchers have established that collaborative arrangements help to stabilize turbulent or new contexts, and the environments where socially inclusive market initiatives operate certainly fit that mold. For most of the organizations we surveyed, this is uncharted territory: the CEO of one organization admitted that at times he felt he was “gambling with his shareholders’ money,” given the uncertainties surrounding a wholly unproven business model that integrated LIS at its core. In such an uncertain environment, any organizational arrangement perceived to stabilize the context and bring predictability is usually appreciated.

Importance of legitimacy. In most cases, socially inclusive strategic networks bring together individuals, social classes, geographical areas or ethnic groups that hitherto had largely ignored each other. Overcoming the inevitable skepticism—even mistrust—among participants is substantially eased by the presence of non-profits and social entrepreneurs, that is, those with credible field presence, track records and legitimacy in the eyes of all parties. At the same time, social organizations working with the poor through market initiatives need the technical know-how, financial clout, distribution channels and strategic insight that only companies can provide. This makes for complementary synergies that can only be captured through partnerships.

Leverage existing social infrastructure. Given the importance of trust and legitimacy, most companies find that it is most cost-effective to leverage existing social networks instead of re-creating them. Non-profits also find sense in the leverage of their own rich portfolio of relations, as well as trust built over the years on the ground—what some call “social capital”— as a productive asset. This strategy gives them access to economic resources while at the same time furthering their mission. Once you have built a strong network to help vulnerable individuals with one project, it makes sense to use the same network to launch another project—capturing what economists call “economies of scale”: as output increases, the cost per unit tends to fall. Moreover, that same network can be leveraged to move into other lines of activity that might be complementary—what the economists call “economies of scope.” Through these economies of scale and scope, social capital lowers the costs of doing business. In the vulnerable environments where LIS live, in which both state and market are weak, social capital becomes the only available cornerstone upon which new institutions can be built, thus becoming critically important. When the public utilities company Gas Natural BAN, which distributes piped-in natural gas in Argentina, decided to launch a market-based initiative targeted at LIS, they partnered with the Foundation for Social Housing (Fundación Pro-Vivienda Social, FPVS). FPVS had launched the first micro-loan program for housing in Argentina, building in the process a strong network of reliable customers and partners among the humble neighbors of Cuartel V, in the outskirts of Buenos Aires. The project—suggestively entitled “Strategic Partnerships and Social Capital”—received financial support from the World Bank, and engaged various community organizations, the local government, and the federal housing public agency. Through this partnership FPVS learned that the social network it had built could be leveraged to launch additional programs. In short order, it went from running just one program to running four, all of which relied on FPVS’ network.

Expert knowledge. Longtime field presence often leads to unparalleled knowledge of the needs and the strengths of the poor, all of which makes grass-roots organizations, non-profits and social entrepreneurs, sought-after partners. Instead of reinventing the wheel, Colcerámica partnered with Bogotá’s community organizations, widely recognized by their grass-root leadership, to co-manage their LIS initiative (see Box 1). Carlos Espinal, marketing manager and leader of Colcerámica’s LIS initiative, recalls that this was not what he had in mind when he sat down with community members to “unveil” the company’s project. “After listening to their leaders make the case for a partnership with community organizations, I asked myself ‘Who is the expert here?’ We should have been more humble and valued their perspectives more.’”

Quest for simplicity. Dealing with vast numbers of low-income customers or producers may be prohibitively complex and costly for companies. Partnering with organizations on the ground brings down the number of interlocutors. Moreover, closing long-term deals with an established non-profit or cooperative is easier and more effective than doing so with hundreds of individuals. Finding the right partner can simplify things to a large extent for any organization seeking to work with LIS. In 1993, Indupalma, the Colombian maker of African palm oil, decided to engage decisively with its neighboring communities and contribute substantially to the improvement of their living standards. The company quickly realized that it could not deal with 900 growers individually. Thus, it built a “community of enterprises” in which 20 cooperatives revolve around Indupalma, closely integrated with its value chain.

Externalize costs. Opening the initiative to non-traditional partners can lower its overall cost. Most of these value chains operate on low profit margins per unit, which impose the need for low-fixed costs. Often, the investments required to bring the community partner up to par could kill the viability of the enterprise. However, as long as the projected network holds the promise of a positive impact upon a vulnerable group, socially minded organizations will be eager to step in and contribute with their resources. The resulting loss of control can be more than compensated by having access to assets such as soft loans and grants. La Fageda, a Spanish maker of dairy products, employs many mentally handicapped workers, about half of its employees, taking work therapy to a new level. Only when work is done in a challenging and real world environment will it serve to reintegrate individuals to society, the company contends. The La Fageda program is not ad-hoc, but inserted in the company’s core value chain, which competes with highly efficient multinational corporations. The company does not receive any special subsidy: however, by employing handicapped workers, it has access to funds that public agencies channel towards this group. These funds are “horizontal,” that is, open to anyone willing to employ handicapped individuals. For example, the Institut Catalá de Salut (Catalan Health Institute) offers a one-time grant for the creation of a permanent work position for a mentally handicapped individual, plus a subsidy of 50% of the minimum wage, and the whole cost of the company contribution to Social Security. For the government, it is a rather convenient deal, as the net cost of having that individual in a mental institution would be much higher. Instead of just hiring the minimum level (5% of payroll) mandated by law, La Fageda maximizes that logic, and taps fully into those resources to integrate a disadvantaged group in its value chain.

THINKING AHEAD.

Strategic networks can reach out towards LIS. They could be a useful tool to bring some of the things we take for granted to places that have rarely seen them—as far as the remote corners of Latin America’s hinterland, and as close as the urban slums of our large cities. They hold the promise of bringing LIS closer to the benefits of the market—opportunity and reward, personal and material growth—thus, improving standards of life in a substantial and sustainable way. When LIS are engaged as consumers, strategic networks can serve them by broadening choice and expanding disposable income; whey they are engaged as suppliers or distributors, strategic networks can improve their management skills, so that they can learn to better leverage their assets for their own good. At the same time, it is by no means clear that such a promise will be realized. Building these networks is fraught with challenges, starting with the difficulties inherent in reshaping ideas, habits and relationship patterns, so that citizens who operated in precarious conditions can become productive members of a 21st century competitive network. This may imply teaching accounting to the illiterate, or turning a subsistence farmer into a forward-looking entrepreneur. In the words of Edison Delgado, former Indupalma employee and founder of one of its associated cooperatives, “Changing your outlook, from being a worker to being an entrepreneur, a one-man enterprise, is quite hard.”

Despite those difficulties, if that potential is to be realized, socially inclusive strategic networks could expand the contours of society, easing the flow not just of goods, services and money, but also of knowledge, information and ideas. In balance, they appear to be a concept worthy of consideration by those who work to improve the life of the millions of Latin American citizens who live in poverty.

Fall 2006Volume VI, Number 1
Ezequiel Reficco is a Senior Researcher, and a member of the Social Enterprise Initiative at Harvard Business School. He has been a Post-Doctoral Fellow at HBS between 2002 and 2004.

Related Articles

Editor’s Letter: Social Enterprise

Editor’s Letter: Social Enterprise

The red and orange leaves of autumn drift past my window. It’s hard to believe that more than two months have gone by since I returned to ReVista from a year’s sabbatical on a Fulbright Fellowship in Colombia.

Print Friendly, PDF & Email