Editor's Choice, December 2011: Business Models that Make a Difference

What better way to round off 2011 than by focusing on the heart of inclusive business – the business models? The supply relationships, distribution networks, products, revenue streams, and margins that somehow make it work: creating value for the company, but delivering social impact too.

These are explored in IFC’s latest report: Accelerating Inclusive Business Opportunities; Business Models that make a difference

IFC – sensibly – does not attempt a comprehensive typology of inclusive business. No categorization is perfect; this one serves as a way to group business models in their portfolio. But more importantly it serves as a basis for some true insight on what makes these models work.

Four lessons are drawn out across the categories:

1. Making assumptions about value for the Base of Pyramid (producers, consumers, entrepreneurs) can be a hindrance. Willingness to pay and willingness to invest are critical, and a truly compelling proposition for BOP comes from listening and learning by doing, not from assumptions.
2. Inclusive business models are almost always high-touch. They require effort: local presence, long-term view, willingness to cultivate BOP suppliers or consumers. Resonance with Monitor’s health-warnings (‘Is the BOP really for you’) are strong.
3. Successful models work across the whole pyramid, so enabling cross-subsidisation and economies of scale when engaging the base of the pyramid.
4. Public funding is no substitute for a business case, but it can make a business case stronger. Be clear which is happening and use it smartly.

The first, second and fourth of these resonate strongly with experience in BIF and IAP. The third less so, probably because we work with smaller companies including many start-ups for whom the BOP is central, not an addition.

Of the seven categories chosen, most are focused on a sector: value-for-money housing, last-mile grid utilities, value-for-money degrees, e-transaction platforms, and experience-based customer credit. Two are broadly related to sectors but grouped at the top and tail of the value chain: Micro-Distribution and Retail (consumer products) and Smallholder Procurement (food, beverage, manufacture and trade).

If you are in any of those sectors, the few pages on each are well worth a read.

For me, the last two were high value. They find Micro-Distribution models work well when existing retail networks can be leveraged, capacity-building is provided for outlet owners and staff, and customers are already familiar with the product, knowing its value.

Smallholder procurement models are flagged as resource-heavy. No surprise. They work best when smallholder sourcing gives companies a comparative advantage (thanks to the product or supply structure), where market-oriented development programmes can help mitigate costs, and where technology can help reduce transaction costs of information flow.

The report was launched by IFC in September, at its Inclusive Business Leader’s Roundtable. If the outline of each model leaves you wanting more, a companion volume gives 2-pages on each of 31 client case studies, that underpin the review.

2011 was the year when the Inclusive Business networks stopped just talking about the excitement of inclusive business and started unpacking the details of the models. This is an excellent step forward, with plenty more to do in 2012.