Editor's Choice, June 2011: Promise and Progress, Market-based Solutions to Poverty in Africa
Just how common and how challenging are inclusive business models in sub-Saharan Africa (SSA)? Until now, we had very little idea. Monitor's 16-month review of the Promise and Progress of 439 initiatives in nine SSA countries now gives us an overall picture. It is a picture rich in detail and diversity. While some will find the detail heavy, there will be sure to be resonance and relevance to your own business or field whether you focus on aggregation in agriculture, impact investing in Africa, managing margins in low-income markets, or planning for scale-up.
The report focuses on 'market-based solutions' (MBS) which are defined as 'initiatives that use the market economy to engage low-income people as customers, offering them socially-beneficial products at prices they can afford, or as business associates - suppliers, agents or distributors - providing them with improved incomes'. The 439 initiatives aim at the $2-a-day segment. One third are classed extreme SMEs. So in practical terms, I find no difference between MBS and our term Inclusive Business. Monitor conveniently uses the term 'business associates' to wrap all the types of low-income engagement in production and distribution, and to distinguish them from consumer-focused models.
The number of intelligent findings is such that even the Executive Summary runs to 23 pages. A few that resonated for me:
- 'Pull' and 'push' products need different approaches. Mobile phones are pulled by consumer demand, but other socially-beneficial products need to be pushed. The report flags the need to build this into plans, either through securing higher profit margins or building collaborative platforms with others. This reflects experience at Oando (Nigeria) supported by the Business Innovation Facility, where Oando is rolling out affordable lpg cooking stoves, while with Facility support, working with the sector to stimulate consumer awareness of lpg as a cooking fuel.
- Take care balancing social and business imperatives. The report finds that most proprietors of MBS tend to favour social over business imperatives when there is a clash, but warns that business growth is essential for poverty impact in the long term. It's a tension that runs throughout our applications and projects supported.
- Impact investment funds are relatively plentiful in Africa, but not well matched to the task of supporting MBS. Acccording to Monitor, MBS need early-stage high risk support, more debt than equity, and often need technical assistance and 'business-readiness' before they can use impact investment effectively. This is grist to the mill for Innovations Against Poverty, which provides early-stage financial grants, and to the Business Innovation Facility, which provides no funds but focuses on technical assistance.
- Achieving scale takes a decade or more for 'market movers' but can be achieved in just three or four years for 'market joiners.' Routes to scaling up are categorised into three: traditional growth and re-investment; replication of a proven business model; and up-grading informal market ventures that are near scale.
Several findings echo and extend upon Monitor's excellent Harvard Business Review article (see Editor's Choice for March) that warned of the challenges of Base of Pyramid engagement for corporates, but the full report adds more on the smaller domestic enterprises. This Africa report also builds on Monitor's India report, which identified seven business models suited to low-income markets. The Africa report makes a valiant effort to maintain the 7 models, while adding 3 new ones, and recognising 4 existing ones from micro-finance. In all honesty, every time that we in the Facility or IAP try to categorise inclusive business projects, weaknesses of categorisation tend to undermine its utility. The 7 models from India were useful but not encompassing. We will give the extended Monitor categories a try, and report back.
If a single message could be distilled, it is that business models attuned to the exacting conditions of low-income markets are very challenging but still offer high potential. In Monitor's words, advice for entrepreneurs is:
'Continue the hard work already underway to develop and perfect scalable business models.... Wait until the business model is proven before franchising it. Do not underestimate the costs of serving this market and the need to organise a solution end-end. And if attempting market creation rather than market entry, expect scale to take a long time.' (Executive Summary pp 15).
If you want to get into the nitty gritty of experience of inclusive business, or market based solutions, and want to read just one thing, the 23 page Executive Summary is a good candidate. It may even leave you dipping into the full (200+ page) report.