Mark Ingram

Business for Development is an independent not-for-profit organisation formed in 2007. Since we began, we have been prototyping how the private sector can work with communities, governments, multilateral organisations and NGOs to solve extreme poverty through inclusive business models in the developing world. So far, we have consulted to over 20 leading multinational companies and have advocated the uptake of inclusive business models to over 4,000 business leaders.

Where does a focus on generating social value conflict with commercial value, and where do they reinforce each other?

Retail, Manufacturing or Consumer Goods
22. Jun 2016

When looking to answer this question, I felt it was best to focus on the food and agribusiness sector where I have predominately more experience when balancing both commercial and social value. With that in mind, let’s try and define what commercial and social value is.

Commercial Value:  There has been a long-held view, especially in the food and agribusiness sector, that the purpose of business is to maximise profit for shareholders. One of the best ways to do this is procure at the highest quality while keeping costs as low to achieve annual profit growth. As a result commercial value has been perceived to be about optimising short-term financial performance.

Social Value: Three-quarters of the world's poorest people depend on agriculture for subsistence living and income generation. The greatest value to them, therefore is providing greater means to sustainably improve their productivity and profitability as farmers. 

There can be a natural conflict of interest between commercial value and social value if the commercial party is seeking to find the best quality at the lowest price and the poor farming community is seeking to obtain the highest price possible for the lowest possible quality. This tension can create competing interest and conflict of value between buyer and supplier, especially if there is no direct relationship between the buyer and seller. So where a commercial partner is simply looking for lowest price and disregards opportunity to enhance farmer productivity, social value creation can be minimal, or at conflict with commercial interests.

Sometimes there are certain market forces which heighten the awareness of the need to form long-term, meaningful relationships with poor smallholder farmers :  

  • Shortage of supply (e.g. cocoa) means buyers need to be active in creating direct relationships with smallholder farmers;
  • Farmers moving out of the crop (e.g. rubber) results in shortage of supply meaning buyers need to incentivise smallholder farmers to produce in-demand commodities;  
  • Control over quality (e.g. coffee) means buyers need to scan the market and find smallholder farmers that can meet product requirements, and or, work with farmers to improve the quality of their output;
  • Consumer sentiment (e.g. sustainable Palm Oil) means there needs to be greater transparency, accountability and responsibility with farmers.

To best respond to these market forces, and add commercial value, a buyer who is ahead of the curve in procurement strategy will seek to secure supply of critical materials by expanding the base and relationship with smallholder farmers. To achieve this, farmer productivity and a more direct market linkage are likely to be the focal points of the buyer. When this occurs, both social and commercial objectives are best met, and long-term relationships are developed. On the one hand, buyers will want to invest to improve yield and ensure good quality, along with reasonable market prices. On the other hand, farmers want a buyer who will purchase their improved harvest on a consistent long-term basis which enables them to move out of subsistence living. 

Photo: Australian citrus producer, Ironbark, providing extension services to a Laos farmer on how to produce citrus, so that the business has a supply chain during the off-season in the Asian market.

It is also important for donors and social investors to consider that where social values are the primary focus, and long-term commercial viability is secondary, there is a high risk that the program will not go the distance and neither social nor commercial objectives will be met.  From our experience we have found that if profit is not made by a commercial partner it is highly likely that the program will fail.

The key to achieving balance between social and commercial value is to create mutual value. When both society needs and commercial outcomes are achieved, that’s when conflict is reduced and when they are more likely to reinforce each other. 

 

This blog is part of the July 2016 series from the Practitioner Hub and Seas of Change on Inclusive Agribusiness. Download the PDF for more insight, updates and opinion.