Business and social impact Business Trends 2014

Overview

Throughout the developing world, water, sanitation, and hygiene are matters of life and death. Every 20 seconds, a child under five dies from a waterborne illness. Eighty percent of diseases are related to contaminated water, and more than 780 million people do not have access to clean drinking water.¹

Unilever has ambitious goals to address these problems: By 2020, it wants to bring safe drinking water to half a billion people around the world and help improve the hygiene habits of twice as many. It established hand-washing education programs in 16 countries, reaching 11 million in Africa alone, and now works with the Millennium Villages Project to develop more scalable water, sanitation, and hygiene interventions.²

Unilever’s actions are not philanthropy; they are key elements of the company’s global business strategy. Fifty-five percent of Unilever’s global revenue now comes from emerging markets.³ Its CEO Paul Polman declares, “We cannot thrive as a business in a world where . . . nearly 1 billion go to bed hungry every night, 2.8 billion are short of water and increasing numbers of people are excluded from the opportunity to work.”⁴ Unilever’s Lifebuoy soap has experienced double-digit growth, in part as a result of the company’s education campaign, and it is one of Unilever’s fastest-growing brands.⁵

This is the new face of corporate social performance in the next wave of globalization. Companies operating in emerging markets must address the challenges of serving low-income consumers and rural communities, and must adapt to the limitations that impede commerce. The prospects are exciting—look out for a period of experimentation and innovation as organizations advance their core business objectives by addressing existing social and environmental issues.

What’s behind this trend?

The global economy has reached a tipping point where emerging markets are no longer simply a rising force but are now taking center stage. Even companies with a strong existing market presence must grapple with how to expand their reach into new countries and segments, including second-tier markets and rural areas.

In these markets, the scale and diversity of social needs provide rich commercial opportunities. But they also present major challenges to service and business operations. Throughout emerging markets, the gap between aspiration and met needs are often substantial with regard to issues of poverty, access to sanitation and clean water, food security, and the social infrastructure of housing, education, and health care.

At the same time, rapid emerging-market growth is exacerbating resource constraints and environmental challenges such as water quality, deforestation, and pollution. In parts of Africa, water scarcity and quality are material issues for beverage producers and manufacturers of other consumer products.⁶ And more than a million people in China die prematurely each year from air pollution.⁷

In Deloitte’s recent globalization survey of 423 global executives, 72 percent of emerging-market executives indicated that minimizing negative environmental impacts in emerging markets is an extremely or very important issue for their company, more than any other social issue.⁸ But natural resources are not the only inputs that a growing business must secure a steady supply of. A business needs capable employees. It needs reliable suppliers and resilient supply chains. It needs a well-governed economy in which people play by the rules. And it needs consumers with the means and confidence to buy. Providing a living wage, improving the local community, and enhancing the local infrastructure were considered extremely or very important when operating in emerging markets by more than 60 percent of emerging-market executives (figure 1).⁹ Companies that do not address these issues may take on operational risks or have market share taken by competitors that do.

Implications

Where companies once viewed social challenges such as poverty, poor sanitation, and unskilled labor through the lens of corporate social responsibility or philanthropy, these issues increasingly operate as real constraints to business expansion and long-term success in emerging markets.

Of course, the stories vary depending on the company and due to the considerable differences among emerging-market regions, countries within regions, and areas within countries. Nigeria, one of the most important anchors of the sub-Saharan African regional economy, consistently scores in the bottom 10 percent of countries ranked on the Social Progress Index for indicators such as primary education rates, piped water, and nutrition and basic medical care. India falls in the bottom 20 percent for improved sanitation facilities and the bottom 40 percent for primary education enrollment. Brazil resides in the top third for access to piped water and in the middle for primary education rates.¹⁰ Depending on where a company is doing business, different social needs take priority. This wave of globalization demands a more granular and local focus even as companies spread into new markets and market segments.

Increased innovation

We’re seeing more innovation by organizations attempting to find growth by addressing the needs of poor and aspirational market segments, including “frugal innovation” to create sustainable and affordable products. Rather than stripping existing products of features, frugal innovation focuses on turning constraints into advantages.¹¹

Indeed, there is often an extra benefit to inventing something that fills a basic need with extreme affordability: It can travel to other markets, including mature markets. A portable ultrasound machine that GE developed in China, for example, offered very basic functionality, and sold well there. Then it found a new market segment among US emergency room doctors and paramedics who would not have invested in a high-end machine, but could use an inexpensive one to improve initial diagnoses.¹² Imagine all the places that could benefit from innovations by the Indian health care service provider Narayana Hrudayalaya. It manages to bring high-quality care to Bangalore at very low prices by applying mass production and lean manufacturing principles to the hospital setting. For the types of surgeries it conducts on patients with heart disease, the hospital’s mortality rates are lower than the state of New York’s. The cost is less than $3,000.¹³

Sustaining local producers

Corporations are paying more attention to the viability of local producers and supply chains. In Vietnam, the Philippines, and Cote D’Ivoire, for example, cocoa-producing farms are in trouble. With their trees ageing, their soil becoming depleted, and their crops under constant assault from pests, farmers struggle to keep yields from falling. It’s an agricultural challenge, but also a social one, as people who have worked the land for generations increasingly leave for the cities, seeking easier ways to make a living.¹⁴

Mars Inc. and other major buyers of cocoa are tackling the problem. In the past several years, Mars has established 17 Cocoa Development Centers in the Ivory Coast to provide research-based techniques and tools for more productive and sustainable farming, and training in how to use them.¹⁵ This is a bottom-line business issue: The companies know that unless something is done to help these farmers, the demand for cocoa will dramatically outstrip supply in the coming decade, raising its costs and limiting its growth.

In the future, companies with a global agenda should assume that nonprofits and philanthropies will be involved in helping to develop and adapt new operating models and technologies.

Partnering and collaboration

Partnering among global organizations—even among competitors—has become more commonplace as businesses encounter issues that are too large or complex to handle on their own. We’re seeing pre-competitive activities between companies in industries where there are industry-wide supply, natural resource, or infrastructure problems. For example, companies such as Nike and Adidas joined the Better Cotton Initiative to transform cotton growing to reduce its environmental impact and improve livelihoods. The initiative promotes the adoption of better cotton practices, trains and supports farmers, and develops support for higher cotton standards throughout the supply chain.¹⁶

Perhaps the biggest change for many organizations will be partnering more with NGOs and the public sector. Whereas once businesses and nonprofits viewed each other largely as antagonists, they are increasingly finding places where they can bring complementary knowledge, experience, and skills to bear on social problems. Meanwhile, government can play an important role as anchor buyer, coordinator, and implementation partner for market-based solutions.¹⁷

One way that partnerships between companies and nonprofits are proving valuable is in developing new market opportunities. Operating in new markets or with new market segments can carry considerable risk, particularly where firms confront strong local brands, unfamiliar consumer preferences, and distribution challenges. Partnering with nonprofits and foundations provides a way of sharing the risk; businesses benefit from the credibility of trusted nonprofits and from access to local knowledge.

For their part, businesses provide these partnerships with market solutions and the capacity to scale. For example, Swiss Re worked with Oxfam, Rockefeller Foundation, and others to provide weather insurance for poor farmers in the Horn of Africa.¹⁸ Barclays, CARE International, and Plan UK have teamed up to provide access to basic financial services to 400,000 people in 11 countries. Their “Banking on Change” partnership consists of microfinance projects that support the creation and development of microfinance groups that are managed by local communities.¹⁹

In Tanzania, a unique alliance among multinational companies, non-state actors, and the government is working to improve the country’s generally low agricultural productivity, address insufficient infrastructure, and promote policy changes. The goal of the Southern Agricultural Growth Corridor of Tanzania (SAGCOT)—whose partners include Unilever, the fertilizer company Yara International, SAB Miller, Monsanto, and the government of Tanzania—is to create an efficient agricultural value chain, with the expectation that they can triple the area’s agricultural output.²⁰ By providing this kind of local-market support and technical assistance, foundations and NGOs can work with companies to improve the economic viability of production in these regions.

While there are ample opportunities for doing well while doing good, making the business case for solving social needs requires a change in mindset and new ways of doing business. The specific needs of underserved consumers, the social challenges facing local suppliers, and the limits of infrastructure and education require a sustained commitment to serve a particular market. This might require longer-term planning horizons, changes in the product development process, new forms of collaboration, and innovative business models.

Looking ahead

Adapting to the new wave of globalization poses challenges for companies. Changing how and where product development is done, being attuned to local market needs, and grappling with the challenges of working with local supply and distribution chains for poorer market segments require innovation and commitment. Companies that do not address these issues risk failing to capitalize on market opportunities and being undercut by competitors, while proactive companies have the opportunity to shape the market they compete in.

We can also expect to see increased attention and debates around the appropriate role of the private sector in addressing social challenges. The expectation that responsible businesses will use their scale to have a positive impact will only grow. However, one crucial question that has already emerged in microfinance centers is about appropriate expectations for short-term profit and profit growth over the long term when companies serve poorer customers.²¹ This raises larger issues about what constitutes public goods and who decides how social needs should be addressed. The social license to operate may come from governments or, crucially, from civil society actors, who can influence popular perceptions of a company’s role and value to the community.

Hand in hand with that expectation will come efforts toward better value and more aggressive monitoring of impacts to address social and environmental issues. Today, this is a challenge because data can be difficult to obtain and assessment of social impact can be difficult to parse. But we are already seeing creative efforts, from standards for quantifying the value of ecosystems to technologies that use satellite imagery to estimate water availability and quality.²² We anticipate more widespread and coordinated efforts to assess the value of social initiatives for threshold investment decisions and to evaluate impact.

There are no longer clearly delimited boundaries between the private, public, and nonprofit sectors. In future, companies with a global agenda should assume that nonprofits and philanthropies will be involved in helping to develop and adapt new operating models and technologies. Philanthropies and nonprofits are increasingly important members of business ecosystems.

My take

By Judith Rodin, PhD, president of The Rockefeller Foundation

At The Rockefeller Foundation, we have a vested interest in understanding how finance can be used to solve problems that affect the world’s poorest or most vulnerable people. Philanthropy and donor governments alone no longer have the resources to solve these challenges. So we must engage the talents, resources, and expertise of the private sector. We see innovative finance as a way to energize market building, healthy and sustainable economic activity, and new opportunities for achieving our dual strategic goals: building more inclusive economies and greater resilience.

We see two pathways for innovative finance to create these opportunities.

Pathway 1 is led primarily by businesses themselves and involves direct investment in local business creation. This route to market building relies on global corporations that understand that, in much of the world, markets must be built before they can be served. Forward-thinking business leaders who embrace this reality make explicit commitments to enter new global markets both as economic opportunity zones as well as community spaces requiring nurturing and support.

Pathway 2 is led by public sector capital and foundation investments, such as those from The Rockefeller Foundation, which pave the way for later business investments. This path acknowledges that some investments are too risky for private capital to take independently. Incentives and assurances must be provided before businesses can step in. We view these seed investments as risk capital that prime the pump and “de-risk” the downstream capital inflows.

As businesses increasingly look to engage the developing world, we generally see their approach to market-building investments unfold in three ways.

First, businesses are thinking intentionally about new ways to secure and maintain quality across global supply chains. These increasingly depend upon an explicit commitment to improve the lives and livelihoods of communities that may be fragile and prone to disruptions due to underinvestment, and to protect the environmental resources on which they depend.

Second, businesses are recognizing that, to successfully enter new markets, they need access to skilled on-the-ground labor that both understands local value webs and can help translate product and service offers to better meet local conditions. This requires investment.

Finally, businesses are realizing that skillfully investing in local NGOs as partners can unlock critical local market knowledge—about why things work the way they do and how to get things done—and in some cases provide an important sales force to reach local consumers. This goes beyond businesses giving money to an NGO because of their good work to also seeing them as a business resource.

Philanthropy can help unleash private capital by de-risking investments from investors, as well as fund and support the testing of new business models. Businesses increasingly see that success in the future will depend on products, partnerships, and innovations that improve the wellbeing of workers, customers, and distribution chains. The Rockefeller Foundation’s goal is to foster innovation, share our knowledge, and build the innovative finance landscape to ensure these investments and business transformations generate the biggest possible impact on human well-being.

The bottom line

Forward-looking companies are driving experimentation and innovation as they try to figure out how to successfully tackle a range of social challenges. We see efforts involving cross-sector partnerships, business and product innovation, assistance to local suppliers and distributors, and industry-wide collaboration. In the process, they are transforming the relationship between companies and the communities they serve.

To find effective strategies for growth in the next wave of globalization, companies will need to engage with the social needs and complexities of emerging and frontier markets. Social and environmental issues are no longer simply the government’s responsibility or part of a company’s philanthropic efforts. Any global business looking for an effective path for growth should bring social impact into the core of its strategy and operations.