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Idea in Brief
Cocreating Businesss New Social Compact
byJeb Brugmann and C.K. Prahalad
The Idea in Brief
Executives and social activists working together? Its true: after decades of mutual
distrust, corporations and nongovernmental organizations (NGOs) are collaborating
to combat poverty around the world. Their weapon? Innovative local businesses
such as self-help savings and loan groups and construction enterprises.
Why this move from adversaries to partners? Corporations and NGOs realize they
need each other to achieve their respective goals in developing countries:
Companies require NGOs local knowledge and community-based marketing
techniques to set up successful enterprises. NGOs need the business discipline
corporations bring to their operations.
Collaboration can enhance a companys reputation and open doors to new markets
while accelerating povertys eradication. But to win these gains, Brugmann and
Prahalad say, managers from both sides must understand the risks in working
together. When managers address these challenges by applying potent principles,
they create far greater valuefor all playersthan their individual efforts could
produce.
The Idea in Practice
How can corporations and NGOs partner successfully? Consider these principles,illustrated by energy company BPs development of a fuel-efficient stove for poor
consumers in rural India.
Satisfy Local Needs
Working with the Indian Institute of Science, BP developed a portable stove that
could use liquefied petroleum gas or biomass as fuel. Consumers could thus switch
fuels based on their income, fuel availability, and cooking styles. And by burning
biomass efficiently, the stove would eliminate the smoke that causes respiratory
illnesses in India.
Build Trust
BP conducted market research with three Indian NGOs interested in distributing the
stoves. Together the groups then defined a shared strategic intent and a set of
working principles. They built trust through relationships established between key
individuals. Trust deepened when BP made a long-term contractual commitment to
the project, and when the groups jointly evaluated the stoves design as well as
returns and risks for everyone involved.
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Be Flexible
The NGOs wanted to protect their credibility and goodwill with villagers, so BP had
to make some accommodations. For instance, it agreed that the women the NGOs
recruited as local sales agents would be the first to receive cash generated by the
business. That way, villagers could recover their working capital investment.The NGOs also proved flexible. For example, BP wouldnt compromise on safety
standards for the stoves or violate its own standards of business ethics. So NGOs
agreed to follow BPs health and safety policies, such as requiring that employees
use seat belts while driving around.
Be Transparent
BP and the NGOs shared their internal economics with each other so they could
understand the choices each faced in terms of distribution costs, consumer service
options, growth rates, and breakeven points. During this process, BP revealed
business data it would not normally share with distributors. The transparencyfurther built trust between the two sides. For example, the NGOs agreed to assume
a great deal of the credit risks and legal liabilities for sales and distribution agents
in the villages. They would not have done so unless they felt confident in BPs
integrity.
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In early 2005, we met privately with the chairperson of one of the worlds biggest
banks to discuss business opportunities in catering to poor people. The chairperson
responded bluntly. We dont care about making profits [on such a business], he
said, with the banks CEO sitting beside him. Theres something even distasteful
about the idea of making money off people who earn less than $1 a day. He raised
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a related issue that, unexpectedly, became the topic of our discussion that morning:
how the bank could create, manage, and scale up a program to support elementary
schools for poor children in a certain developing country. We were a little surprised
that a banker was so preoccupied with a problem that usually keeps not-for-profit,
nongovernmental organizations (NGOs), rather than large corporations, up at night.
A week later, we spent a day with representatives of three relatively small NGOs in
India. One specializes in infrastructure development and postdisaster
reconstruction. Another focuses on the cultivation and processing of herbal
medicines. The third provides business support to rural enterprises. Together, the
three organizations also manage several self-help savings and loan groups involving
around 50,000 women. The NGOs and their business advisers, some of them
executives working for a large global company, wanted our help in deciding which
businesses to set up. They had conducted research and market tests on
opportunities in the financial services and insurance, construction, consumer
products, and health services industries. By the end of the day, the NGOs decided
to go ahead with three businesses: selling insurance products, retailing groceries,and providing sanitation facilities to people whose income is around 50 cents a day.
We were impressed by the NGOs desire and readiness to organize local
communities so they could manufacture and sell products in the marketplacejust
like good entrepreneurs.
Those two meetings, were convinced, captured more than a fleeting role reversal;
they symbolize an enduring shift in the practices of corporations and social groups
and, perhaps, in their attitudes toward each other. That may sound like a startling
claim. Since the protests against globalization at Seattle and Davos in the late
1990s, people have assumed that the gulf between the private sector and the civil
society, as the media call NGOs, has been growing. After all, despite social groups
protests, more countries have opened up to foreign investment, and governments
have continued to privatize industries. Meanwhile, companies, especially Western
multinational corporations, have come under a dark cloud. Their recent shenanigans
fraud at Enron, insider trading at WorldCom, and inept governance at Hewlett-
Packard, not to mention a rash of social, environmental, and health-related
controversies at blue-chip companies such as Nike, Shell, and McDonaldshave led
to a near crisis of confidence in the role of the modern corporation in society.
However, a countertrend has emerged. Over the last five years, some corporations
have started to pay attention to customers at the bottom of the economic pyramid.As the pioneers move into inner cities and villages, their middle managers are
spending more time than you might imagine on acquiring local knowledge, value
engineering, developing low-cost business models, and community-based
marketing. Meanwhile, several NGOs have set up businesses to provide jobs and
incomes in order to free people from the tyranny of poverty. Product development,
logistics, project management, and scaling techniques are some of the mechanisms
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theyre using to kick-start socioeconomic development in long-neglected
communities.
Realizing that they each possess competencies, infrastructure, and knowledge that
the other needs to be able to operate in low-income markets, companies and NGOs
are trying to learn from and work with each other. For example, Danone has set upa joint venture with Bangladeshs Grameen Bank to manufacture and sell bottom-of-
the-pyramid dairy products. Microsoft has tied up with the NGO Pratham to deliver
personal computers to Indian villagers, while Intel and two large Indian information
technology firms, Wipro and HCL Infosystems, have launched the Community PC in
partnership with other NGOs to do the same. Nestl has joined hands with health
professionals and NGOs in Colombia, Peru, and the Philippines to deliver educational
programs on nutrition and nutritionally fortified food products to the poor.
The Three Stages in the Convergence Between the Corporate Sector and the Civil
Society
Preconvergence
Companies and NGOs adopt different attitudes toward liberalization and
globalization. They quarrel over the nature and speed of deregulation. They fight
over companies conduct, especially in developing countries.
Stage One
Companies and NGOs realize they have to coexist. They look for ways to influence
each other. Some corporations and NGOs execute joint social responsibility projects.
Stage Two
Some companies get into bottom-of-the-pyramid segments and niche markets even
as NGOs set up businesses in those markets. Companies and NGOs try to learn
from, and work with, each other.
Stage Three
Companies and NGOs enter into cocreation business relationships. Cocreation
entails the development of business models in which companies become a key part
of NGOs capacity to deliver value and vice versa.
As their interests and capabilities converge, these corporations and NGOs aretogether creating innovative business models that are helping to grow new markets
at the bottom of the pyramid and niche segments in mature markets. These
models, we believe, will lead to novel frameworks that can renew the corporations
social legitimacy even as they allow for sustainable development and accelerate the
eradication of poverty. This convergence is making it imperative that managers in
both sectors understand the opportunities and risks in working together.
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Liberalizations Unexpected Consequences
Companies and NGOs have arrived at the same place by different routes. Over the
last two decades, as many countries opened their economies to foreign
competition, often at the behest of the International Monetary Fund and the World
Bank, business and the civil society fought bitterly. At first, both sides battledvociferously and publicly with governments over the need for, the nature of, and the
pace of economic reforms. While companies, especially multinational corporations,
wanted governments to reduce tariffs sharply and allow foreign investment into
every sector immediately, the civil society argued that liberalization should take
place slowly and only in some industries. Then, as governments softened labor,
environmental, and investment regulations to attract foreign investment, the two
sectors waged a shadow war over the reforms future. Finally, as governments
played less and less of a regulatory role, corporations and NGOs fought each other
directly, debating the boundaries within which socially responsible corporations
should operate. Those battles led to three unanticipated consequences.
First, NGOs emerged as the corporate sectors de facto regulators, occupying the
vacuum that governments were leaving behind. They arent newcomers to the task;
for many years, NGOs have influenced markets in areas such as chemical
regulation, oil spill liability, air emissions, liquid waste, pharmaceutical and food
standards, child labor, and employment discrimination. Their influence has created
a regulatory framework tougher than the legal requirements corporations face.
NGOs may be small, but through the Internet, even a single person or organization
can coordinate smart mobs, as Howard Rheingold calls them in his 2002 book of
the same name, allowing NGOs to mount actions on several fronts simultaneously.
For instance, local NGOs attacked the Coca-Cola Company over its use of water in
the village of Plachimada in Kerala, India. As accounts have spread from Web site to
Web site, the dispute has grown into a worldwide battle over the brands presence
in universities and schools. The escalation of the campaign from market to market
and from issue to issue has, as the Wall Street Journal wrote, cost Coca-Cola
millions of dollars in lost sales and legal fees in India, and growing damage to its
reputation elsewhere.
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Jeb Brugmann is a Toronto-based consultant who works with companies to develop
business models for the underserved segments of emerging markets.
C.K. Prahalad is the Paul and Ruth McCracken Distinguished University Professor of
Corporate Strategy at the University of Michigans Ross School of Business in Ann
Arbor. This is his 14th article for HBR.Comments
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