I am returning to this topic because I think that any discussion of the role of government and policy in inclusive business will benefit from understanding better how IB contributes to a transformation in a specific market system, and indeed vice versa.
While all market systems programmes do not involve innovation by an individual company (or a group of companies), many do.
It is also the case that an inclusive business innovation may flourish without any change in market system being needed, but I think there is growing evidence that IB often needs a supportive ‘eco-system’, and that, in essence is about the whole market system in which any one IB project is happening. The recent ‘Growth for Good or Good for Growth?’ puts this in the following terms:
“Where companies once viewed the wider context that surrounds business opportunities and the challenges therein, such as poverty, poor sanitation, poor governance, missing institutions and unskilled labor, through the lens of corporate social responsibility (CSR) or philanthropy, today many of these “contextual gaps” pose real threats to business expansion and long-term success in emerging and mature markets.”
Two other recent reports, Growing Prosperity and Beyond the Pioneer, also talk about the same issues, as explained by Karen Smith in a recent brace of blogs for the Hub and for Springfield.
My examples are intended to illustrate in what contexts an integrated market systems and IB approach may be needed. I hope that this will help practitioners from range of different practice areas to see a bigger picture to their efforts, where this is necessary.
The four scenarios are:
Where a transformation in market viability is needed;
Where a transformation in risky and harmful practices is needed;
Where a transformation in collaboration between market players is needed;
Where a transformation in demand for beneficial products and services is needed.
In the rest of this blog sets out my examples for you to browse. I hope you find them useful.
1. Challenges in market viability
Commodities such as oil palm, cocoa and cotton depend on small farmers, but farming as an occupation is becoming so unpopular that some fear for the long term supply of these commodities. Companies are innovating to try and build more direct links to farming communities, but a wider transformation in the whole market system is needed to increase supply chain transparency and build farmers’ skills and productivity. However this market system change needs to be driven by companies taking responsibility to innovate in their supply chains.
The following scenario is asked on a real enquiry to BIF during the BIF pilot. It was from a palm oil company that was seeking to include more low-income, informal producers of palm kernels into its supply chain.
This diagram captures how the market system change and business innovation are both needed:
The next diagram puts this into ‘market systems’ language. The approach is to understand what constraints there are in a market system that are preventing poor people from benefiting as much as they could from participation in the market. When these constraints are identified, it is then essential to consider what the root causes are of these constraints. In the examples I have developed, these root causes can then be addressed by the business innovation that we would consider as inclusive business.
In the case of commodity supply chains, the constraints analysis (left hand side) and business innovation challenges (right hand side) might look like this:
Finally I looked at where the BIF pilot was able to start addressing both of these constraints as a market facilitator, and the outcome could have been. I present this as a notional results chain. Note that these are only examples, and BIF at that time was not able to do this work.
2. Risky and harmful practices in a market
The garment sector is an example of a market in which a lack of understanding and collaboration in the market system is sustaining harmful labour practices. This requires individual employers to take the lead in making the case that better jobs will lead to greater commercial success and sustainability, but these companies are ultimately dependent on market level collective action to change the reputation of a particular sourcing country. Poor environmental practices in industries such as intensive flower and vegetable production can also fit this template.
The following is the worked example from the BIF portfolio, using the same approach as above. It starts with this description of the market system context ad business innovation needed:
This example builds on some analysis of market constraints and business challenges that BIF has actually done in a programme, and is now implementing in Myanmar. The BIF analysis of constraints and challenges is as follows:
The results chain for this intervention looks like this:
I have blogged more extensively on this example elsewhere if you would like to know more.
3. Collaboration between market players is needed
Stanbic IBTC Bank in Nigeria have pioneered a complex collaborative model that unlocks a market for them in seasonal finance for small farmers (see BIF pilot case study). However for this to scale it needs to happen systematically between companies in Nigeria providing finance, agricultural inputs and mechanised services, and those buying what the farmers grow. However for this market transformation to happen, innovators such as Stanbic IBTC are essential because few other banks see this is a profitable option.
Other markets where poor people need to access finance for seasonal credit or for assets can follow this pattern, as can some insurance markets.
The worked example presents this lack of collaboration across inter-connected markets as the main constraint. In a market systems approach a market is carefully defined in terms of a supply chain, and other supply chains become part of the supporting functions for that market. Fertiliser supply in a market that is defined by the crop that is being grown is a good example. However fertiliser has its own value chain and systemic issues, and thus is a separate – but connected – market to the one defined by crop. The market system constraint then becomes the ability of these different markets to all function well together in support of small farmers, as presented here, with Stanbic Bank’s innovation being the catalyst:
The following is my notional constraints analyses of this challenge in the market….
….and the results chain could then be as follows, again with the Bank’s innovation as a key driver or this collaborative approach across markets to happen:
4. Transformation in demand for beneficial products and services
My final example is of situations where consumers are not familiar with buying and using a product or service. Conventional markets will fail because of this, so for any one product or service to succeed actions at the market system level are needed to educate consumers and remove unfavourable legislation. However, for this to happen pioneer companies have to develop products, services and business models that can be commercially viable if the wider demand issues are addressed. Nutritional food-based products and solar lighting are two typical examples of this phenomenon, as are some markets for health services.
The following is a worked example:
Again, this then becomes an analysis of constraints that are stopping the market from developing and individual companies from making any progress:
If these issues are addressed, the outcomes could be a portrayed in this results chain: