Small enterprises are embracing a new inclusive business model
Earlier this year about 50 spaza shop owners in Gauteng got together and decided it made more financial sense to buy together, in bulk, the baked beans, tinned fish, maize meal and other products they needed than it did to buy their stock individually.
A representative of the group takes the orders from the other owners and gives it to the nearest cash-and-carry store. The order is then delivered to the association’s office or to one of the spaza shops from which the owners collect their goods, according to the president of the South African Spaza and Tuckshop Association, Rose Nkoni.
“We benefit because we get a very big discount on goods and the cash-and-carry will deliver,” she said. “It also benefits the supplier because they get more customers.” Nkoni said organising this group to be more effective in their businesses was the first step towards partaking in inclusive business.
This business model includes people at the base of the pyramid in a company’s value chain, either as suppliers, distributors, retailers or customers.
By penetrating this large, low-income market, the approach benefits companies and encourages job creation and the growth of a sustainable economy.
When companies adopt a more inclusive approach to business, they open themselves to contributing to a more sustainable economy and the dismantling of the myriad socioeconomic problems associated with unemployment and low levels of entrepreneurship.
Moipone Molotsi, the director of the Centre for Small Business Development at the University of Johannesburg, said one example of inclusive business was big business providing “procurement opportunities to small businesses or even their employees in their value chain, coupled with support over an extended period of time until these small businesses or employees are able to supply at the right quality and quantity expected, like trucking”.
In Nkoni’s case, this might one day mean a certain cash-and-carry supporting one of the spaza shop owners in purchasing a truck and taking over some of the deliveries.
“People are desperate. People want to be part of big business – that’s why they come together. This is the first step for inclusive business. The next step is when one spaza shop owner goes with a truck and fetches the supplies, checks the stock and then employs other people to check the stock and then jobs are provided. Or maybe one spaza shop owner is given the deliveries part of the business in that area by the company,” she said.
“We are looking forward to working with big companies and raising our small business people.” Molotsi said the main benefit of embracing inclusive business was that many more people who would otherwise not have become involved in meaningful economic activities “would now gain both business and technical skills and have the opportunity to be big players in the formal economy”.
She said there were big cracks in the economy because many South Africans were not entrepreneurial. “Research by the Global Entrepreneurship Monitor has repeatedly reported this finding … Because of a lack of skills and entrepreneurship we have high unemployment and a high rate of businesses failing. There is so much dependence on imports and this affects prices of goods in the country.” She was encouraged to see that the government would, in its next term of office, “be focusing on building black manufacturers”.
Embracing inclusive business “will go a long way in contributing towards building a culture of entrepreneurship. This will have a big economic and social impact: if you start building skills, encouraging business to become innovative, jobs will be created, and the economy will be boosted,” she said.
One company that has successfully done this in South Africa is Walmart-owned retailer Massmart. With its supplier development programme, Massmart is using an inclusive business model to “ensure local small, medium and micro enterprises [SMMEs] are given a chance to sustainably supply its businesses like Game, Makro and Builders Warehouse”, supplier development manager Sherry-Lee Singh said.
It does this in two ways. One is to support direct supply of items through an SMME for direct sale to the business. An example in the manufacturing space includes XChem Chemicals, which supplies glue and adhesive products to Builders Warehouse, Singh said.
“The supplier has grown from a regional off-take to a national off-take and is now set up to supply through a distribution centre,” she said. Massmart recognised the talent of Xchem Chemical’s owner and her business’s growth potential “and helped her, through the supplier development programme, to effectively participate in the economy by giving her access to the company’s supply chain”.
The second way it is implementing the inclusive business model is through “indirect supply”. “An SMME, usually a micro business that does not have the ability to supply directly, is linked up with the business through a more-established supplier,” Singh said.
“An example is Pitseng Arts and Crafts, a supplier based in Soweto who manufactures clay pots and lamp shades. Pitseng has been linked – by Massmart – to two more established suppliers of potted plants and lighting equipment. The inputs from Pitseng are further assembled at the factories of the established suppliers who then supply Massmart stores with a finished product.”
The success of this approach can be shown, among other ways, in its numbers. In the past year the company has included 20 manufacturers in its value chain, Singh said, but getting to this point was no easy task.
“The biggest challenge is the time it takes to get suppliers retail ready,” she said. “Retail readiness involves a number of requirements such as factory and product compliance, labelling, marketing and roll-out planning, sales monitoring and in-store merchandising. It can take up to 12 months for a supplier to reach full provincial or full national distribution.”
The company overcame these challenges by putting a strong staff resource focus on targeted SMMEs. “The majority of the staff resources on the supplier development programme are targeted at supporting suppliers to be retail ready.
“Furthermore, the programme assists its SMME suppliers with access to finance, access to compliance support, access to in-store merchandising support for the first year of trading and access to in-store promotions support to ensure there is sufficient brand and product activation with customers so that sales follow.”
Moipone Molotsi, the director of the Centre for Small Business Development at the University of Johannesburg. (Oupa Nkosi)
The commitment needed to overcome these challenges is significant, but there are organisations and companies that specialise in assisting companies to do just that.
In 2006 the SNV Netherlands development organisation partnered with the World Business Council for Sustainable Development to push the inclusive business model worldwide, but mostly in developing countries.
Rik Overmars, the country office director based in Mozambique, said 60% of the world’s people were at the base of the pyramid, which meant they earned less than $4 a day.
“It’s a huge market of five trillion US dollars per year. But companies have, for a long time, not seen it as an opportunity to do more business and include more people in the formal economy. Africa offered enormous potential for business, he said, because “much of the population in Africa is low-income and a lot of people don’t have access to quality affordable basic services”. “So this creates opportunities for companies to step into this marketplace, be it with solar energy, low-cost LED lighting, cooking energy and sanitation.”
Investing in farmers
Small-scale farmers also produce most of the commodities. “There is a lot of room for improvement to increase productivity and scale. Buying companies can increase their footprint and adjust their sourcing strategy by investing in farmers.”
An example of how SNV facilitated this was with the Export Trading Group in sesame production in Mozambique. The arrangement doubled farmers’ yields in sesame, increased their income considerably, and secured more sesame for the processing factory.
To help to open companies’ eyes to this opportunity, Overmars said SNV designed inclusive value chains “whereby we broker a long-lasting relationship between the company and communities to do business”.
“This is done either by working with companies to source from low income groups or to develop markets for those groups.” The organisation had done this with banana producers in northern Peru by linking them to the Dole Food Company, “improving quality, productivity and logistics”.
By doing ethnographic research, SNV also establishes what markets low-income groups wish to engage with. “We have deep discussions with communities, we learn what they want, what products they aspire to having. Then we communicate that to the companies. For instance, stoves or toilets need very specific designs to guarantee quality and affordable pricing. And it requires new models of distribution, retail channels and payment schemes.”
To make doing inclusive business easier for everyone “you need partnerships and collaboration between business and nongovernmental organisations [NGOs] and also have the right policy framework in place”, Overmars said. “For many companies the base of the pyramid is a new market and they can work together with NGOs to relate to them.”
Recognising the potential for long-term profit is key too. “Many models which NGOs were promoting were, for a long time, based on corporate social responsibility motives, which is a cost to a company, but inclusive business should contribute to increased profitability by investing in the right things.”
SNV and other partners created a local assistance facility for companies in Mozambique, Uganda and Vietnam, which will later be expanded to Zambia, Zimbabwe, Ghana. This local facility – the Inclusive Business Accelerator – is a “one-stop-shop for business to get assistance in designing, incubating and implementing inclusive business partnerships”. SNV also has an online platform for matchmaking between companies, investors and mentors who want to scale up inclusive business.
A local consultancy firm, Reciprocity, has developed a business by helping other businesses to become more inclusive because it believes such models can help South Africa to address some of its core socioeconomic problems, such as unemployment and inequality.
“If we don’t develop more inclusive ways of doing business, there will continue to be more inequality and not enough socioeconomic progress,” associate Pierre Coetzer said.
Founded eight years ago, Reciprocity offers some of the initial legwork for companies interested in embracing a more inclusive approach to business. “We compile fact sheets, case studies and reports for a variety of organisations documenting and analysing inclusive business models,” he said.
Deconstructing preconceived ideas
“We take business executives and business students into townships and informal settlements and get them to deconstruct some of the preconceived ideas about the base of the pyramid. A typical township is a very diverse space and it’s amazing how little some South Africans know about that space.”
Reciprocity also does market research for companies such as banks or consumer goods companies, “which can ask us to find out more on people’s needs and expectations in low-income markets, for example”.
Finally, Reciprocity offers to test business models with the company to see whether they work. Inclusive business has the ability to uplift millions of people, but it’s not being implemented fast enough or as effectively as it could.
“A very large business like a multinational and a small spaza shop function in parallel universes, so it’s not easy to get the two together. You have to provide mentorship, business training, development of skills in managing, marketing and things like bookkeeping. You have to provide ongoing support, more than just a few weeks of training,” Coetzer said.
Standard Bank, for example, has created a network of 9 000 spaza shops that provide basic banking services. “It has equipped informal traders with point-of-sale devices and skills so they can provide basic banking services like money transfers, and this provides traders with income in the form of commission,” Coetzer said.
“The problem is people’s level of trust in letting someone else handle their money. It’s not very high.” This was an example of how, in practice, inclusive business was not working as well as it could. “But the fact that it is not working as well as it should does not mean that it is failing, just that a lot more could be done.”
Find out what people really want
To keep up and make the model work, Reciprocity believes companies should innovate. “They need to find out what people really want, and leverage opportunities in financial services, retail, housing and energy, et cetera.”
Despite scepticism from shareholders and some company executives about the viability of the model, low-income business owners are “positive”. “I do sense from our experiences working with informal businesses a huge sense of forlornness about being left to their own devices, yet they don’t expect to be helped. “They get excited about entering formal value chains. When you tell them, ‘We have an opportunity for you to get involved in big business’, there is some scepticism but there is also a lot of enthusiasm.”
There was so much that could be achieved from giving each other the benefit of the doubt, he said. “There is occasionally a narrative in some NGOs and government circles that business is out there to fleece the poor and just make profits. It’s actually not true, and it’s not helpful to think that.
“However, it’s also true that business also needs to change its attitude and the way it does things. If everyone just opened their eyes to the possibilities of this model, they would see how much we could achieve as a society, how many benefits there are for everyone, that this is a win-win for everyone.”
This article forms part of a series presented in partnership with the Southern Africa Trust. The series looks at key development issues in the SADC region.