New business model incorporates the poor

Inclusive business is the corporate world’s buzzword, commerce’s flavour of the decade, the flag big companies, particularly in the developing world, want to be seen flying. It’s innovative, dynamic and, most importantly, it’s for the greater good. Inclusive business models are as hip in commerce as being green is in the corporate world. Inclusive is in.

But what exactly do we mean by inclusive business, and what are we trying to achieve through it?

By definition, an inclusive business model is a commercially viable framework benefiting low-income groups by including them in a company’s value chain – on the demand side as clients and consumers, or the supply side as producers, suppliers, entrepreneurs and employees. The prerequisite is the inclusion be conducted in a financially viable, sustainable manner.

The concept of inclusive business is linked to “base of the pyramid” (BoP) economics: the idea that low-income segments collectively represent a significant market: globally, the BoP designates the four billion people around the globe who live on $3 into $4 a day or less. In South Africa, an estimated 19-million people fall in that category, accounting for at least between R275-billion and R300-billion in annual purchasing power, according to the World Bank.

The thinking is businesses and governments should stop viewing the poor as victims, but rather as resilient entrepreneurs and value-demanding customers. Low-income markets present an exceptional opportunity for large corporates to serve them in ways responsive to their needs, mutually benefiting both parties.

By exploring opportunities at the base of the pyramid, businesses can build new markets and strengthen supply chains, while the poor enjoy better access to essential goods and services, opportunities to earn sustainable incomes, improve skills, raise living standards and empower themselves.

Although its key focus is on economic upliftment and engagement, the inclusive model remains business in its own right – it is not to be confused with corporate social responsibility, philanthropy or charity. Inclusive business requires commercial viability – projects must be designed to at least break even, but preferably become self-sustainable over time. They should also contribute directly to environmental sustainability in some way.

These criteria, says Pierre Coetzer, associate at development company Reciprocity, is the key reason there are so few inclusive business models in South Africa and the rest of the world. Many companies want to achieve an inclusive model, but few have managed to combine the need for financial return with social and environmental return.

“There is enormous potential in South Africa for inclusive business, as we’re fortunate to have a very strong and diverse corporate fabric. We’re one of few emerging markets where major local and international companies can be found in virtually any sector. We have very pronounced problems with socioeconomic inequality, and a very strong corporate network we could use to build a more inclusive country,” says Coetzer.

“When a small player becomes integrated into the value chain of a larger business, an interesting succession of mutual dependencies tends to emerge. In this way, larger corporates can drive small and medium enterprises (SMEs) towards sustainable growth,” he says.

Coetzer sees the biggest economic challenge to inclusive business in South Africa as the disconnection between the formal and informal worlds. The informal sector is by far the larger in terms of numbers, but contributes much less in economic terms than the formal sector.

“South Africa has pronounced problems around socioeconomic inequality. Ideally we should have thousands of inclusive business models in place, supporting SMEs, as they will create the most jobs. Right now, our country is not doing much for the hundreds of thousands of small informal businesses across the country that are just surviving – that by definition are creating work, but should be financially stimulated to create more jobs.”

Coetzer says the entrepreneurial spirit in South Africa is strong, people are eager and hungry to work, but the current legislation does not encourage entrepreneurship. Rather than being given a step-up, start-ups are hamstrung by our current laws.

“For SMEs to be able to create jobs, our labour legislation needs to be relooked [at] with SMEs in mind, differentiating the large corporate from start-ups, particularly informal businesses in communities. The small business owner who has a shop on a street corner cannot comply with the current regulations. Smarter and more realistic legislation that is focused on SMEs in informal communities would assist corporates in helping small businesses get started. The ripple effect would be huge – creating employment gives more people an income, it reduces inequality, sparks economic growth, and addresses the core socioeconomic challenges we face in South Africa.”

Shepherd Balani has a shack-building business in Khayelitsha. He employs a small team of workers, and has a vibrant operation that keeps him and his team able to school their children and to live with dignity. But getting the business off the ground was extremely difficult. Balani’s greatest obstacle was access to start-up funds. Hearing from others how difficult it is to apply for a small business loan, he made a plan – selling offcuts of building materials.

“Now that Bakiti Bhangaloz is successful, we have a bigger plan – we want to grow, employ more people and invest in equipment so that we can build flats. But the banks and government don’t do much to help informal businesses. I strongly believe small businesses are the answer to our country’s job creation challenges – we are the ones who can create jobs to employ the people,” says Balani.

The paradox in South Africa is that there is a wealth of money available, with massive and accessible consumer credit made available for the poor. Yet access to working capital for entrepreneurs and start-ups is made extremely difficult. Unlike in other African countries, the problem is not one of availability of funds but of accessibility.

Coetzer says one of the greatest inhibitors to growth and socioeconomic equality in our country is people can’t get a working capital loan – the hoops they are made to jump through are too great. The irony is the people looking for business loans are the potential wealth-creators.

“Given today’s technologies, our financial institutions would be well inspired to follow examples like M-pesa in Kenya, the mobile phone-based money transfer and microfinancing service launched by that country’s largest cellphone network in partnership with Equity Bank.

Using the service, users can deposit, withdraw, transfer money and pay for goods and services using a mobile device. Importantly, the technology also offers a facility for small loans, enabling easy access to working capital,” says Coetzer.

One of the cornerstones of inclusive business is its effect on human development – it plays a considerale role in inclusive business by increasing the income of the poor, improving their access to basic goods and services such as education, health, housing, water and sanitation.

Dr Francois Bonnici, director at the Bertha Centre for Social Innovation and Entrepreneurship, a specialised unit at the University of Cape Town Graduate School of Business, says there are several innovative inclusive business models that are successfully building bridges between business and the poor for mutual benefit.

One model is for large corporates to adapt their core business to present a similar service offering to a lower income market. Six years ago CareCross Health, through its offshoot OCSACare, broadened its managed healthcare service offering by providing full spectrum unlimited primary care to low-income blue collar workers for a premium of R214 a month paid by employers. The scheme’s target members are people earning less than R5 000 a month.

“From a strategic business perspective, the company kept within its core business – it already had everything in place, and the marginal cost of extending the service offering to a whole new untapped market was relatively small: no need for different suppliers or diversification of the supply chain; they simply created a subsidiary business division to focus on this potentially mass market,” says Bonnici.

South Africa has a surge of unemployed youth. In an effort to improve youth employability, the Hollard Insurance Group created Harambee’s Youth Employment Accelerator, a private-sector initiative that provides a sustainable way to successfully employ and retain first-time entrants into the job market. The initiative reached 150?000 jobseekers in the past four years, teaching young South Africans essential hard and soft skills with which to achieve and retain jobs.

“Inclusion cannot happen without focused intention and effort made by the public sector and government to connect systemic factors in South Africa that have excluded people from employment, such as education, access to finance, access to transport and solid support networks. The accumulation of many businesses operating inclusively will facilitate considerable growth in our country by encouraging and advancing entrepreneurship and spurring the creation of small businesses,” says Bonnici.

Inclusive business can never be the sole solution to South Africa’s socio-economic woes. Instead it is one of several ingredients through which we can create more employment and reduce inequality.

Growth and socioeconomic effects are not incompatible; they are two sides of the same coin – one is necessary for the other to exist. Profit is not the enemy of the poor if they are included in creating it.

This page forms part of an M&G partnership with the Southern Africa Trust to highlight issues of poverty in the region.

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