M. A. P. Insights
By Niceto S. Poblador
Guideposts for the successful execution of inclusive business strategies
Inclusive business strategies — more commonly known as Inclusive Business Models (IBMs) — are business solutions that provide access to economic opportunities to the poorest segments of society in a manner that will make businesses more profitable and sustainable. They are implemented by incorporating low-income populations in the firms’ value networks for the purpose of insuring, among other things, a continuous source of well-trained and highly capable workers, constant and reliable supplies of raw materials and other inputs, and steady increases in sales revenue mainly from poor and hitherto unserved or underserved customers who benefit from lower-priced versions of their products and services.
Pursuing inclusive strategies entails a major shift in the way that business is conducted.
Most importantly, it requires giving due importance to the economic interests and material well being of ALL groups that contribute to the production process (aka stakeholders), and not being exclusively focused on the financial interests of the owners. This by no means requires the rejection of the traditional goal of profit maximization, only that we follow a radically different approach in pursuing this goal.
From a larger social science perspective, the function of the firm as a specialized social institution may be viewed as one of creating economic value for society, and appropriating this among the different groups that contribute to the production process — the firm’s customers, its workers, its suppliers, and the community of which it is an integral part. By this dictum, the goal of the business enterprise in modern society may now be stated as one of maximizing the production of economic value.
By implementing appropriate strategies and governance mechanisms for the allocation of value to its other stakeholders, we contend that the residual value that accrues to the owners of the firm (aka profits) will consequently be maximized.
AIMING FOR THE BOTTOM
To make business truly serve its modern role of addressing the needs of society, it should go beyond seeking the economic interests of its major stakeholders.
It should, additionally, pursue what are known as “bottom (or base)-of-the-pyramid” (BoP) strategies, those intended to uplift the economic condition of the poorest and least privileged members of society among its stakeholders. IBMs are the means of achieving this social objective.
Over the past several years, business has been playing an increasingly important role in poverty alleviation and social development. These initiatives are usually considered as part of the firms’ corporate social responsibility and are assumed to entail sacrifices in profits in exchange for the material benefits that they provide for society.
Our position, however, is that IBMs have a potential positive impact on the firm’s long-term profitability and should therefore be an integral part of any business firm’s strategic agenda.
What follows are important guideposts for the successful implementation of inclusive business strategies.
GUIDEPOST #1:
GIVE PRIMARY IMPORTANCE TO YOUR CUSTOMERS
Among the four major groups that comprise a firm’s stakeholders, its customers, not the owners of the firm nor their appointed managers, are the ones who determine economic value. It is they who decide what their needs are and what is useful to them. They are the ones who set the maximum prices that they are willing to pay for these products and services (or what are known as “reservation prices”). It is only proper, therefore, that they be given the utmost importance that they deserve. They are, after all, the major contributors to the firm’s revenue streams that are the lifeblood of any business enterprise.
GUIDEPOST #2:
DEVELOP AND IMPLEMENT STRATEGIES FOR GENERATING VALUE
The first order of business of the enterprise, whether an ongoing one or a newly established venture, is to identify its market, or the customers whom it intends to serve, and to determine the current and potential demand — or to create one, if necessary — for the products or services that it intends to introduce in that market. Attention should be focused on currently unserved or underserved markets, particularly potential customers in the poorest segment of society. This incipient demand should be sustained and continuously enhanced through appropriate promotional and product development strategies, and by maintaining a continuing and mutually beneficial relationship with customers.
GUIDEPOST #3:
DEVELOP AND IMPLEMENT STRATEGIES FOR PRODUCING VALUE
The next important step is to produce in the most effective and efficient manner the economic value that customers expect from the firm. This requires building a productive organization by investing in appropriate production technologies, developing a culture that encourages sharing and collaboration, and designing an organization that facilitates the unfettered movement of people and information across virtual boundary lines within the organization, and between the organization and its environment.
GUIDEPOST #4:
DEVELOP AND IMPLEMENT STRATEGIES FOR APPROPRIATING VALUE
We conceptualize the firm as a value-producing (or -creating), value-appropriating (or -allocating) social institution.
While customers determine the value that they perceive in the firm’s products, it is the firm that creates that value by producing the goods and services that it intends to offer to them. The net economic value that goes to the consumer (aka consumer surplus) for a unit of a product or service that she buys from the firm is the value that she attaches to that product less the price that she pays for it. It is clear therefore that the amount of value that is appropriated to the consumer depends in large measure on the firm’s pricing strategies. The higher the price, the smaller the value that accrues to the customer, and the larger the portion that is retained by the firm.
The firm’s pricing policies determine the size of its sales revenue which constitutes the main source of value for allocation to the firm’s other major stakeholders. The value that goes to the firm’s workers is decided through its compensation and motivational strategies, and the value that is allotted to its suppliers and distributors is determined through its supply chain (or value network) management strategies. The residual value that remains is what constitutes profits — the value that accrues to the owners of the firm.
It should be noted that these value-appropriating strategies also serve the added purpose of enhancing the value of the firm’s output, reducing its operational costs, and improving its brand image. For example, giving more value to customers ensures their continued patronage, paying wages that are higher than market rates and providing comfortable working conditions enhance productivity, and treating suppliers and distributors fairly reduces what are known as transaction costs.
Creating value for society has traditionally been subsumed under the rubric “Corporate Social Responsibility” or CSR.
From a purely strategic point of view, however, we maintain, as we have noted earlier in this essay, that the more appropriate way of dealing with the firm’s social agenda is through BoP strategies and the implementation of IBMs.
Not only do these strategies serve the long-run strategic interests of the firm but, more importantly from a social development perspective, it enables business firms large or small and in all areas of business to collaborate with government agencies, multilateral institutions, and NGOs in helping achieve the country’s Sustainable Development Goals (SDGs), notably those relating to poverty alleviation and the reduction of economic inequality.
The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.
Niceto S. Poblador is a member of the MAP Corporate Governance Committee, a retired UP Professor, and until recently was Professorial Lecturer at the UP School of Economics.
