Alfonso Caso
Managing Partner
AOSENUMA

Podcast

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Startup Contributor

Inclusive Businesses and Their Importance to the Value Chain

By Alfonso Caso | Thu, 06/16/2022 - 09:00

In a globalized world, where markets operate in real time and production lines are connected directly with end consumers in a network of logistics, inventory management, shipping and financing, the incorporation of information, technology and communication (ITC) is articulated in such a way as to minimize the marginal effects in the cost structure of each product. Suppliers, regardless of their size or production structure, are subject to quality controls, delivery times, cost analyses and production flexibility, all of which demonstrates how complex it is to be part of a supply chain.

Furthermore, Corporate Social Responsibility (CSR) and Environmental, Social, Governance (ESG) principles are being incorporated by firms to engage their production lines in processes of the circular economy, where waste generation is reduced to a minimum and the recyclability of materials creates additional value in the supply and production chains.

For socially responsible companies, this effort requires inclusive solutions that are based in the respect of human rights and that provide open and transparent communication with stakeholders through ethical principles. From this perspective, enterprises plan broader economic inclusion processes to incorporate segments of society that have a marginal participation in a market economy. The objective is to develop fair economic negotiations so that stakeholders at the base of the pyramid (BoP) can benefit from these opportunities. Ambitious social innovation is needed to create mechanisms and develop procurement processes to evolve inclusive businesses (IBs) into the company’s value chains as suppliers. The goal is to make them strategic allies who add competitiveness and innovation and generate mutual economic benefit, based on good-faith and fair and transparent agreements with a long-term vision.

For the OECD, an inclusive economy creates opportunities for all segments of the population and provides a more equitable distribution of the benefits of shared prosperity, in both monetary and non-monetary terms, to all of society.

The magnitude of inequality and poverty in the world requires initiatives that impact the greatest number of people. Such a challenge demands the alignment of business initiatives with programs by governments and civil organizations like MASISA, FUNDES, WRI, ASHOKA, SEKN and the UNDP, all of which have strategies to develop IB together with local and national allies, such as nonprofit organizations, governmental agencies, multilateral organisms and financial promotion institutions.

The Schwab Foundation for Social Entrepreneurship defines social entrepreneurs as people who “seek practical solutions to social problems, combining them with innovation, initiative and opportunity that topple barriers in apparently unconnected aspects of life.”

What Are Inclusive Businesses?

The term inclusive business was used for the first time in 2005 by the World Business Council for Sustainable Development to refer to strategies to alleviate poverty by including low-income communities in value chains without losing sight of profitability.

The paradigm shift proposed in the concept of CSR is that the disadvantaged segments of the population who have been relatively excluded from the market economy can be reincorporated successfully by participating in certain market niches.

BoP refers to people living below a certain income or spending threshold. In general, the poverty threshold in Mexico is set at between US$1 and US$2 a day. Others believe the cutoff line is better placed at US$5 to US$8. These income parameters determine the target population of these businesses. IBs operate with the same opportunities and budget restrictions as any other business; they are not commercial activities subsidized by others but are sustained by market supply and demand. An IB cannot sacrifice its capacity and interest in profits, so the term refers more to a business concept than to its size.

The New Agenda

With the Paris Agreement of 2015, and then with the signing of business commitments at the 2016 Davos Forum, the frame of reference was set so that promotion of IBs was aligned with the United Nations Sustainable Development Goals (SDG), together with the 2030 agenda.

The movement to support IBs is directly aligned with SDG 1,2, 3, 8, 12 and 17, depending on their characteristics, and also with SDG 4, 5 and 11, in addition to those activities related to the environmental SDG.

The United Nations has called the 2030 Agenda a roadmap for ensuring no one is left behind. It looks forward to a world of universal respect for equality and non-discrimination based on respect for human rights regardless of race, color, sex, language, religion, political opinion, disability, or any other condition.

In this regard, any company seeking to conduct itself responsibly must pursue a triple bottom line social, environmental and economic profits with clearly defined rights and responsibilities for each participant. The promotion of these markets should be aligned with the targets of the SDG.

The new agenda outlined by the World Economic Forum this year states:

  • Shift from compliance to value creation in terms of social outcome.
  • Ensure a social impact lens is embedded throughout the value chain beyond direct workforce and supply chain.
  • Building trust with the right stakeholders by identifying the right goal and metrics.

Successful incorporation of IBs into the corporate value chain depends on three basic aspects:

  • Real involvement by the board of directors.
  • Close tracking and metrics.
  • Strategies coordinated through community engagement areas.

In the case of Mexico, some successful businesses that have incorporated IBs into their value chains are:

  • TOKS: This nationwide chain of restaurants has incorporated products like jams, moles, chocolate, honey and coffee into its value chain and its suppliers include coffee-growing communities on a long-term basis.
  • CEMEX: The multinational cement corporation has generated a mainstream value offering of 17 actions that rest on the pillars of housing, social integration and the environment. In the past decade, it has focused on the use of alternative fuels, construction of plant nurseries and reduction of its carbon footprint using clean energies.
  • NESTLÉ: For more than four decades, it has been committed to incorporating IBs and small businesses into its milk supply chain, with high-quality controls and continuous improvement, along with a quality assessment every three years.

Conclusions

Inclusive value chains incorporate IBs developed by stakeholders from the BoP, both as clients on the demand side and as producers, distributors, and service providers on the supply side. This instrumentation generates processes of social responsibility linked with personal empowerment, social entrepreneurship and innovation that have brought a change in the perspectives of companies for designing their CSR programs and the possibilities of growth and better incomes for communities that have no opportunities for development.

To ensure a successful incorporation of IBs into corporate value chains on a long-term basis, an appropriate community engagement must be addressed from its conceptualization, in addition to an ethical commitment by all stakeholders, including the areas of social responsibility, procurement, and senior management. The results obtained need to be scalable, replicable and economically profitable.

Photo by:   Alfonso Caso