American economist Milton Friedman famously said the social responsibility of business was solely to increase profits. The millennial generation begs to differ. In a recent survey of today’s millennial crowd, Deloitte asked about the primary purpose of business. The most frequent response? Improve society.
What it means to be a responsible corporate citizen has clearly evolved, which is why good corporate social responsibility (CSR) reporting is the new normal. But changing attitudes about what it means to be a responsible business are not just adding to corporate reporting duties. It’s true that the shift is being partly fueled by the tremendous growth in global philanthropy. But, what’s next? How about a strategy that embeds overcoming some of the world’s toughest social challenges into your business model? That’s effectively what Coca-Cola did when it partnered with inventor Dean Kamen to use his portable water purifier to provide clean drinking water to a billion people. The business case? Save three million lives while opening new markets.
Welcome to the solution economy, which is currently comprised of a disparate and growing cadre of global wave-makers, focused on addressing social problems through sustainable and multifaceted business models in which financial results and social contributions are no longer considered a trade-off. In fact, fusing business strategy with social contribution is what drives this new way of doing business.
We spent over two years studying the global phenomenon of how business, government and social enterprises are teaming up to solve some of society’s toughest problems. For any business enterprise, taking on social troubles comes with risks, which range from longer return-on-investment timelines to struggles with execution. But potential payoffs are huge. Keep in mind that about four billion people sit at the bottom of the world’s economic pyramid and they represent about US$5 trillion in purchasing power. This article looks at how the solution economy is eroding the border between public and private sectors and discusses how businesses can best find opportunity in social challenges.
THE SOLUTION ECONOMY AT WORK
Private enterprise for public gain is clearly no longer an oxymoron. Consider the case of multinational consumer goods company Unilever, which saw opportunity for mutual advantage where many others did not. Since 2000, the company has been working with banks, government and NGOs to reduce infant mortality across rural India that is attributed to dehydration from diarrhea caused by the spread of germs, a problem largely solvable with basic hand washing.
Unilever’s Project Shakti, which launched with just 17 saleswomen, worked with micro-lending institutions to open lines of credit for the fledgling entrepreneurs who would use their microloan to buy soap, and in turn, educate and supply it to their villages with a seven per cent markup. It addresses sanitation needs, but also lifts these women – and their families – out of poverty.
The company backed a hygiene education program and even kept the environment in mind, supplying the program with low-oil soap since many poor people wash in rivers. The initiative’s workforce now includes 45,000 saleswomen serving three million Indian households. And the concept has spread to Sri Lanka and Bangladesh. As far as Unilever is concerned, the profitable project isn’t even a form of philanthropy. It’s a marketing program that has social benefits because the company’s health depends on the health of the communities it serves.
Other examples of solution economy ventures are cropping up around the world. Imagine, for example, what it used to be like to do some banking for people living in Kenya’s remote villages. It usually meant taking a very long walk and risking robbery along the way. Even the lucky ones that made it to a bank still had to worry about having deposits embroiled in disputes. As a result, many locals simply found a place to stash their savings and hoped for the best. All that changed in 2007, when telecom provider Safaricom partnered with Vodafone to launch M-Pesa, which offers cell phone users a kind of virtual bank (the M is for mobile and pesa is money in Swahili).
About a fifth of Kenya’s GDP now flows through M-Pesa, which is used by about 17 million individuals. The initiative, which the Economist calls the most successful scheme of its type on earth, has spread to Tanzania, Afghanistan, South Africa and India. It worked because Africa’s pervasive poverty didn’t mean people were out of touch. In fact, the continent represents the world’s second-largest cell phone market with about 650 million subscribers as of 2011. And using existing technology to fill the gap in banking services has spawned unimagined benefits. Schools in Kenya, for example, have become less susceptible to corruption as parents pay for private education via M-Pesa, instead of cash.
GROWTH OF FINANCIAL SUPPORT FOR IMPACT VENTURES
The spread of M-PESA was assisted by The Bill & Melinda Gates Foundation, which kicked in US$4.8-million to help Vodacom raise awareness about the initiative in Tanzania. Arguably the most influential philanthropic organization in the world, the Gates Foundation issued grant payments in 2012 of US$3.4 billion, more than what many nations dedicate to foreign development. With more than 1,150 employees and a massive money pot (assets of US$38.3 billion as of June 30, 2013), it is active in at least 100 countries. And it is a big supporter of the emerging sector known as impact investing, which aims to generate financial returns while delivering measurable social or environmental benefits. Indeed, while calling for “more creative capitalism,” Bill Gates has noted “private money can take risks in a way that government money often isn’t willing to.”
Bill and Melinda Gates, of course, are not the only supporters of impact investing. Other major players include eBay founder Pierre Omidyar and his wife Pam. Launched in 2004, the Omidyar Network has invested in Bridge International Academies, a growing private school network in Kenya, where it has helped more than 25,000 children receive an education. According to studies, the Bridge children have been outperforming children taught in government classrooms. With Omidyar’s funding, Bridge plans to educate 10 million children in the developing world. It is currently expanding into sub-Saharan countries, creating jobs along with better education by building about two new schools a day through 2015.
Impact ventures are not just for power couples, but they haven’t yet reached the mainstream. The World Economic Forum (WEF) has highlighted some of the challenges, which include relatively small deal sizes, the early-stage of target markets, lack of long-term track records and difficulties in measuring financial performance. According to WEF, taking impact investing from the “margins to the mainstream” will require significant collaboration among multiple participants as well as a commitment from institutional investors to become advocates for the sector and share best practices.