Winning Strategies For the Solution Economy

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.

Nevertheless, as things stand, J.P. Morgan and the Rockefeller Foundation estimate total funds allocated to creating mutual benefits could top US$1 trillion by 2020. And that’s a massive potential capital pool available to corporations seeking opportunities in the solution economy.

PARTNERING FOR A PURPOSE
Dean Kamen, who possesses a knack for inventions such as the Segway scooter and implantable insulin pumps, has a history of investing his own money in social good projects. In 2003, he developed a water purification unit dubbed the Slingshot, which could pump out thousands of litres of purified water daily, running on energy sources as diverse as cow manure.

Investing US$50 million of his own money, Kamen imagined using his invention to bring clean drinking water to more than a billion people, potentially saving millions from being killed by waterborne disease. Despite his personal investment and ingenuity, he had trouble generating interest among the usual suspects. The United Nations and major NGOs took a pass. Enter Coca-Cola.

Kamen’s vision fit with the drink maker’s water stewardship goals, which include replenishing all of the water used in its drinks and production by 2020. Coca-Cola pledged to install the Slingshot system in rural parts of the world, starting in Africa, Asia and Latin America and expanding to South Africa, Mexico and Paraguay. To date, more than 1.6 million people have benefitted. Last summer, in conjunction with a number of other players, Coca-Cola announced plans to expand the drinking water program, including it in a program offering kiosks designed to improve the well-being of communities which is slated to be rolled out to 20 countries by the end of 2015. If all goes as planned, up to 2,000 Coca-Cola EKOCENTERs will offer a mix of products, services and resources, ranging from safe drinking water, wireless communications and vaccination storage to education on health, entrepreneurship and community development. People selected to operate the kiosks will be given business skills training similar to that provided by Coca-Cola’s 5by20 program, an initiative designed to economically empower five million women entrepreneurs across the company’s value chain by 2020.

“EKOCENTER represents an investment in the future prosperity and progress of some of the most fragile and at-risk communities we serve,” company CEO Muhtar Kent said at the time of the announcement. “Through EKOCENTER we have the ability to change lives by offering access to safe drinking water and other needed resources, all while empowering local entrepreneurs. What started as an aspiration is now becoming a reality as we welcome our partners across the golden triangle of business, government and civil society to scale and improve this innovation.”

The alliance between Coca-Cola and Dean Kamen is a one-on-one partnership. However, a new model is emerging in which business aligns with different groups around particular societal challenges. For example, Deloitte is one among a network of organizations (including nonprofits, academics, foundations and business) that supports the advancement of global well-being through a non-profit called the Social Progress Imperative. One of its main goals is to identify key challenges and find innovative solutions to tough social problems in countries around the world through The Social Progress Index. Whether done via a corporate joint venture or through a networks-based initiative like the Social Progress Imperative, participation in the solution economy generates benefits that go well beyond meeting basic human needs and direct contributions to the bottom line. Just ask CEOs at companies that issue CSR reports, which studies show help boost the market value of their organizations.
 

DRIVERS OF SUCCESS
As we have described, businesses can take the world’s toughest social challenges and view them as business opportunities. But just how should they tap into the solution economy? We identified six key features of successful, multi-rational, business strategies.

1.     When entering the solutions economy, everyone should use a wide lens to assess the target markets and what they offer in terms of problem solving. Partnering with wavemakers from business, government and civil society needs to be a core component of the approach.

2.     Disruptive technologies are key to success, so embrace smart phones, mobile apps, the internet and cloud computing. You don’t have to reinvent the wheel. As M-pesa demonstrated, using existing technology in a new way can change the world.  

3.     Keep the door open to new business models. Franchising, for example, can be tailored specifically to reach underserved markets through partnerships with local entrepreneurs and community groups.

4.     In the solution economy, reputation, public data and citizen ingenuity can offer non-financial but tangible ways of fueling innovation.  

5.     Think about creating platforms that exchange public value.

6.     Multi-rational strategies require multi-lateral relationships. Wavemakers don’t ever try to change the world on their own. They aim to expand the ecosystems where committed parties jointly tackle tough social problems. Why else would a beverage company create a platform for storing vaccines?

 
The solution economy is already creating enormous value while helping to solve big social issues. With all due respect, we think even Milton Friedman would have seen the benefits to be gained by expanding the traditional role of business in today’s world.

Reprint from Ivey Business Journal
[© Reprinted and used by permission of the Ivey Business School]