Alleviating Global Poverty Through Profitable Partnerships: Markets, Economic Well-Being and Moral Vision

1. Alleviating Global Poverty Through Profitable Partnerships: Markets, Economic Well-Being and Moral Vision Laura P. Hartman Associate Vice President & Professor, DePaul University, Chicago, USA

2. Acknowledgment to Co-Authors: • Scott Kelley, DePaul University • Patricia Werhane, DePaul University • Dennis Moberg, Santa Clara University

3. The Simple Underlying Principle “If we can find approaches that meet the needs of the poor in ways that generate profits for businessand votes for politicians, we will have found a sustainable way to reduce inequity in the world.” - Bill Gates, address to Harvard University graduates, 2007

4. The Thesis Poverty can be alleviated, if not eradicated, both locally and globally, but only if we change our narratives about global free enterprise, and only if we rethink our mindsets regarding how poverty issues are most effectively addressed.

5. So, let us review our current narratives. . .

6. Moving from CSR as Responsibility or Obligation to Moral Vision with Guile Defining the CSR as Responsibility narrative: “Companies are unlikely to engage in CSR under certain competitive conditions or unless the institutional environment is favorable” (Campbell, 2007) = • Preferring self-interest with guile, whenever possible • Firms are only going to engage in CSR when the favorable environment already exists. NARRATIVES

7. Moving . . . to Moral Vision with Guile Defining the Moral vision with guilenarrative (alternative): • It is those firms with moral vision, moral imagination, that will be vigilant for opportunities to act in ways that are both socially responsible and will enhance their long-term financial performance. (Moberg, Werhane, Hartman 2008) • If a firm is strategic in its vision, it will identify those self-interests in more opportunities. NARRATIVES

8. A sustainable outcome orientation The outcomes of a self-interested approach ≠ those of moral vision with guile. • In a growing global economy, with consumer saturation among the rich countries, companies aiming for long-term value creation must look to new markets, even to potential customers who are very poor, and understand these new stakeholders. • Otherwise, companies will simply function as extractors from those communities, a strategy that cannot contribute to new market development and thus will not be viable in the long run.

9. Should big business have the responsibility to save the world? – The R of CSR can evolve to Strategy • “Corporations are not responsible for all the world’s problems, nor do they have the resources to solve them all. • Each company can identify the particular set of societal problems that it is best equipped to help resolve and from which it can gain the best competitive benefit. • Addressing social issues by creating shared value will lead to self-sustaining solutions that do not depend on private or government subsidies.” • Continued . . . Source: Porter, M.E. and M.R. Kramer, “Strategy and Society: the link between competitive advantage and corporate social responsibility”

10. Porter & Kramer: Bottom Line “When a well-run business applies its vast resources, expertise, and management talent to problems that it understands and in which it has a stake, it can have a greater impact on social good than any other institution or philanthropic organization.”

11. Poverty alleviation is just one such particular societal challenge • If in the realm of their core competence, firms addressing this social issue can gain competitive benefit. • Their creation of shared value will lead to self-sustaining solutions that do not depend on private or government subsidies. • If these firms will apply their vast resources, expertise, and talent to poverty alleviation – a challenge in which they now have a stake – they can have a greater impact on social good than any other institution or philanthropic organization

12. For purposes of this audience and presentation, I will not cover other elements of poverty in any depth here. We are merely suggesting the issue of poverty alleviationas one opportunity where multinationals can use strategy to have a positive impact on multiple stakeholders, including themselves. In this discussion, however, I would like to focus on the possibility that, by turning a responsibility into a strategy – in any arena – we are changing the mindsets sufficiently to create successes where they could not before exist. The Scope of the Issue Today

13. As an example, • Cemex distributed cement products - 2.5 million poor in Guadalajara • Typical construction time: • Over a year to construct a single room • Over 13 years to finish a modest, four-room dwelling. • Cemex offered financing to low-income families to build or expand their homes.

14. One would assume . . . • Since Cemex was appealing to the BoP Mexican market, they had virtually no competition! • Without competition, traditional theory (self-interest with guile) would predict market exploitation since there would be no institutional forces supporting CSR. • Yet, it was apparently moral vision with guile that drove Cemex leaders to its proactive CSR - they were willing to forego competing on price where they had a clear advantage and instead invest in building an institutional infrastructure among their customers.

15. Required: Customers participated in savings groups • In return: Participants were offered technical assistance, educational programs, guaranteed quality materials and delivery, guaranteed prices, and free storage of materials. • To Cemex: profits of $1.5 million (2005), anticipated expansion into Colombia, Venezuela, Egypt and the Philippines

16. Insights for Poverty Alleviation: Changing the mindsets The poor do not lack resources. Poverty alleviation is an evolving, dynamic process. Poverty is often the result of patterns of exclusion. Feasible approaches to poverty reduction have been and can be created through commerce.

17. Evidence of:Entrepreneurial Cunning • Moral imagination drives moral vision but, in many circumstances, it is incomplete without guile, that exercise of cunning that accounts for sustainable responses to institutional opportunities. • The following are a series of corporate actions that demonstrate the entrepreneurial cunning component that comprises moral vision with guile. • We offer these not as an exhaustive list but rather as a useful starting point.

18. 1. Rudimentary Institution Building • As we saw in the Cemex case, firms appealing to BoP markets find it valuable to use rudimentary institution building as a form of entrepreneurial cunning. • By encouraging and facilitating the formation of buyers’ cooperatives, political action networks, or community self-help associations, firms essentially create new stakeholders through which to negotiate and conduct commercial activities.

19. 2. System Engagement and Systems Thinking • Focuses on the nature of the relationships a firm builds with its stakeholder institutions. • Ongoing cooperative relationships with local stakeholders in place of far less sustainable one-shot market transactions. • Involves the firm not just in a one-to-one relationship but in a system of interactions with customers and local communities. This, in turn, requires “systems thinking.”

20. Example - Finance Partnerships: SELCO of India • SELCO brought reliable, affordable and environmentally sustainable electricity to 45,000 small businesses through a small, solar home electrical system • It linked customers with microfinance partners, financing systems based on a share of future earnings.

21. SELCO of India • It was SELCO’s readiness to escape the traditional mental modeland to conceive of rural Indian customers as participants in a vast cultural and social system that marked their moral vision. • SELCO realized that trust and confidence could only develop if the company benefited others in the customer’s local area through partnerships.

22. 3. Stakeholder Solidarity • Stems from an attitude of identification and alliance that only comes from prolonged contact with local stakeholders (e.g., potential employees and customers). • As a result, company strategies are chosen that are not just respectful of stakeholder customs, but also that represent wishes, habits, and practices that this group has but may not express.

23. Example: ONIL Stove • Donald O’Neal noticed that poor women cook over dangerous three-rock, open fires inside their homes, causing respiratory illness and severe burns, and contributing significantly to air pollution. • He decided to design a better method of cooking. • He lived among them and studied the cultural as well technological issues associated with cooking in Guatemala. • Two years later, he had designed a solution made principally of cement and called the ONIL stove.

24. But where are the big guns? • So far, our examples have focused on entrepreneurial ventures, often locally operated, in countries known for corruption, non-enforcement of a rule of law, and many other institutional barriers to market entry. • The costs seem too large, the margins too low, and the opportunity for loss of shareholder value and reputation seem too great. • But, taking a systems approach combined with moral imagination, moral cunning, and a concern for poverty alleviation, we find increasing global involvement in BoP markets.

25. Systems Engagement: BHP Billiton • BHP Billiton is the largest diversified resources company in the world • In 2001, BHP Billiton expanded an enterprise loan program it had established in Mozambique, where it runs an aluminum smelter. • During its original project (“Mozal”), its use of contractors from the local community on the project was not successful. • However, as with Cemex, BHP found that the most effective way to increase local participation in the later project was through building local institutions to support an infrastructure which would then support BHP’s business objectives.

26. Systems: BHP Billiton • BHP participated in the development of the Small and Medium Enterprise Empowerment and Linkages Program (SMEELP) which helped to provide contractors with the skills necessary to compete for BHP contracts, ultimately benefiting themselves, their communities and BHP. • This systems thinking will guarantee its sustainability • Once the project is over, the Mozambique government will assume management of the program in order to assure local control of the activities and its foreseeable future, including partnerships with other organizations who will utilize the contractors.

27. Institution Building and Solidarity • In India, there are an estimated 660,000 diarrhea-related deaths per year, a problem with known preventative measures as simple as hygienic education and access to anti-bacterial soap. • BUT: While Hindustan Lever, Ltd. (HLL) had an advanced distribution system in urban areas, it could not replicate them in rural areas. • The sheer vastnessof the task had discouraged many other MNCs from entering these areas, a challenge facing NGOs, developments, and government as well.

28. Unilever’s Lifebuoy Soap Campaign • But, “the company does not coat it in the ‘do-goody mantra’ of corporate social responsibility. It states openly that it wants to make washing hands with soap a habit – especially after going to the toilet and before eating – in order to sell more bars of its Lifebuoy soap.” • “Profitability will guarantee what all development projects need: consistent support. ‘It’s the fact that we hope to make money which makes our involvement sustainable,’ she says. ‘This can’t be a fashion if we are a soap company. When we say ‘we’re in this for the money’ it helps, because people know we’re not going to leave next year when the chairman’s wife finds a new charity.’” Jopson, B. “Unilever looks to clean up,” Financial Times (November 14, 2007)

29. Show me the Money!!“We’ll be smiling all the way to the bank.” • Unilever Uganda soap sales per annum: €1m ($1.5m, £700,000) • But “only 14 per cent of Ugandan adults used soap to wash their hands after going to the toilet.” • “Imagine if we change behaviour, if every household starts to wash hands with soap,” says George Inholo, Unilever’s head in Uganda. “We’ll be smiling all the way to the bank.” Jopson, B. “Unilever looks to clean up,” Financial Times (November 14, 2007)

30. These shifting mindsets have produced: • Appropriate and effective incentives, • Stakeholder interest maximization, • Economic growth, and • The potential for the reduction of both poverty and the unfulfilled needs of the abject poor.

31. Embracing the concept of “profitable partnerships” means an effort towards new mindsets: From maximizing profits From short-term shareholder gain From working for people From charity & philanthropy To simply making more profits to medium/long term perspectives. to working with people. to profitable partnering!

32. What have we learned? Institutional structures in developing economies should not be assumed to be insurmountable barriers to market entry in global settings. Rather, such structures can facilitate entry without compromise if one couples moral vision with cunning and guile. Indeed, if any progress is to be made in alleviating global poverty, such forms of guile and cunning are imperative.

33. Much to be learned: tentative conclusions MNCs need to develop and to encourage and nurture moral imagination. Proactive CSR at the BoP requires mental models that both individualize stakeholders and break through those mental models that condemn millions to the vicious cycle of poverty.

34. Leaders must be systems thinkers. In addition to considering stakeholders (institutional or individual) one at a time, they must consider existing and potential interactions and interrelationships. There is no substitute for immersing oneself in the experience of those stakeholders with which one intends to partner. Engagement requires an intimate knowledge of a partner’s experience. (á la Paul Polak, Out of Poverty) Much to be learned: tentative conclusions

35. Whether there is a “fortune” at the base of the pyramid or only sustainable profits is inconsequential. That there are profits in markets previously overlooked and ignored is of great consequence to both poverty alleviation efforts and to the sustainable development of global companies in the new flat world of the Twenty First Century.

36. Abilityneed not begat responsibility.Abilityneed only inspireus to care more effectively and as much for others as we do for ourselves and our stakeholders.