Social innovation: Good for you, good for me

Ethical Corporation, 10 April 2008 - Big firms are joining the queue to follow in Muhammad Yunus's footsteps by developing businesses designed to fix social ills.

Muhammad Yunus has for more than 30 years challenged business leaders to find radical ways of creating new markets in poor countries. The Nobel Peace Prize winner's latest book, “Creating a World Without Poverty: Social Business and the Future of Capitalism”, is no less ambitious. It explores how big companies can invest in external partners to develop products and services that will benefit the poor.

Yunus outlines the concept of a “social business”, which he defines as a “no loss, no dividend” company with social objectives. Social business ventures are set up by a “social entrepreneur”, such as Yunus, who combines the risk-taking of enterprise with an explicit mission to address urgent problems, such as access to healthcare, sanitation, education and so on. The new products and services that these inventive individuals devise are examples of “social innovation”.

Unlike charities, social businesses do not need to keep applying to governments or foundations for grants. They support themselves by selling goods and services at cost, or at a small profit – all of which is reinvested to fund their expansion. But to do this, social entrepreneurs must find investors willing to help take a new idea to scale.

Now multinational companies are emerging as an important source of funding for social innovation. Big companies are looking for exciting and potentially lucrative new ways to meet their sustainability goals.

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The archetypal social business – in the Yunus sense of a no-loss, no-dividend company – is Danone Grameen Foods, a joint venture set up two years ago between Yunus's own Grameen group and the French food and drink multinational Danone. The partners have developed an affordable, fortified yoghurt for poor children in Bangladesh. The yoghurt is high in calcium and other nutrients that children lack. It is cheap because it is produced locally, cutting down on expensive refrigeration.

As a social business, Danone Grameen Foods measures its success in terms of “social dividend” or “social return on investment” – its positive impact on the rate of market failure that it was set up to redress. In this case, the dividend and return are the improvement in child health in Bangladesh and the number of jobs its activities supports. The first yoghurt processing plant in Bogra will in three to four years support 1,600 jobs, while the company plans to build 50 plants over the next ten years.

Reputation rub-off

Danone invested $1 million in the Bogra plant – a tiny amount for a company with revenue of €14.5 billion in its latest full year. For that investment it has seen significant returns that are hard to measure financially. Danone says it has learnt how to cut energy and save money in its supply chain and how to sell the idea of nutrition to the poor in emerging markets. And then there is the reputation rub-off of being associated with Yunus, founder of the Grameen Bank and now something of a celebrity for his pioneering work on microfinance.

Investing in social entrepreneurs can boost a company's reputation for being responsible in a way that limits the risks of investing in new products, especially when these could take years to become commercially viable.

Drug maker GlaxoSmithKline's progress on finding a malaria vaccine, which is in the final stage of clinical trials, is one of the company's favourite responses to critics of the pharmaceutical industry. But work on the vaccine may not have happened without the financial support of Path, a Seattle-based not-for-profit organisation that forms alliances with private sector partners to research and develop treatments for neglected diseases, which has been funded by the Bill and Melinda Gates Foundation.

Alternatively, big companies can buy up innovative firms that have already done the groundwork on products with social benefits and commercial potential. Dow Chemical, for example, in 2006 added three water purification technologies to its Dow Water Solutions portfolio when it acquired Chinese firm Zhejiang Omex Environmental Engineering. Dow backs up this work with its more media-friendly sponsorship of Blue Planet Run, a US non-profit group that raises money for clean drinking water projects in developing countries.

Partner problems

Acquisition in some cases might be the preferred option for companies wanting to avoid the potential pitfalls of partnering with mission-driven social entrepreneurs.

Intel's decision in January to withdraw from One Laptop Per Child (OLPC) is a case of a partnership that was not meant to be. The initiative, announced by social entrepreneur Nicholas Negroponte at Davos in 2005, aimed to put a $100 laptop in the hands of 150 million children in poor countries within four years. Three years later the project is struggling to take off, with just a few thousand children using the cheap laptops in pilot projects around the world. Chip maker Intel ploughed millions of dollars into OLPC and joined the board in July 2007. But the partnership was never a good fit, as the laptops run on chips made by Intel's rival AMD. Having quit the association with OLPC, Intel continues to develop its own low-cost laptop, the Classmate, which is priced at $200-$300.

One reason why partnerships between companies and social entrepreneurs are yet to take off could be mutual ignorance of each other. “This is quite new territory for business,” says International Business Leaders' Forum director Ros Tennyson, who advises companies on partnerships. “Most do not know what the term ‘social entrepreneurship' means.” She says business must listen to social entrepreneurs “if it is to get beyond simply philanthropic funding of a good idea”. But, she adds, social entrepreneurs, too, must be flexible and understanding of companies. “They need to develop a genuine interest in business drivers and priorities in order to conduct purposeful and equitable conversations.”

Partnerships are the best way for companies to tap the knowledge that social entrepreneurs have of emerging markets, says Pamela Hartigan, managing director of the Schwab Foundation for Social Entrepreneurship and co-author with John Elkington, founder of think-tank and consultancy SustainAbility, of “The power of unreasonable people: how social entrepreneurs create markets that change the world”. But in joining forces, companies and entrepreneurs will come into conflict, she admits, saying: “It will be a rough ride. But it is beginning to happen.”

Microfinance is typically the most fertile common ground on which companies and social entrepreneurs can meet. Thanks to Grameen Bank, the model has been shown to work at a small, local level, in the commercial sense that most borrowers are able to repay their loans. More and more banks are interested in helping to expand microfinance networks, using them as a bridge into emerging markets where most people do not have access to bank accounts. Companies outside of financial services are using microfinance networks to extend their distribution and sales reach into remote areas of emerging markets, as Unilever is doing in India.

Microfinance remains the “paradigmatic example” of social entrepreneurship, says Stephan Chambers, chairman of the Skoll Centre for Social Entrepreneurship at the University of Oxford. He adds: “And in some senses, it's the problem that the field has. It is still in its infancy and its still trying to figure out what are the next half a dozen really good examples.”

Chambers compares the state of social entrepreneurship to Silicon Valley before the internet boom. “There's lots of energy, lots of activity, lots of investment, lots of creativity – and so far one billion-dollar company.” He adds: “Someone is going to be the next Muhammad Yunus. And as soon as that starts to happen there will be loads of them.”

Brand power

Chambers's advice to companies is to take an interest in social entrepreneurs only if it is relevant for their business to do so. He says: “They shouldn't [take an interest] unless they wish to. There is no ‘should' about it. If the incentives are aligned correctly, they will.”

Unilever's vice-president for corporate responsibility, Santiago Gowland, says companies should take a selective approach to partnerships. He explains: “It is about really understanding your core competencies. It is understanding what you are best placed to deliver, with authority, in a way that you can own that intervention and sustain it over time.”

With a strong historical presence in many emerging markets, which are expected to account for 50 per cent of group sales during 2008, Unilever's brands are well placed to do this. Gowland highlights the example of Lifebuoy soap, which has been marketed in India as part of an ambitious public health campaign to encourage 250 million villagers to wash their hands, and so cut down the number of preventable deaths to diarrhoea. Lifebuoy sales were up 20 per cent within two years of the start of the campaign.

Gowland describes the Lifebuoy campaign as an example of “social innovation”, which he defines as “that famous win-win, where there is a social issue to which a company is best placed, through its core competences, to provide a solution”.

To identify new opportunities like these, Unilever has developed a systematic approach to factoring sustainability concerns into product development, called Brand Imprint. Unilever evaluates the social and environmental impacts of each brand at every stage of the value chain. It invests €906 million a year in R&D, and has 6,000 scientists.

Social innovation

Another company that understands the benefits of fostering social innovation internally is Vodafone. In February 2007, the UK mobile phone giant launched the M-Pesa mobile banking service in Kenya through its subsidiary Safaricom. The service is aimed at the 80 per cent of Kenyan adults who do not have a bank account, many of whom do have a mobile phone.

M-Pesa customers can transfer money to each other via text message. Instructions are sent to a central server, which authorises the transactions. Money can be paid in and withdrawn at kiosks, petrol stations and supermarkets that sell mobile phone airtime. M-Pesa now has 1.8 million subscribers, or 18 per cent of mobile customers in Kenya, with most transactions being relatively small ($15 or less).

Revenues from M-Pesa are growing “incrementally”, says Vodafone's global head of international payment solutions, Nick Hughes. “The objective was to come up with a commercially viable service that addressed the issue of financial inclusion,” he says. But the project would not have got started without £1 million from the UK Department for International Development, he explains. The company matched that investment.

Vodafone is now looking to extend its mobile payment service to other areas such as bill and salary payments, says Hughes. The remittance market is another key growth area. Vodafone has partnered with financial services giant Citigroup to pilot a remittance service enabling customers to send money via mobile to relatives and friends in their home countries. “We are learning lots about moving money across borders, especially compliance [with rules] around anti-money-laundering and customer due diligence,” says Hughes.

Another “strategically important” area for Vodafone's mobile banking platform, Hughes adds, is microfinance. In Afghanistan the company has been working with Roshan, the network operator, to facilitate microcredit loan disbursement and repayment, building on the pilot phase work with Kenyan microfinance institution Faulu.

The success of M-Pesa, and these new product developments, vindicate Vodafone's decision to invest in researching how mobile technology could be used to address social problems. Six years ago Hughes was working in the firm's corporate affairs department on research projects that the company grouped under the heading of “social innovation”. The initiative has developed into a new business stream, with a ten-strong (and growing) team at Vodafone's head office, functioning as a regular business unit with revenue targets.

‘Intrepreneurs'

Hughes is what is now being described as a “social intrepreneur” – an individual working within a large company that spots the commercial opportunities of new technologies to meet pressing social needs.

According to SustainAbility's Maggie Brenneke, who has researched social intrepreneurs for a Skoll Foundation-funded report that is out in mid-April, these individuals delivering products to meet commercial and ethical goals sit in all areas of big organisations. She says: “They are not your typical corporate social responsibility executive. A lot of the time it is someone from sales or marketing or emerging markets who saw an opportunity and is now running entirely new business units.” She cites Citigroup's microfinance division as an example, and Nike's Native American Business.

Ultimately, whether a company is able to foster social innovation internally depends on leadership, says Unilever's Gowland. The consumer goods giant and its rival Danone both have chief executives in Patrick Cescau and Frank Riboud who have marked out emerging markets as key growth areas for their organisations. Success in these markets depends on adapting existing products and experimenting with new business models, which both firms are doing.

Successful companies have always been those that are most receptive to new ideas and best able to take them to market. To any hard-headed board member, the latest wave of “social” entrepreneurs, businesses and innovation looks like just the latest opportunity for companies to sell more stuff. Except this time, they can do so at little moral cost.

Danone Grameen Foods

The Bogra plant creates direct and indirect jobs for:

- 50 factory workers;
- 300 women vendors (the “Grameen Ladies”);
- 200 small shops, which it supplies with fridges; and
- 400 farmers.

In three to four years' time, once the factory in Bogra has reached full capacity, this project should provide income for more than 1,600 people.
Source: Danone

Hybrid value chains

Under its “Shakti” initiative, Unilever 's Indian subsidiary, Hindustan Lever, uses an existing microfinance network of mainly women entrepreneurs to sell its products door-to-door in villages. The project employs 30,000 salespeople and covers 100,000 villages, serving nearly 100 million consumers and generating revenues close to $100 million a year, at a small profit for both the company and the women vendors.

In Mexico, cement firm Cemex is extending its distribution and sales arms for low-cost building products through a network of sexual health workers run by Sisex, a coalition of community-based NGOs.

Another Mexican firm, Amanco , a subsidiary of Grupo Nueva, has partnered with farmer co-operative Red de Agricultores Sustenebles Autogestivos to sell Amanco's irrigation systems to small holders.

Bill Drayton, founder of Asohka , a fund that invests in socially minded start-ups, describes these partnerships between big companies and business-oriented community groups as “hybrid value chains”.

On the supply side, US firm SC Johnson has partnered with social entrepreneurs in Kenya to guarantee its supply of pyrethrum, an active ingredient in the production of insecticides. SC Johnson is the biggest buyer of the crop that supports 200,000 small farmers in Kenya. It has partnered with KickStart, a social business that helps farmers gain access to low-level technologies, to provide suppliers with water pumps to irrigate their crops.

Nike goes Native

Good ideas can come from anywhere – just ask Nike's Native American Business . The unit started life as a Native American community health programme but is now morphing into a social business.

In September 2007 Nike launched a customised sports shoe, the Nike Air Native N7, designed to fit Native American feet. All profits from sales of the shoe, which costs $42.50, go towards sports community programmes in Native lands. The company expects to sell out its initial run of 10,000 pairs in the next few months, turning a profit of $200,000.

Nike developed the product three years ago after Native podiatrist Dr Rodney Stapp told the company he was modifying its shoes to fit diabetic patients' feet. Diabetes linked to obesity is reaching epidemic levels among the 4.3 million Native Americans in the US, and can result in serious foot problems and, in extreme cases, amputation.

Nike measured a number of Native American feet, finding that they were wider than the conventional sizes for which its shoes were made. The company found that Native American women were prepared to buy Nike trainers up to two sizes too big for them, at risk of compounding diabetes-related foot problems for some.

For its founder, Sam McCracken, Nike's Native American Business was conceived as “a grassroots business opportunity”. The idea was to use the power of Nike's brand to encourage Native Americans to exercise. “Growing up in the community, I knew the power of our brand,” he explains.

McCracken himself was working in Nike's distribution centre in Oregon when he wrote the business plan for the Native American unit. The idea came to him after taking part in the company's diversity programme.

This article is reproduced with permission from the April edition of the London-based global business magazine Ethical Corporation. For a free trial or to subscribe to the magazine email: This email address is being protected from spambots. You need JavaScript enabled to view it. or go online www.ethicalcorp.com/subs/trial/