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    Idea in Brief

    Cocreating Businesss New Social Compact

    byJeb Brugmann and C.K. Prahalad

    The Idea in Brief

    Executives and social activists working together? Its true: after decades of mutual

    distrust, corporations and nongovernmental organizations (NGOs) are collaborating

    to combat poverty around the world. Their weapon? Innovative local businesses

    such as self-help savings and loan groups and construction enterprises.

    Why this move from adversaries to partners? Corporations and NGOs realize they

    need each other to achieve their respective goals in developing countries:

    Companies require NGOs local knowledge and community-based marketing

    techniques to set up successful enterprises. NGOs need the business discipline

    corporations bring to their operations.

    Collaboration can enhance a companys reputation and open doors to new markets

    while accelerating povertys eradication. But to win these gains, Brugmann and

    Prahalad say, managers from both sides must understand the risks in working

    together. When managers address these challenges by applying potent principles,

    they create far greater valuefor all playersthan their individual efforts could

    produce.

    The Idea in Practice

    How can corporations and NGOs partner successfully? Consider these principles,illustrated by energy company BPs development of a fuel-efficient stove for poor

    consumers in rural India.

    Satisfy Local Needs

    Working with the Indian Institute of Science, BP developed a portable stove that

    could use liquefied petroleum gas or biomass as fuel. Consumers could thus switch

    fuels based on their income, fuel availability, and cooking styles. And by burning

    biomass efficiently, the stove would eliminate the smoke that causes respiratory

    illnesses in India.

    Build Trust

    BP conducted market research with three Indian NGOs interested in distributing the

    stoves. Together the groups then defined a shared strategic intent and a set of

    working principles. They built trust through relationships established between key

    individuals. Trust deepened when BP made a long-term contractual commitment to

    the project, and when the groups jointly evaluated the stoves design as well as

    returns and risks for everyone involved.

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    Be Flexible

    The NGOs wanted to protect their credibility and goodwill with villagers, so BP had

    to make some accommodations. For instance, it agreed that the women the NGOs

    recruited as local sales agents would be the first to receive cash generated by the

    business. That way, villagers could recover their working capital investment.The NGOs also proved flexible. For example, BP wouldnt compromise on safety

    standards for the stoves or violate its own standards of business ethics. So NGOs

    agreed to follow BPs health and safety policies, such as requiring that employees

    use seat belts while driving around.

    Be Transparent

    BP and the NGOs shared their internal economics with each other so they could

    understand the choices each faced in terms of distribution costs, consumer service

    options, growth rates, and breakeven points. During this process, BP revealed

    business data it would not normally share with distributors. The transparencyfurther built trust between the two sides. For example, the NGOs agreed to assume

    a great deal of the credit risks and legal liabilities for sales and distribution agents

    in the villages. They would not have done so unless they felt confident in BPs

    integrity.

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    In early 2005, we met privately with the chairperson of one of the worlds biggest

    banks to discuss business opportunities in catering to poor people. The chairperson

    responded bluntly. We dont care about making profits [on such a business], he

    said, with the banks CEO sitting beside him. Theres something even distasteful

    about the idea of making money off people who earn less than $1 a day. He raised

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    a related issue that, unexpectedly, became the topic of our discussion that morning:

    how the bank could create, manage, and scale up a program to support elementary

    schools for poor children in a certain developing country. We were a little surprised

    that a banker was so preoccupied with a problem that usually keeps not-for-profit,

    nongovernmental organizations (NGOs), rather than large corporations, up at night.

    A week later, we spent a day with representatives of three relatively small NGOs in

    India. One specializes in infrastructure development and postdisaster

    reconstruction. Another focuses on the cultivation and processing of herbal

    medicines. The third provides business support to rural enterprises. Together, the

    three organizations also manage several self-help savings and loan groups involving

    around 50,000 women. The NGOs and their business advisers, some of them

    executives working for a large global company, wanted our help in deciding which

    businesses to set up. They had conducted research and market tests on

    opportunities in the financial services and insurance, construction, consumer

    products, and health services industries. By the end of the day, the NGOs decided

    to go ahead with three businesses: selling insurance products, retailing groceries,and providing sanitation facilities to people whose income is around 50 cents a day.

    We were impressed by the NGOs desire and readiness to organize local

    communities so they could manufacture and sell products in the marketplacejust

    like good entrepreneurs.

    Those two meetings, were convinced, captured more than a fleeting role reversal;

    they symbolize an enduring shift in the practices of corporations and social groups

    and, perhaps, in their attitudes toward each other. That may sound like a startling

    claim. Since the protests against globalization at Seattle and Davos in the late

    1990s, people have assumed that the gulf between the private sector and the civil

    society, as the media call NGOs, has been growing. After all, despite social groups

    protests, more countries have opened up to foreign investment, and governments

    have continued to privatize industries. Meanwhile, companies, especially Western

    multinational corporations, have come under a dark cloud. Their recent shenanigans

    fraud at Enron, insider trading at WorldCom, and inept governance at Hewlett-

    Packard, not to mention a rash of social, environmental, and health-related

    controversies at blue-chip companies such as Nike, Shell, and McDonaldshave led

    to a near crisis of confidence in the role of the modern corporation in society.

    However, a countertrend has emerged. Over the last five years, some corporations

    have started to pay attention to customers at the bottom of the economic pyramid.As the pioneers move into inner cities and villages, their middle managers are

    spending more time than you might imagine on acquiring local knowledge, value

    engineering, developing low-cost business models, and community-based

    marketing. Meanwhile, several NGOs have set up businesses to provide jobs and

    incomes in order to free people from the tyranny of poverty. Product development,

    logistics, project management, and scaling techniques are some of the mechanisms

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    theyre using to kick-start socioeconomic development in long-neglected

    communities.

    Realizing that they each possess competencies, infrastructure, and knowledge that

    the other needs to be able to operate in low-income markets, companies and NGOs

    are trying to learn from and work with each other. For example, Danone has set upa joint venture with Bangladeshs Grameen Bank to manufacture and sell bottom-of-

    the-pyramid dairy products. Microsoft has tied up with the NGO Pratham to deliver

    personal computers to Indian villagers, while Intel and two large Indian information

    technology firms, Wipro and HCL Infosystems, have launched the Community PC in

    partnership with other NGOs to do the same. Nestl has joined hands with health

    professionals and NGOs in Colombia, Peru, and the Philippines to deliver educational

    programs on nutrition and nutritionally fortified food products to the poor.

    The Three Stages in the Convergence Between the Corporate Sector and the Civil

    Society

    Preconvergence

    Companies and NGOs adopt different attitudes toward liberalization and

    globalization. They quarrel over the nature and speed of deregulation. They fight

    over companies conduct, especially in developing countries.

    Stage One

    Companies and NGOs realize they have to coexist. They look for ways to influence

    each other. Some corporations and NGOs execute joint social responsibility projects.

    Stage Two

    Some companies get into bottom-of-the-pyramid segments and niche markets even

    as NGOs set up businesses in those markets. Companies and NGOs try to learn

    from, and work with, each other.

    Stage Three

    Companies and NGOs enter into cocreation business relationships. Cocreation

    entails the development of business models in which companies become a key part

    of NGOs capacity to deliver value and vice versa.

    As their interests and capabilities converge, these corporations and NGOs aretogether creating innovative business models that are helping to grow new markets

    at the bottom of the pyramid and niche segments in mature markets. These

    models, we believe, will lead to novel frameworks that can renew the corporations

    social legitimacy even as they allow for sustainable development and accelerate the

    eradication of poverty. This convergence is making it imperative that managers in

    both sectors understand the opportunities and risks in working together.

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    Liberalizations Unexpected Consequences

    Companies and NGOs have arrived at the same place by different routes. Over the

    last two decades, as many countries opened their economies to foreign

    competition, often at the behest of the International Monetary Fund and the World

    Bank, business and the civil society fought bitterly. At first, both sides battledvociferously and publicly with governments over the need for, the nature of, and the

    pace of economic reforms. While companies, especially multinational corporations,

    wanted governments to reduce tariffs sharply and allow foreign investment into

    every sector immediately, the civil society argued that liberalization should take

    place slowly and only in some industries. Then, as governments softened labor,

    environmental, and investment regulations to attract foreign investment, the two

    sectors waged a shadow war over the reforms future. Finally, as governments

    played less and less of a regulatory role, corporations and NGOs fought each other

    directly, debating the boundaries within which socially responsible corporations

    should operate. Those battles led to three unanticipated consequences.

    First, NGOs emerged as the corporate sectors de facto regulators, occupying the

    vacuum that governments were leaving behind. They arent newcomers to the task;

    for many years, NGOs have influenced markets in areas such as chemical

    regulation, oil spill liability, air emissions, liquid waste, pharmaceutical and food

    standards, child labor, and employment discrimination. Their influence has created

    a regulatory framework tougher than the legal requirements corporations face.

    NGOs may be small, but through the Internet, even a single person or organization

    can coordinate smart mobs, as Howard Rheingold calls them in his 2002 book of

    the same name, allowing NGOs to mount actions on several fronts simultaneously.

    For instance, local NGOs attacked the Coca-Cola Company over its use of water in

    the village of Plachimada in Kerala, India. As accounts have spread from Web site to

    Web site, the dispute has grown into a worldwide battle over the brands presence

    in universities and schools. The escalation of the campaign from market to market

    and from issue to issue has, as the Wall Street Journal wrote, cost Coca-Cola

    millions of dollars in lost sales and legal fees in India, and growing damage to its

    reputation elsewhere.

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    Jeb Brugmann is a Toronto-based consultant who works with companies to develop

    business models for the underserved segments of emerging markets.

    C.K. Prahalad is the Paul and Ruth McCracken Distinguished University Professor of

    Corporate Strategy at the University of Michigans Ross School of Business in Ann

    Arbor. This is his 14th article for HBR.Comments

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