Is free-market forces pulling SE in India?

Is free-market pulling ‘social entrepreneurship’ in India

[Conversational/Q&A form of idea delivery rather than article]

What is social entrepreneurship?

A social enterprise (SE) is for-profit but serves a social goal. Recently, there is a lot of talk about social entrepreneurship, how it has become favorable through the forces of free market and may raise the world out of poverty.

How will market forces lead to SE?

Well, the argument is simple. Take the case of India: There are 700 million people in rural India. If you can do business with 1 in 1000 of this population and make a miniscule $1 on each of them, you can form a company with revenue of $0.7M! It is not wrong to assume that 0.1% of this population has economic capacity to spend a few dollars in a year. This set of people is the so-called emerging market for new businesses. Also, the huge volume of market with low profit per person is described as the economy of scale.

How is this different from conventional businesses?

The difference lies in the number of clients a company sells to. There are highly specialized businesses which work with a very few clients and make huge profits with each of them, for instance consider the defense industry. There is a spectrum of different industry from highly specialized to consumer-oriented products like shampoos, etc. The emerging market stretches this spectrum further to a huge market with lesser purchasing power. Compare the US consumer market, which has a 40 times (rough pessimistic number) higher purchasing power and a total population of 300 million, which is saturated in many respects.

But you said SEs have a social goal? Does serving the emerging markets imply social development?

The thesis is as follows. Enterprises now need to deliver products which are in lieu with demand, purchasing power and consumption patterns of the rural market. This would lead to development of products and processes to enable the demands and purchasing power of rural folks. For instance, the packaging of shampoo into sachet was a product innovation which matched the consumption pattern of the rural market and thus succeeded. The rural market will demand the services which they require for their progress and by the dynamics of free market, companies would provide it. One Laptop per child [1] is a project in this vein, though it is not completely demand-driven.

How would companies distribute to such a spread-out market?

A few different models work. The traditional model of big companies like Hindustan Lever was to connect multiple players in the supply chain from their centralized unit to the small paan-waala shop in the villages. This requires huge infrastructure: distribution network, storage facilities, etc. and trust with the local supplier [2 and references therein].

Building these huge networks, stocking product upfront and negotiating with the village shop-waala is surely not an easy task financially and operationally for a new business. The new approach is to work with NGO networks in rural areas and sell product through commission agents. For instance, let us consider one model. Grameen Phone [3], now a huge company, formed local entrepreneurs (commission-based agents) to sell mobile phone calls to villagers in Bangladesh. One key point of their model was to work with Grameen bank which already had a network and acted as hubs for training the agents and providing other support. Product distribution wasn’t a big headache for Grameen Phone given they were a services company. Second, commission-based models work well since the marketing is done by a person who knows the local language and behavior and is motivated to sell the product. This motivation of the agent leads to a pull for the product making distribution easier. A third desirable feature is to prove the model in one region and then incrementally or possibly organically ramp up the operations. These features allows for financially and operationally feasible models with small investment. Also, commission agents and other business processes lead to more employment and inflow of money in rural economy.

Hmmm, then it pretty much seems that market forces are pulling SE in India…

No, they are not.

But why, we just saw how people can and are building businesses around the rural market…

Yes, it is possible to build an enterprise focused around the rural market, but it is hard! And herein lies the problem. Doing business in the rural market in India is possible, but it isn’t easy. The whole process described above to form business processes and creating the right products can be achieved but it is easier said than done and risky.

This poses a problem because there are easier alternatives. In a free market, the entrepreneur goes with the idea which provides him/her the easiest and reliable way to earn most amount of money. The emergence of the rural market is a secondary phenomenon in India. A more dominant phenomenon is the rapid growth of a middle class with smooth consumption and a good amount of money to spend on leisure. This market is more like the developed markets in the West: smaller volume and higher profit per client, better infrastructure, easier distribution networks, etc. In comparison of this option, a SE for rural market is not attractive. Thus the free market favors the former than the latter.

Then there is a second problem. The maximum profitable products may not be the socially most plausible. An extreme example: it is more profitable to use computer kiosks to show pornographic films than doing microfinance transactions or deliver educational products (think liquor too!). This draws us into another issue: does a semi-literate population know what is best for them and if not, who decides (correlate with problems of democracy)? We wouldn’t enter this debate. Nonetheless, the point is that the most profitable service or product may not be a socially useful one. Also a socially useful product could be more challenging to develop.

So, are there no advantages to go for the rural market?

There is. A harder market directly implies less competition. If you can succeed in the rural market by taking all the achievable but not easy right steps, you have created a bar for others to enter. To build an enterprise for the rural market is harder and more time-consuming, but if it succeeds, the entrepreneur has the ‘last laugh’.

So, who do you think is currently and in future target the rural market?

Let us separate the traditional players, the bigwigs like Hindustan Lever, etc. Apart from them, there are big companies whose product consumption in the city market has saturated, so their next step of expansion is rural markets. Kellogs is one such example. Soft drink companies are similar. These companies also realize the future potential of the market.

Others might be very spirited entrepreneurs, who are ready to go the high risk-high gain way and can foresee a future gold-mine in the rural markets. I would believe that only people with a solid bank balance and good recovery plan in case of failure would go for such an enterprise. This is certainly not the small company, incremental growth and NGO networks model we discussed before.

So it is only the big companies that are getting in?

No, this is contrary to evidence. There are these third kinds of people, who are getting in. This is the centre of my argument. They aren’t getting pulled in by the free market forces. Free market would push entrepreneurs to middle-class markets and not surely socially useful products. The people doing SEs really have one of their aims to solve social problems. The free markets provide a substrate for their possible success. They can be technology people who have developed a rural technology or others with a large heart or some sort of social conditioning.

So who are these people?

Let us discuss this in Part II of the article.

References

1. One Laptop Per Child: http://laptop.org/

2. Tapping India’s Rural Market: http://www.uwstout.edu/rs/2004/article11.pdf

3. http://www.grameenphone.com/