Hybrid Value Chains: Social Innovations and the Development of the Small- Farmer Irrigation Market in Mexico C o-authors: Valeria Budinich, Kimberly Manno-Reott , Stephanie Schmidt Harvard Business School Conference on Global Poverty and Business Approaches December 2, 2005 1 December 1-3, 2005 HBS Global Poverty Conference
Content • Hybrid Value Chains and Social Innovations • The Mexico Case: Small-Scale Irrigation • Moving forward 2 December 1-3, 2005 HBS Global Poverty Conference
Larger trends are creating an enabling environment for a new type of cross-sector partnerships Creation of Creation of social value economic value Citizen sector Business sector Serving low-income Leading companies have Due to competition and started to integrate the pressure for sustainability, consumers through creation of social and citizen organizations are cross-sector environmental value as increasingly adopting commercial part of their business income-generations partnerships goals strategies 3 December 1-3, 2005 HBS Global Poverty Conference
Our goal: help develop Hybrid Value Chains, a new type of partnerships to serve low-income markets Creating social and economic value for low-income consumers, business partners and social partners: Access to affordable and better products and services, empowered customers Low-income Consumers Win-Win Social Business Win Organizations Partners New markets, goodwill Sustainable sources of and pioneering income and accelerated corporate image social impact 4 December 1-3, 2005 HBS Global Poverty Conference
Principles emerging from the work of social innovators Factors/ Limited purchasing High volume business Poor understanding of Principles power of individual based on small (even the human and social clients tiny) individual capitals of low income transactions communities Principle #1. “World Class Quality at “Low cost technology” “Acquiring Technology Design products and Affordable Price” IDE through Micro-Leasing” services that tap into David Green (*) Agriculture (Asia) Fabio Rosa (*) the wealth of poor Health (Global) Energy (Brazil) “Multi-Tiered Pricing Model” “Group Micro-Lending “Leveraging Social Principle #2. Change radically the Rebeca Villalobos (*) and Demand Networks” logic behind your Health (Costa Rica) Aggregation” ICICI (**) and CSOs’ business model Prof.Muhammad Yunus Financial Services (India Financial Services (Global) Principle #3. “Shared Purchasing” “Transforming economies “Intellectual Property of of Small Producers” Intangibles” Leverage the power of Grameen Telecom (**) communities as both ICT (Bangladesh) Dr. Verghese Kurien Ron Layton (*) consumers and Dairy (India) Coffee Production producers (Ethiopia) * Source: www.changemakers.net – Market-Based Strategies that Benefit Low-Income Populations 5 December 1-3, 2005 HBS Global Poverty Conference
Advancing Full Economic Citizenship through a three- prong approach HYBRID VALUE CHAIN Serving low-income consumers CLASSES OF SMALL PRODUCERS Improve products and services FULL to low-income communities Support the restructuring of production and around the world thanks to ECONOMIC distribution systems for a whole cluster of business social hybrid CITIZENSHIP small producers to allow them to get an collaborations increased value for their production Transforming small producers economies Enable a faster development of mechanisms that allow low-income people and organizations to leverage the economic value of their assets Leveraging assets of the poor WEALTH OF THE POOR 6 December 1-3, 2005 HBS Global Poverty Conference
Content • Hybrid Value Chains and Social Innovations • The Mexico Case: Small-Scale Irrigation • Moving forward 7 December 1-3, 2005 HBS Global Poverty Conference
Existing Value Chains are not designed to serve small farmers markets: a package of integrated services is needed I rrigation Sub-sector Medium and Large Farmers Small Farmers or BOP Market Segment Value Chain Steps Market Segment currently served by Amanco • State-of-the-art solutions designed for large • Most solutions available in the market are not Product Development farmers and their needs readily available and affordable because they require an upfront cash affordable investment and were not designed to address needs of small farmers • Reliance on “makeshift” solutions (e.g., widespread use of plastic hoses or water channels made with shovels by hand) • Highly efficient and productive manufacturing • Very high relative cost of inputs given the type of Production facilities home-made solutions • Network of 200 specialized value added • Only informal and highly inefficient distribution Distribution & Logistics resellers providing customized irrigation channels solutions fitting the specific conditions of each Inputs are bought through small local retailers who farmer’s terrain tend to have high profit margins • Purchasing decisions are made on the basis of • Purchasing decision requires persuading the farmer Sales & Marketing technical specifications not price first that he or she can have a more profitable farm • Marketing materials used are highly technical not technology • Tailored marketing materials do not exist • When needed, financing is secured directly by • Do not meet conditions of financial institutions or Financing clients through local commercial banks approval process is too complex and costly. A financial “broker” is needed • Client are well informed about market • Clients are dispersed and require an intermediary Marketing of Agricultural Production [1] conditions and maintain direct relations with capable of aggregating production and negotiating on potential buyers their behalf 8 December 1-3, 2005 HBS Global Poverty Conference
Background, roles and “the deal” of the Amanco/ social entrepreneur/Ashoka HVC partnership Background Role Deal • Learn about credit • Access to irrigation systems • Over 1 million small farmers (less Small -scale opportunities for investment at fair price plus value- added than 4 hectares) could benefit in farmer in farm; provide required services like financing, Mexico alone Becomes an empowered documents commercialization and • Major opportunity to increase consumer and increases • Make purchase decision technical assistance productivity and reduce rural poverty his/her income significantly and pay 10% of costs • Doubled or tripled incomes upfront in cash • Product and technical • Leading Latin America company • New rural distribution Amanco training providing water solutions channel for serving small Water distribution • Pricing and quotations • Part of Grupo Nueva conglomerate; farmers profitably company opens • Marketing support (e.g., 2004 revenue US$1,300 million • US$ 1 million in sales an underserved market materials) • Chairman mandate that 10% of during the pilot phase revenues come from BOP by 2008 • Sales and promotion • Arturo Garcia: organization RASA; • Larger social impact and Social (aggregating demand) dedicated to increasing economic commissions to be invested Entrepreneurs •Technical support to farmers power of small farmers in coastal in other programs that • Leveraging gov’t financing Serves small farmers Guerrero area require subsidies while creating • Partnerships with crop- • 35% discount on list price • Juan Jose Consejo: organization sustainable source purchasing companies and INSO; dedicated to the conservation creates commissions of revenue trainers in organic farming of water in Oaxaca area • Social sector organization • Facilitates Amanco and • Contributes to accelerated Ashoka dedicated to creating a globally - social entrepreneurs’ social change integrated and competitive citizen partnership • 1.5% commission on total Acts as a business/ • Barrier-remover/problem- sales of each new rural sector social broker • 1600 social entrepreneurs (Ashoka solver distributor for 3 years Fellows) in global network • Systematizes learnings 9 December 1-3, 2005 HBS Global Poverty Conference
Exhibit 3: Hybrid Value Chain partnership to develop irrigation market among small farmers in Mexico Core competencies, assets, innovations Amanco RASA / INSO Hybrid Value Chain Small Product/ service Distribution & Sales & Farmers Production Financing development logistics marketing in Mexico The combination of skills and assets of both the company and social entrepreneur together create a new value chain for irrigation systems that meets the unique needs of small farmers in Mexico. This includes providing an integrated package of services to small farmers. 10 December 1-3, 2005 HBS Global Poverty Conference
Content • Hybrid Value Chains and Social Innovations • The Mexico Case: Small-Scale Irrigation • Moving forward 11 December 1-3, 2005 HBS Global Poverty Conference
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