Transnational corporations (TNCs) or multinationals operate in developing countries for any number of reasons and some use microfranchising to distribute products that are produced in the country and compete within that country. Posts can learn much form the strategies used by multinationals.

C. K. Prahalad, in his book “The Fortune at the Bottom of the Pyramid”, argues for “inclusive capitalism”. He says that there is significantly more potential for new markets in developing countries than commonly assumed. Bill Gates also speaks of “creative capitalism” and argues that capitalism should be used to solve the world’s problems by finding new markets and innovative solutions to provide economically disadvantaged people with access to high quality products.

Globalisation has led to a rise in transnational corporations (TNCs) or multinationals. The expanding reach of transnational corporations has been seen as both bad and good. In many cases there have been concerns about labour exploitation. Some TNCs employ people to manufacture products that are simply shipped back to industrialized countries.  Often these people are subjected to poor working conditions and receive very little pay.

However, many TNC’s produce products within developing countries and these products compete in markets within that country. These TNCs realize that there are opportunities in developing countries.

There are 3 ways in which multinationals are helping developing countries but also helping their shareholders:

  • Creating a “shared or higher values” or “higher social purpose” to motivate all their employees and customers;
  • Reverse innovation; and
  • Using microfranchising as a lower-cost sales and distribution method. Nestlé uses small entrepreneurs to sell products in remote communities in the Amazon. Unilever uses door-to-door vendors to sell health products in villages in India and west and east Africa. The brewer SABMiller has developed inexpensive beers in some African countries.

Global companies are striving for “shared or higher values”

Many companies today are focused on solving real problems for real people, corporate social responsibility, corporate citizenship, social performance, philanthropy, environmental stewardship, consumer protection, upholding human rights or diversity, supporting free trade, greening or sustainability – as a way to reduce risk, be involved in their communities, create brand recognition, develop customer loyalty, generate employee engagement and gain a competitive edge. Nevertheless, corporations are increasingly seen as profiting at the expense of society. Capitalism needs to be retooled.

The concept of Shared Value was defined in the Harvard Business Review article “Creating Shared Value” (January/February 2011), by Professor Michael E. Porter and Mark R. Kramer. Michael Porter wrote, “Businesses must reconnect company success with social progress… Shared Value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center…We believe that it can give rise to the next major transformation of business thinking.”

Shared Value can be created by:

  1. Defining markets in terms of social needs and developing profitable products or services that remedy these conditions;
  2. Increasing the productivity of the company by addressing the constraints in its supply chain; and
  3. Strengthening  regions where the company operates in ways that contribute to the company’s growth and productivity.

Whole Foods has a clear societal dimension to their corporate strategy which has virtually changed the industry in which they operate in.

GE reinvented itself and has aimed its efforts at driving reverse-innovation and new business by tackling some of the planet’s biggest problems—energy efficiency and harmful environmental impacts in emerging markets – China, India, Brazil and Africa and positioning itself  for future growth. Within five years, the initiative accounted for more than ninety products and services and some $18 billion in revenues.

Strategic Innovation displayed by Whole Foods and GE have shown us that you can make money and make the world a better place at the same time. This approach fundamentally changes capitalism as we know it.

Capitalism can improve efficiency, create jobs, and build wealth. Yet, to date our narrow execution of capitalism, with its focus on short-term gain, has prevented businesses from reaching their full potential, focusing on long-term success, and meeting our broader societal and environmental challenges, which have been heretofore left up to governments and NGO’s.

Numerous companies like Tetley, Marks and Spencer, Walmart, and Starbucks are being lean and green – saving energy and lowering their packaging costs while reducing landfill. Others only buy “fair trade” and support various causes.

Progressive corporations have realized that making a social value proposition a core part of their corporate strategy strengthens the brand, engages employees, creates opportunities and customer loyalty, gives them a competitive edge and can provide necessary growth.

Using reverse innovation in developing countries

Clearly, growth is slowing down in the developed world and skyrocketing in the emerging markets of the developing world. You have to be where the action is with the right solution and products.

Pioneer and innovative corporations have learned to reverse innovate – developing products in countries like China, India, Brazil and Africa – and then distributing them globally. In addition, they are developing new ways to distribute their products.

C.K. Prahalad’s global bestseller “The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits” rethinks our long-term held definitions of market, marketing and competition and challenges the notion that the only way to improve the lives of the poor at the bottom of the pyramid is through government and non-profit NGO intervention.

Fusion Universal summarized the concept well in the following video, arguing that global companies can access a huge market and profit, if they are willing to focus on inclusive capitalism and shift to lower-cost production models, smaller margins and mass adoption.

In fact, many bold companies (Nokia, Procter & Gamble, Nestle, Unilever, Danone, Natura, etc.) are attempting to get ahead of the curve, address global issues and be part of the positive change before these emerging giants swallow them. Nokia created new features in its hand-held phones sold in the US, based on observations of how phones are shared in Ghana. Procter & Gamble created a honey-based cold remedy for Mexico and later marketed it in Europe and the United States. Nestle developed low-cost, low-fat dried noodles for rural India and later positioned the same product as a healthy alternative in Australia and New Zealand.

GE reinvented itself from entertainment, nuclear reactors, jet engines and medical-imaging equipment to addressing world issues such as energy efficiency, harmful environmental impacts and reinventing tech for the emerging world. GE is serving an important public purpose while enhancing its bottom line. Building for tomorrow, GE is going into local markets and developing local technologies to serve those markets – GE’s new handheld electrocardiogram developed for the Indian market sells for around $1,000 and the portable, PC-based ultrasound that was designed for China sells for as little as $15,000.

GE

Using microfranchising as a way to distribute products or services

Poverty remains the most intractable problem of the developing world. According to The International Labour Organization, necessity entrepreneurs make up 70% of informal employment in sub-Saharan Africa, 62% in North Africa, 60% in Latin America, and 59% in Asia.

In many countries at the bottom of the pyramid, many are self-employed because they have no other choice, because there is no employment, because they have no education or because they have no political or social connections.

You have seen them – rural farm peasants selling in market stalls, people operating small food stands and urban hawkers buying and selling small wares. They exist on a day-to-day subsistence level; barely make a living for themselves and their families.

They operate in the informal economy and as such contribute little to strengthen and grow the economy of their country as a whole.

Access to credit is important, but often the result of individuals starting small identical enterprises with low returns is that they generate little additional employment or economic growth.  The necessity entrepreneur or microcredit / microfranchising borrower may also lack fundamental entrepreneurial skills and may not be particularly skilled in business.

Only when, Microfinancing and Microfranchising are coupled, can we create the personal initiative and enterprise necessary to pull people out of poverty.

Fairborne Consulting produces for-profit business models for the developing world:

Fan Milk Ltd., a great success started in 1960 by a group of Scandinavian investors, is Ghana’s leading manufacturer of ice cream and yogurt. The company produces milk products, ice cream, yogurt and popsicles. It is now listed on the Ghana Stock Exchange and has over 4,000 shareholders. It employs more than 350 people directly and more than eight thousand agents and microfranchisees indirectly. It has developed an affordable franchise program, including training.

Fan Milk also requires microfranchisees to save 10 percent of their profits. Vendors usually stay about 8 years and then leave, taking their savings, to start larger businesses.

Fan-Milk.ashx

Microfranchising is a new economic development engine that follows in the footsteps of microloans, microcredit, and microfinance. It had its origins in the 1980’s with BRAC, the international development NGO based in Bangladesh, and its system of providing low-cost health care through community health promoters in Bengali.  However, Jason Fairbourne, Steve Gibson and other faculty and students at the Brigham Young University Marriott School of Management pioneered the current microfranchising movement.

Microfranchising provides all of the same fundamentals of the business-format or package franchise model, but requires a much smaller investment from both the franchisor and the franchisee.

Microfranchising borrows from the established business-format or package franchise model’s business concepts, scales them down and applies them in developing countries.

Microfranchising allows the entrepreneur to get a loan from a microfinance institution to pay for the minimal franchisee investment fee, which gets him a turnkey, ‘business in a backpack’ that often also benefits his community. He now gains access to an entire system of business and operations training, support, branding and marketing as a franchisee.

Microfranchising is a tool designed specifically to create jobs, train people, and effectively deliver a business solution. It lifts people out of poverty; creates hope, dignity and opportunities for the world’s poorest people; and assists these entrepreneurs to become more successful in reaching economic, personal, and family self-reliance, by providing them with a successful business model as well as the necessary initial training and ongoing support needed to succeed.

Microfinancing, enhances the loan repayment rate because franchisees are likely to be more successful than the usual start-ups.

Katherine Terrell, Professor of Business Economics and Public Policy at the University of Michigan summarized it well,  “Microfranchising has enormous promise. First, the model makes sense: it fits the reality of the bottom of the pyramid, has the right incentive structure, and can enable more people to have good jobs than the microfinance model (which truly requires entrepreneurial talent). Second, the model allows social entrepreneurs to invest in poor countries, allowing them to ‘do well and do good’ at the same time.”

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