What are the business opportunities in pursuing social innovation?
Companies can pursue a number of social innovation opportunities and generate a range of business benefits. See some opportunities, grouped into four broad clusters below:
Each cluster offers a starting point for companies to look for social innovation opportunities most relevant to them. Specific opportunities will be driven by multiple factors including a company’s operating environment, geographic footprint, product portfolio, supplier base and raw material dependencies, and talent models.
For example, market-facing companies from sectors such as healthcare or consumer goods have embraced business growth through innovations in products, services or distribution channels targeting underserved consumers. Companies heavily reliant on supply chains, including from food, agriculture or textiles, have pursued strategies that secure raw material supply, increase product quality and engage customers, while companies in professional services or IT focus on building future talent pools and enhancing employee loyalty.
Build future markets
As growth slows in developed markets, the “next 4 billion” consumers in emerging economies represent a growth opportunity for local and multinational companies alike. In the short term, the relatively low purchasing power of these consumers makes it harder to achieve profit margins, yet forward-looking companies view their market-building and business development efforts in this segment as a form of “long tail” investment. In doing so, they can gain insights on the unique needs and preferences of these customers, drive awareness and behavioural change, and innovate to make product lines more affordable and relevant.
Companies that successfully pursue social innovation as an opportunity for developing new markets typically innovate in three specific ways. First, they design products and services that respond to the unique needs and behaviours of low-income customers. This can include developing new products and services or adapting existing product lines for their needs (e.g. food brands fortifying existing products with micronutrients to address malnutrition). Second, the products and services must offer strong value for money despite – or because of – low purchasing power, necessitating the design of cost-effective products.
Third, products must be made accessible across large geographies with poor infrastructure, which requires thinking creatively about distribution channels. As demonstrated by Novo Nordisk’s experience, in addition to enhancing the quality of life of low-income customers, such innovations can also present opportunities to promote micro-entrepreneurship and enhance incomes.
Strengthen supply chains
The experiences of Jollibee, Nestlé and C&A demonstrate how companies can achieve social and financial outcomes through innovations in the supply chain.
There are three major strategic benefits for social innovation in a corporate supply chain. The first motivation is to ensure the stability of access to raw materials. Many supply chains, particularly those in the agriculture, food and consumer goods industries, are laced with intermediaries, all of whom take a share of the price paid by the consumer. Unless small suppliers can increase productivity or volumes, households may abandon crops that have become unviable, threatening the supply of raw materials. The threat of a global cocoa shortage, for instance, has prompted many global chocolate manufacturers to partner with social enterprises, such as Kennemer Foods in the Philippines, to help cocoa farmers increase crop productivity.
Extreme weather is another driver of supply volatility. Diversification of and investment into a supplier base can create direct and trusted relationships with farmers, which help maintain stability in supplies and prices in the face of extreme weather events, as demonstrated by the Jollibee example.
The second strategic benefit revolves around improving the quality of raw materials, which supports a company’s ability to achieve a price premium while strengthening consumer loyalty. Nespresso is an example of a business model that enables both smallholder farmers and the company to increase the price premium by focusing on quality improvements.
A third motivation is reputation and proactively responding to changing consumer preferences. An increasing number of consumers are willing to pay a premium for products sourced through socially responsible supply chains. The experience of C&A is instructive in how companies can generate a brand premium and customer loyalty through investing in producers.
Invest in talent
Increasing levels of diversity in the workforce can present a significant social innovation opportunity. Seeking a more diverse workforce both increases the size of the recruiting pool and can introduce new capabilities into an organization. Many companies have realized the opportunity this can bring – according to the “2011 Fostering Innovation Through a Diverse Workforce survey” by Forbes, 85% of companies agree talent diversification results in more innovative product generation ideas.
SAP is one example of a company that has tapped into talent pools traditionally considered unemployable, thereby increasing the diversity of its internal talent. Firms have recognized that “new” talent pools (other examples might be immigrants, the long-term unemployed and the disabled) can bring new strengths and perspectives to their team. However, to successfully tap into these groups, firms need to assess how existing hiring approaches and work procedures will need to be adapted.
As the Intercorp example shows, other companies have focused on increasing the availability of “employable” talent in their operating markets either through youth vocational skill training or through primary and secondary education. Firms have approached the issue by searching for allies who share the same mission and are willing to enter into partnerships. Governments or educational institutions – or even competitors – are often willing to co-invest or bring in their expertise and teaching infrastructure. At the same time, companies can play an active role by (co-)designing the curricula, bringing in their practical experiences and ensuring a targeted skill development that matches the demands of business.
Finance can be a key tool for a company to engage in social innovation. Companies such as Telefónica have helped grow social enterprises by managing impact investment funds or incubators. In addition to generating financial returns, such investments can offer a pipeline of ideas to support a company’s innovation agenda and can become future partners, or even future customers.
To benefit the most from its impact investments, a company should invest in start-ups that are strongly aligned with the company’s business strategy or operating in adjacent markets. As Morgan Stanley’s case also illustrates, targeted investments into social entrepreneurs can generate new business opportunities for the company.