Lessons in Developing Inclusive Business in Agriculture: Learning from Grow Asia’s Experience
The Philippines has embraced the concept of inclusive business as an effective approach for large- and medium-size companies to provide more opportunities for the poor to participate in the growth process, particularly for the agriculture sector which has had dismal growth in the past decade.
As defined by the Food and Agriculture Organization of the United Nations (FAO), inclusive business models (IBMs) promote the integration of smallholders into markets with the underlying principle that there are mutual benefits for poor farmers and the business community. The “inclusive” element relates to the constraints of linking commodity-dependent smallholders and small enterprises to markets, while the “business” element relates to mainstreaming business tools and private sector approaches into agricultural development. (FAO, 2015)
In its report released in 2019, Grow Asia distills its learnings from the multiple inclusive business value chains with which it has been involved. It also draws lessons from independent case studies of mature value chain projects in its network.
Grow Asia notes building IBMs in agriculture is a long-term investment that requires sustained attention, often with the close coordination of multiple stakeholders. When done successfully, it is a powerful catalyst of rural transformation. However, it says creating an IBM and a strong supply chain in agriculture will often be a 4 to 8-year endeavor. Progress can be steady, and impact delivered at scale – but it is not immediate.
Here are the key lessons it outlined for working group partners in its Inclusive Business Roadmap:
1. Align Stakeholders
- For an effective delivery of IB, there must be representation from key stakeholders across the value chain, accountable leadership with clear roles and responsibilities of members.
- Prior to investment, there must clarity of purpose and shared objectives. Stakeholders must align on the ‘what, why, and how’ and there must be common understanding of relevant industry information, trends and market data, agenda for action with strategic rationale, and agreement on structure, process, and means of action, which often includes small groups with discrete tasks.
2. Design the Model
- A proven demand in the market is a must and prerequisite for any project. No demand, no business model. However, this is only half of the equation success. IBMs must deliver sustained incentives for all players along the value chain for economic sustainability.
- Market requirements and linkages must be established upfront to support farmer groups to align their activities and ensure buyers clearly communicate their expectations.
- Design access to finance for smallholder famers. In the pilot stages of an intervention, the lead company will usually provide loans to the farmers, but as the project scales up, it is often necessary to develop partnerships with financial institutions. Financial solutions need to be adapted to the business economics of the crop, farmer, and route-to-market.
- Ensure that there are no constraints in the regulatory or policy environment that could create unmanageable risk for small-scale players. Policies can unintentionally create imbalanced risks for smaller-scale players. It’s important they are not over-exposed to market risks.
3. Build the Business
- IB models often succeed when they result in sustained increases in on-farm productivity. This, in turn, leads to the lowering of unit costs, increasing volumes and the achievement of consistency in quality and sustainability. Most smallholder farmers are only achieving one-third of commercial yields, resulting in high unit costs and barriers to investment.
- In nearly all instances, IB models with scaled impact and sustained profits have required the presence of a lead firm (either an upstream input supplier or downstream buyer) with a business interest in increasing on-farm productivity and sourcing agricultural products.
- Non-profits, foundations, and governments can play a strong organizing and enabling role. In certain situations, they can play a strong role in organizing farmers and incubating and funding pre-commercial activities. They cannot, however, act as a substitute for a market player over the long-term.
- No one solution fits all value chains. IB and/or conventional business models (or parts of the business model) can be replicated in similar market contexts. Product economics, market dynamics, and local social structures all factor into the IB solution. Ultimately, the functional efficiency of the solution, and the profit it generates, are more important than its form or structure.
- When feasible, bring international standards testing to local markets. Locally available testing for international standards can create a platform for aspiring producers to meet the standards and compete with imported produce.
4. Execute, Measure and Scale
- Begin small, with pilots in numerous locations, and with multiple farmer groups. Not every location or farmer relationship will work. Piloting in multiple locations with a variety of farms will widen the learning and mitigate start-up risk.
- A high level of distrust between farmers and agribusinesses often exists, which can be a barrier to famer participation. The lack of trust exists for off-takers concerned about side-selling and growers in their relative disadvantage in negotiating fair prices. Trust can be built, or rebuilt, through sustained, face-to-face engagement over time. It can alternatively be substituted by using trusted, (generally) local intermediaries.
- All business models have natural competitive boundaries and limits to scale by the finite size of the lead player’s market demand.
- Explore ways to scale the IB model. From Grow Asia’s experience across the network, there are four Pathways to Scale: Institutionalization, Business mainstreaming, Replication, and Catalytic financing.
You can download the full report of Grow Asia here.
Grow Asia was established by the World Economic Forum, in collaboration with the ASEAN Secretariat, to bring together farmers, governments, the private sector, NGOs and other stakeholders in Southeast Asia to convene, facilitate and help scale inclusive agriculture value chains as well as multi-stakeholder sectoral coordination.