People Franchises

How can the low-income population take advantage of sustainable economic activities? How can the excluded and unemployed join promising activities? How can the involvement of socially and environmentally responsible players be secured at the bottom of the social pyramid? Inclusive ventures offer some answers to these questions, and their implementation is achieved through several business engineering tools among which people franchises stand out.In prior articles, we discussed poverty and inequality reduction strategies. Their most salient features serve as an introduction to the subject of this article:

(i) Poverty and inequality are the outcome of an income and asset concentration process that disrupts the integrality of sustainable development. Not only do they create severe social hardship but they also affect the way in which the economic system functions: goods and services production and effective demand get decoupled; preeminence of financial speculation over the real economy, superfluous consumerism coexisting with extended poverty and indigence, environmental deterioration that jeopardizes the planet’s future, public finances running amok, surplus appropriation by criminal organizations affecting countries’ development, extended corruption enervating values and decisions, loss of social cohesion resulting in political instability and citizen insecurity, among other effects.

(ii) It is possible to abate poverty and inequality but not through isolated measures; it can be attained by acting at the level of macro-economic policies (aligning public spending in social and production infrastructure, the tax system, and monetary policy with this goal), at the level of value chains by securing the involvement of production network leaders, and by supporting capital formation at the bottom of the social pyramid.

(iii) To abate the poverty, inequality and periodic crises hitting our countries we must transform our way of thinking and functioning, imagine new referential utopias, adopt attitudes, leaderships, social and political agreements that are capable of bringing us closer to a fairer, more sustainable development.

Without ignoring this contextual framework, on the lines below we will focus on one of the several dimensions of the effort to abate poverty and inequality: capital formation at the base of the social pyramid. With this purpose in mind, we discuss the generation of productive ventures which, acting with social and environmental responsibility, make it possible to integrate poor populations into promising activities.

Productive mobilization of the poor: a response that cuts across challenges

In southern hemisphere countries, low-income population sectors do not represent poverty “pockets”: they make up a huge, mostly majority, mass of disadvantaged, excluded, marginalized individuals. Their existence has severe ethical, social, economic and political implications, including a tremendous waste of talent, energy and work capacity. With appropriate actions, however, such grossly underused potential may be productively mobilized and contribute to transforming adverse circumstances by generating stable occupation, better income, and social and economic capital formation.

A costly error of judgment that programs supporting small and micro producers tend to commit is overlooking the fact that successful economic activities are not only founded on financial resources: they require a series of non-financial factors such as effective management, knowledge of excellence, good contacts, information and market access. Availability of such resources significantly increases the capacity to identify better business opportunities, and to become organized in order to seize them. Very little of that is at the disposal of low-income population sectors.

Generally speaking, that population embarks on low-productivity economic activities yielding low income they use to secure their precarious subsistence. They cannot afford capital formation processes or join broader social networks or promising productive networks. The quality of the services they are provided with in terms of education, health, security, transport, environmental sanitation is extremely poor. Their voices are ignored by the media, policy-makers and political parties who, in general, view them as mere electoral clientele.

For the poor, the worst

Even though there are noteworthy exceptions confirming the rule, solutions aimed at tackling poverty are usually short-termed and ill-designed. That should cause us no surprise: they are given low priority. They normally take the form of financial aid to small business units (micro-credits and SMB credits), sometimes coupled with technical assistance on technology and management. These efforts do their part and should not be underestimated, as they constitute a first level of support to sectors that are permanently left behind: they are necessary but usually insufficient.

One critical limitation of small ventures is their tiny scale, which restricts their access to opportunities. Due to their size, small ventures lack differentiated management facilities: the small producer is at the same time the general manager as well as responsible of production, marketing and administration. this shortfall calls for the devise of other support modalities that may overcome these restrictions and allow those sectors at the base of the social pyramid to access top quality knowledge, management, information, contacts and, most specially, state-of-the-art business engineering, so that they may keep up with other economic players and access better opportunities.

The support of cutting-edge business engineering: inclusive ventures

Today, there exists state-of-the-art business engineering enabling a group of small producers to partner up with a strategic partner that contributes knowledge of excellence, contacts, information, management, market and finance access. This business engineering includes franchise systems, holdings of cooperatives, trading and export consortia, agribusiness locomotives, among others. On this basis, new types of economic players can be established: what we called “inclusive ventures”.

Inclusive ventures are intended to operate as medium-sized concerns oriented to profitable businesses in promising sectors, favoring groups of individuals of humble origin without harming the environment. The goal is to include low-income families in promising activities, instead of heading them towards activities of extremely low productivity and very gloomy prospects, as it is often the case.

Although some inclusive ventures crop up spontaneously in today’s markets, in truth, they are scarce and tend to be poorly structured. Hence the need to establish small promotion entities devoted to identifying and seizing opportunities that may benefit low-income sectors: the inclusive venture developers.

Developers are not bureaucratic entities: they are made up of very small teams specialized in identifying market opportunities and, very especially, organizing ventures with a view to taking advantage of such opportunities. Developers may be promoted by state and city governments, development agencies, ministries, in association with umbrella business entities, unions, and civil society organizations.

To attract both small producers and the strategic partner, an inclusive venture should be organized in such a way that it may appeal to both by ensuring good returns and equal treatment. An inclusive venture developer should ensure such balance and embody it in the way the venture is structured.

People franchises

One example will allow us to define concepts and players clearly. Let’s take the case of a family-run rural inn franchise. The project would consist in organizing a venture bringing together a certain number of rural families who are willing to join this activity as owner-managers of a small or medium-sized inn located in tourist attraction areas. By entering the franchise, each franchisee has: (i) the right to receive from the franchise access to funding and support to build, upgrade or equip its estate, market its services, obtain training and technical assistance, etcetera, and (ii) contractual obligations to comply with, such as abiding by rules and standards the franchise sets forth in terms of physical infrastructure, equipment, procurement, customer service, sharing a common reservation system, among others.

People franchises have three stakeholders: small producers, the strategic partner, and those who contribute capital (startup investment and future capital increases. In the case of our example, the small producers are the families with their inns; the strategic partner is someone having expertise in tourist venture operations; and the capital contributors may be different actors who share the inclusion aim; in addition to the small producers and the strategic partner, public, private or mixed funds or trusts, development agencies, umbrella business entities, unions, and civil society organizations, among others.

The ownership structure of the inclusive venture (in this case, those who fund the rural inn franchise) is crucial to make sure that efficacy and equity converge: the inclusive venture should bring in an experienced, high-quality strategic partner who may manage the venture efficiently, as well as ensure the fair distribution of results among franchise participants (inns owners, managing partner, capital contributors).

The family-run inn franchise allows two levels of inclusion: (i) a first level made up of the families who own the inns, as they add a non-agricultural source of income (they increase their income and diversify their risk), and (ii) micro-ventures that provide services to franchise customers such as fresh farm products, guided tours, artistic and cultural activities, handicrafts, horseback riding, etc. (they secure income and stable demand for their services).

People franchises, as well as other business engineering forms that may be used to establish inclusive ventures, are applicable to a wide assortment of activities such as agricultural products trading, certain value chains (for instance, honey, olive, vicuña), urban accommodation networks (bed & breakfasts), fresh product and service concentration markets, among many others.

Local governments may be excellent boosters of inclusive venture developers, even though, due to their budgetary restrictions, they would not necessarily need to contribute funding and management. Exception being made of municipalities with large budgets, their role is to promote and catalyze initiatives, rather than carry them out themselves. These matters of municipal and state interest are addressed in Opinión Sur’s work sessions called The Local Boom: new ways of promoting local development.

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