Early examples already show the value that efficacy has in supporting business success. For instance, the efficacy activities conducted with Pearson’s Wall
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World Economic Forum 91-93 route de la Capite CH-1223 Cologny/GenevaSwitzerlandTel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744Email: contact@weforum.orgwww.weforum.org World Economic Forum® © 2016 Œ All rights reserved. No part of this publication may be reproduced or Transmitted in any form or by any means, including Photocopying and recording, or by any information Storage and retrieval system. REF 150216
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3Contents 4 Preface 5 Why social innovation matters to business 7 What are the business bene˜ts to pursuing social innovation? 17 How to get started: A framework for implementation 8 Build future markets 8 Design new products and services: Becton, Dickinson and Company 9 Serve new geographies or customers: Allianz 9 Expand sales and distribution: Novo Nordisk 10 Strengthen supply chains 10 Ensure stable supply and price of raw materials: Jollibee Foods Corporation 11 Increase product quality and price premiums: Nestlé 11 Enhance customer engagement: C&A 12 Invest in talent 12 Explore new sources of talent: SAP 13 Build tomorrow™s workforce: Intercorp 14 Leverage ˜nance 14 Gain market insights and brand recognition: Telefónica 15 Generate ˜nancial returns: Morgan Stanley 18 Identify 18 Mobilize teams around a leadership vision: MasterCard 18 Co-create with your future leaders: Centrica 19 Empower the front lines: SABMiller 20 Design 20 Focus on the real problem being solved: Philips 21 Offer patient funding and incubation support: Barclays 21 Engage a cross-functional change management team: Royal DSM 23 Learn 23 Embrace experimentation: Marks and Spencer 23 Create robust learning loops: RB 24 De˜ne and measure performance: Pearson 25 Scale 25 Leverage technology for growth: Cisco 25 Create a centre of excellence to support growth: Novartis 26 Find new opportunities to create business value: ITC Limited 28 Partner 30 Conclusion 31 Contributors
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4Preface Reducing inequality and accelerating real, meaningful and widespread inclusive growth are the most urgent challenges of our age. The World Economic Forum recently launched the Global Challenge Initiative on Economic Growth and Social Inclusion to engage all stakeholders Œ governments, the private sector, experts, civil society leaders and social entrepreneurs Œ in the design and implementation of scalable solutions. In addition to supportive policy frameworks enacted by governments, private sector action across all industries is indispensable. What form should that action take? Social innovation Œ innovative, practical, sustainable, market-based approaches that bene˜t society, with special focus on the vulnerable Š offers an answer. As fithe voice of social innovationfl, the Schwab Foundation for Social Entrepreneurship has championed the concept and practice of social innovation for the past 15 years. The Schwab Foundation™s global community of founders and chief executives of social enterprises Œ for-pro˜t and non-pro˜t organizations created with an explicit social mission Œ demonstrate how such approaches and methodologies can create life-transforming impact. But what about multinational corporations? Do the tools and approaches of social innovation apply? As this report demonstrates, the answer is a resounding fiyesfl. Global and regional companies are vital contributors that can take the practice of social innovation Œ and the enduring social impact it creates Œ to scale. As a central effort in the Global Challenge Initiative on Economic Growth and Social Inclusion, the World Economic Forum and the Schwab Foundation offer this report as a fihow to guidefl for companies to create social and business value. Drawn from a series of workshops and interviews with more than 35 executives from leading companies, and guided by the Forum™s Global Agenda Council on Social Innovation, this guide offers an action framework for companies to embed social innovation within their businesses. The report begins by articulating the fiwhy:fl why social innovation is becoming an increasingly relevant strategy for companies to pursue in today™s shifting business landscape. It then showcases the fiwhatfl: what social innovation strategies and business models look like, what the range of opportunities are, and what business bene˜ts companies can derive from pursuing them. Finally, the report drills down into the fihowfl: how did companies turn intentions into action? How did they identify opportunities aligned with their long-term business strategy? How did they identify partners, design metrics and devise internal structures to deal with fibusiness as unusualfl? The menu of approaches and framework for implementation showcased in this report can serve as an inspiration and a valuable reference for many more companies to embed social innovation practices into their business strategy and operations. We wish to extend our appreciation to the members of the Global Agenda Council on Social Innovation, who have been a great inspiration and support throughout the process, the dozens of executives who shared their time and insights with us, the Apax Foundation for their generous support, our partners at Oliver Wyman for their commitment, and the project lead Manju George, without whom this report would not have been possible. Jennifer Blanke , Chief Economist, Member of the Executive Committee, World Economic Forum Katherine Milligan , Head, Schwab Foundation for Social Entrepreneurship
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5Why social innovation matters to business The World Economic Forum™s Global Agenda Council on Social Innovation, an advisory body comprised of leading practitioners, thought leaders and academics, de˜nes social innovation as fithe application of innovative, practical, sustainable, market-based approaches to bene˜t society in general, and low-income or underserved populations in particularfl. Social innovation means being more strategic, more ambitious and more collaborative in how access and opportunity can be provided for billions of low-income people to participate in the global economy. Corporate involvement in societal issues is not new, of course. Companies have long deployed a portfolio of tools to exercise their citizenship in society, including corporate governance, corporate philanthropy and corporate social responsibility. What distinguishes social innovation from these traditional approaches is the pursuit of societal challenges in ways that create tangible business bene˜ts. While those methods and approaches can vary, social innovation strategies share certain characteristics: Œ They are directly aligned with the company™s innovation agenda and business strategy. Œ They leverage a company™s core for-pro˜t assets, such as human capital, value chains, technology or distribution systems. Œ Increasingly, they are managed from within a ˜rm™s core operations or business units. Bene˜ts to the companies include not just ˜nancial returns but also improvements to long-term competitiveness, including access to new markets or consumers, strengthened supply chains and talent retention. Why is social innovation relevant to business? Restoring trust in business: According to the 2015 Edelman Trust Barometer, public levels of trust in business are at its lowest since 2008. More than half (55%) of chief executive of˜cers who participated in the PWC Annual CEO Survey are concerned about these declining trust levels. Businesses that are able to enhance their net positive contributions to society are more likely to earn the trust of stakeholders and secure their licence to operate in society. Adapting to resource scarcity and environmental concerns: There is heightened pressure on companies to invest in the resilience of their supply chains and a growing business case to assess their social and environmental footprint, ensure responsible practices and fiinternalizefl negative external impacts. Companies that pursue business models and strategies that invest in the economic prosperity of key stakeholders in its supply chain, including small producers and local communities, are better poised for long-term competitiveness. Attracting and retaining talent: Tomorrow™s workforce views business success differently than their parents™ generation, and prioritizes long-term sustainability over short-term pro˜t maximization. In the Global Shapers Annual Survey 2015, six in ten millennials indicated that an opportunity to fimake a difference in society, my city, or my countryfl is the top factor they look for in a job. Moreover, considering that an absence of loyalty to employers marks this generation Œ two out of three respondents in the Deloitte Millennial 2016 survey expect to move to a new employer by 2020 Œ companies must fistand outfl in their efforts to improve employee retention, pride and loyalty, or face signi˜cant turnover costs. Changing performance metrics: A growing number of investors are including social and environmental considerations into their performance metrics and investment decisions. For instance, according to the Global Sustainable Investment Review 2014, the share of sustainable assets within all professionally managed assets globally grew from 21.5% in 2012 to 30.2% in 2014. For the ˜rst time, the 2015 Harvard Business Review ranking of the top 100 performing CEOs in the world Œ a measure aimed at evaluating long-term performance Œ weighted social and environmental performance at 20% of the overall score. The #1 CEO on the list, Lars Rebien Sørensen of Novo Nordisk, crisply summed up the importance of this shift in measuring success: fiIn the long term, social and environmental issues become ˜nancial issues.fl Search for growth and inclusion at scale: Even as the World Bank reports signi˜cant progress in tackling extreme poverty across the world (with less than 10% of the global population estimated to be living on less than $1.9 a day), there are growing concerns on rising income inequality worldwide. As the world searches for solutions at scale to address societal challenges, governments and civil society leaders are calling on business to make key contributions. The recently launched Sustainable Development Goals (SDGs) offers an opportune framework for such contributions. Companies that turn societal challenges, such as unemployment and lack of healthcare services, into opportunities that enhance business growth and long-term competitiveness will be positioned for sustainable success. It is society that gives us the right to be active, our licence to operate. A business leader has to think about how to solve the societal challenges of today, because if we don™t solve them, we will not have a business. Peter Brabeck-Letmathe Chairman of the Board, Nestlé
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8Build future markets As growth slows in developed markets, the finext 4 billionfl 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 pro˜t margins, yet forward-looking companies view their market-building and business development efforts in this segment as a form of filong tailfl 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 speci˜c 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 Œ or because of Œ 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. Design new products and services: BD (Becton, Dickinson and Company) In the late 1980s, concern was growing among health workers regarding disease transmission risks from needle- stick injuries in their work environment. Although, BD was the largest producer of needles in the world, the company identi˜ed safety-engineered designs as a key area for business growth and social impact. In the 1990s and 2000s, BD invested over $1 billion to redesign its needle-based devices and recapitalize manufacturing in order to transition most of the company™s needle product lines to safety- engineered designs. The company also invested in advocacy, training and an occupational injury surveillance system to raise awareness and encourage safer practices in hospitals. By 1994, a key safety product category generated $70 million in sales just in the United States. This product eliminated needles entirely for IV access procedures, the highest frequency cause of injuries at the time. Moreover, safety-engineered devices became the single largest source of growth for BD over the last 25 years. Today, these devices generate over $2.6 billion annually in global turnover Œ a successful strategy that, in many countries, preceded legislation requiring health facilities to use them. ˇ •ˇ •ˇ Focusing strategically on unmet societal needs has enabled BD to identify and pursue new social innovation opportunities to expand our global relevance and growth. Vincent Forlenza Chairman, President and Chief Executive Of˜cer, BD, USA
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9Serve new geographies or customers: Allianz In 2003, Bajaj Allianz, a joint venture between Allianz AG and Bajaj Finserve in India, started offering insurance products to a new customer segment: households with incomes between $1.25 and $4 per day. For the consumers, who were not covered by conventional insurance products or government social protection programmes, micro-insurance offers protection against a number of risks, including illness, accidental death and disability, theft, ˜re, agricultural losses and natural disasters. In the years that followed, Allianz subsidiaries in Colombia, Indonesia and Africa also developed insurance product lines for this consumer segment. Initially, the Allianz head of˜ce in Germany supported each subsidiary with communication and incubation services, but as the local businesses grew, Allianz created a new business unit, Emerging Consumers, tasked with business expansion in existing and new geographies. While still small compared to its traditional business, Allianz has built a pro˜table micro-insurance business, which offers the long-term opportunity to grow its customers from micro-insurance to conventional businesses. As of June 2015, Allianz had micro-insurance operations in 11 markets, insuring a total of 57.4 million lives. Expand sales and distribution: Novo Nordisk Historically, a key obstacle to treating diabetes in Bangladesh has been the availability of insulin. In 2006, the Denmark- based global healthcare company Novo Nordisk undertook a study that found that only 16% of the country™s population (all living in or near the capital of Dhaka) had access to Novo Nordisk products. Its only distributor at the time had just one insulin facility; only 25% of pharmacists in Dhaka stocked insulin; and most doctors and pharmacists lacked proper cooling systems required to keep insulin in stock. With the study results in hand, Novo Nordisk identi˜ed three ways to strengthen its insulin distribution network. First, it switched distributors, increasing the number of distribution points from one central depot in Dhaka to 29 depots across the country. Second, it established a partnership with the Bangladesh Diabetes Association (BADAS) and the World Diabetes Foundation to install proper cooling systems in clinics. More than 310 systems have been installed to date with the aim of reaching 550 clinics by 2017. Third, Novo Nordisk built a local manufacturing facility with Eskayef Bangladesh, a local pharmaceutical company, to produce insulin locally, ensuring a steady supply. These distribution system improvements alone led to a compound annual growth rate in insulin sales of 9.5% in the past decade.
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10Strengthen supply chains The previous section highlighted opportunities for consumer- driven social innovation. The experiences of Jollibee, Nestlé and C&A demonstrate how companies can achieve similar outcomes through innovations at the start of the supply chain. There are three major strategic bene˜ts for social innovation in a corporate supply chain. The ˜rst 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. Diversi˜cation 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 bene˜t 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. Ensure stable supply and price of raw materials: Jollibee Foods Corporation Jollibee Foods Corporation (JFC) runs the largest chain of fast food restaurants in the Philippines and is reliant on a steady supply of raw materials, such as vegetables, cereals and animal produce, at signi˜cant quantities and stable prices. However, the agricultural sector in the Philippines is particularly vulnerable to such extreme weather events as typhoons, and when extreme weather reduces crop yields, the price of produce inevitably spikes Œ exacerbated by middlemen who hike prices exorbitantly. To mitigate this supply chain risk, in 2009 JFC began sourcing produce directly from smallholder farmers in addition to its traditional intermediary traders. JFC invested a signi˜cant amount into partnership building and training to organize the farmers into functioning cooperatives. Buying directly from the farmers has meant that when one area of the country is producing lower yields, JFC can buy from a less affected region. Product quality is assured and prices are more stable as the negotiation relationship is directly between JFC and the farmers. By 2015, Jollibee had helped over 900 farming families in 27 cooperatives with an increase in income of 200-500%. One-fourth of all vegetable produce sourced by JFC is now purchased directly from the farmer cooperatives. ˇ •ˇ •ˇ On the supply side, we bene˜t from better diversi˜cation and hence more stable prices. By having both a few traders and many farmers, we have diversi˜ed our set of suppliers and are assured of supply while helping boost the rural economy. Ysmael Baysa Chief Financial Of˜cer, Jollibee Foods Corporation, Philippines
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11Increase product quality and price premiums: Nestlé As a globally successful brand and reference for high-quality premium coffee, Nespresso, a globally managed business of Nestlé, needs a guaranteed and continued supply of high- quality coffee beans. Nestlé identi˜ed a number of growing trends that reduce the attractiveness of coffee farming among farmers and threaten the potential supply of coffee to the company. These trends included low crop productivity, price volatility, lack of insurance and provisions for retirements, and younger generations moving away to other careers. In 2003, Nespresso responded by creating a unique supply chain model Œ the Nespresso AAA Sustainable QualityŽ Program Œ that combines the company™s coffee expertise and strict quality criteria and processes with the non- governmental organization (NGO) Rainforest Alliance™s know-how in sustainable farming practices. Nespresso created the AAA Program to ensure its continued supply of high-quality coffee, while preserving the environment and enhancing farmer welfare. The programme builds long-term, direct relationships with farmers and invests in their capacity to continuously improve on the fitriple Asfl Œ quality, sustainability and productivity. Farmers are offered training, ˜nancing and technical assistance through a network of over 300 dedicated agronomists. Price premiums, which are 30-40% above coffee market price and 10-15% above market price for similar quality coffees, are also paid. Investments are made in post-harvesting infrastructures. By December 2014, the programme was serving over 63,000 farmers in 11 countries, covering 280,000 hectares of coffee farms. In addition to increasing the quality of coffee, the programme increases farmers™ incomes, yields and sustainability. Between 2009 and 2011, a survey of Colombian farms demonstrated 22.6% better social conditions, 41% better economic conditions and 52% better environmental conditions than non-AAA farms. Enhance customer engagement: C&A Cotton is the main ˜bre used for over 60% of C&A™s products. In 2004, C&A made a commitment to steadily increase the use of sustainably grown cotton in its product lines. The company saw this as an opportunity to improve the sustainability of cotton production practices among farmers in its supply chain while at the same time enhance its customer engagement and brand equity. In 2009, in partnership with Textile Exchange and the Shell Foundation, C&A created CottonConnect, a social enterprise that supports farmers and retailers to increase the production and use of sustainable cotton. In 2014, C&A was the largest purchaser of organic cotton globally and one of the largest retailers of organic cotton apparel through its Bio Cotton range of products. This range constitutes roughly 40% of its overall cotton product sales and the company has the 2020 goal of achieving 100% sustainable cotton in all its cotton products. While C&A chose to price its sustainable cotton collections the same as its regular collections, organic cotton products sell faster and price markdowns are lower, which creates a higher gross margin for the company. For farmers, the bene˜ts include lower costs of production, reduced reliance on traditional intermediaries, and crops with higher resilience to climate change. However, to increase the number of participating farmers, ˜nancial incentives need to be created that compensate for the short-term loss of yield during the transition period as well as investments that further enhance crop productivity, such as high-performing organic seeds. The C&A Foundation works closely with the company and in collaboration with NGOs and governments to address some of these larger challenges.
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