THE NATURE OF CORPORATE RESPONSIBILITY AND CORPORATE CITIZENSHIP, RELEVANCE IN THE PRESENT DAY BUSINESS ENVIRONMENT.

Corporate social responsibility (CSR, also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business/ Responsible Business)[1] is a form of corporate selfregulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. In some models, a firm's implementation of CSR goes beyond compliance and engages in "actions that appear to further some social good, beyond the interests of the firm and that which is required by law."[2][3]CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders. Some commentators have identified a difference between the Canadian (Montreal school of CSR), the Continental European and the Anglo-Saxon approaches to CSR.[11]It is said that for Chinese consumers, a socially responsible company makes safe, high-quality products; for Germans it provides secure employment; in South Africa it makes a positive contribution to social needs such as health care and education.[12]And even within Europe the discussion about CSR is very heterogeneous.[13] A more common approach to CSR is corporate philanthropy. This includes monetary donations and aid given to local and non-local nonprofit organizations and communities, including donations in areas such as the arts, education, housing, health, social welfare, and the environment, among others, but excluding political contributions and commercial sponsorship of events.[14] Some organizations do not like a philanthropy-based approach as it might not help build on the skills of local populations, whereas community-based development generally leads to more sustainable development.[clarification needed Difference
between local org& community-dev? Cite]

Another approach to CSR is to incorporate the CSR strategy directly into the business strategy of an organization. For instance, procurement of Fair Trade tea and coffee has been adopted by various businesses including KPMG. Its CSR manager commented, "Fairtrade fits very strongly into our commitment to our communities."[15] Another approach is garnering increasing corporate responsibility interest. This is called Creating Shared Value, or CSV. The shared value model is based on the idea that corporate success and social welfare are interdependent. A business needs a healthy, educated workforce, sustainable resources and adept government to compete effectively. For society to thrive, profitable and competitive businesses must be developed and supported to create income, wealth, tax revenues, and opportunities for philanthropy. CSV received global attention in the Harvard Business Review article Strategy & Society: The Link between Competitive Advantage and Corporate Social Responsibility by Michael E. Porter, a leading authority on competitive strategy and head of the Institute for Strategy and Competitiveness at Harvard Business School; and Mark R. Kramer, Senior Fellow at the Kennedy School at Harvard University and co-founder of FSG Social Impact Advisors. The article provides insights and relevant examples of companies that have developed deep linkages between their business strategies and corporate social responsibility. Many approaches to CSR pit businesses against society, emphasizing the costs and limitations of compliance with externally imposed social and environmental standards. CSV acknowledges trade-offs between short-term profitability and social or environmental goals, but focuses more on the opportunities for competitive

advantage from building a social value proposition into corporate strategy. CSV has a limitation in that it gives the impression that only two stakeholders are important - shareholders and consumers and belies the multi-stakeholder approach of most CSR advocates. Many companies use the strategy of benchmarking to compete within their respective industries in CSR policy, implementation, and effectiveness. Benchmarking involves reviewing competitor CSR initiatives, as well as measuring and evaluating the impact that those policies have on society and the environment, and how customers perceive competitor CSR strategy. After a comprehensive study of competitor strategy and an internal policy review performed, a comparison can be drawn and a strategy developed for competition with CSR initiatives.

Cost-benefit analysis with a resource-based view In competitive markets the cost-benefit analysis regarding positive financial outcomes upon implementing a CSR-based strategy, can be examined with a lens of the resource-based-view (RBV) of sustainable competitive advantage. According to Barneys (1990) "formulation of the RBV, s ustainable competitive advantage requires that resources be valuable (V), rare (R), inimitable (I) and non-substitutable (S)."[16][17] A firm can conduct a cost benefit analysis through a RBV-based lens to determine the optimal and appropriate level of investment in CSR, as it would with any other investments. A firm introducing a CSRbased strategy might only sustain high returns on their investment if their CSR-based strategy were inimitable (I) by their competitors. In competitive markets, a firm introducing a CSR-based strategy might only sustain high returns on their investment and there may only be a short-lived strategic competitive advantage to implementing CSR as their competitors may adopt similar strategies. There is however, a long-term advantage in that competitors may also imitate CSR-based strategies in a socially responsible way. Even if a firm chooses CSR for strategic financial gain, the firm is also acting responsibly. [3] Attention to CSR as an element in corporate strategy led to examining CSR activities through the lens of the resourcebased-view (RBV) of the firm. The RBV, as introduced by Wernerfelt (1984) and refined by Barney (1991), presumes that firms are bundles of heterogeneous resources and capabilities that are imperfectly mobile across firms. Accordingly, the imperfect mobility of heterogeneous resources can result in competitive advantages for firms that have superior resources or capabilities. McWilliams and Siegel (2001) used a model based on RBV to address optimal investment in CSR. In their model, CSR activities and attributes may be used in a differentiation strategy. They conclude that managers can determine the appropriate level of investment in CSR by conducting cost benefit analysis in the same way that they analyze other investments. Applying the RBV to CSR naturally leads to the question of whether firms can use CSR to achieve a sustainable competitive advantage. Reinhardt (1998) addressed this issue and found that a firm engaging in a CSR-based strategy could only sustain an abnormal return if it could prevent competitors from imitating its strategy.[18] Incidents like the 2013 Savar building collapse with more than 1,100 victims have led to a shift from company-individual thinking towards supply-chain thinking in order to increase social responsibility. Thus, best practices from supply chain management are increasingly applied to the CSR context. Wieland and Handfield (2013) suggest that companies need to audit products and suppliers and that supplier auditing needs to go beyond direct relationships with first-tier suppliers. They also demonstrate that visibility needs to be improved if supply cannot be directly controlled and that smart and electronic technologies play a key role to improve visibility across the supply chain. Finally, they highlight that collaboration with local partners, across the industry and with universities is crucial to successfully managing social responsibility in supply chains.[19] Social accounting, auditing, and reporting For a business to take responsibility for its actions, that business must be fully accountable. Social accounting, a concept describing the communication of social and environmental effects of a company's

economic actions to particular interest groups within society and to society at large, is thus an important element of CSR.[20] Social accounting emphasizes the notion of corporate accountability. D. Crowther defines social accounting in this sense as "an approach to reporting a firms activities which stresses the need fo r the identification of socially relevant behavior, the determination of those to whom the company is accountable for its social performance and the development of appropriate measures and reporting techniques. Social license Social license generally refers to a local communitys acceptance or approval of a companys project or ongoing presence in an area. It is increasingly recognized by various stakeholders and communities as a prerequisite to development. The development of social license occurs outside of formal permitting or regulatory processes, and requires sustained investment by proponents to acquire and maintain social capital within the context of trust-based relationships. Often intangible and informal, social license can nevertheless be realized through a robust suite of actions centered on timely and effective communication, meaningful dialogue, and ethical and responsible behavior. Local conditions, needs, and customs vary considerably and are often opaque, but have a significant impact on the likely success of various approaches to building social capital and trust. These regional and cultural differences demand a flexible and responsive approach and must be understood early in order to enable the development and implementation of an effective strategy to earn and maintain social license. Governments could facilitate the necessary stakeholder mapping in regions for which they are responsible and provide a regulatory framework that sets companies on the right path for engagement with communities and stakeholders. Social media tools empower stakeholders and communities to access and share information on company behaviors, technologies, and projects as they are implemented around the world. Understanding and managing this reality will be important for companies seeking social license. Voluntary measures integral to corporate-responsibility frameworks contribute to achieving social license, particularly through enhancing a companys reputation and strengthening its capacity for effective communication, engagement, and collaboration. However, such measures do not obviate the need for project-specific action to earn and maintain social license. The growing reliance on social media tools by stakeholders and proponents alike, and the risks associated with disclosure through them, may lead to an increase.[33] More in Pacific Energy Summit.[34] Potential business benefits The scale and nature of the benefits of CSR for an organization can vary depending on the nature of the enterprise, and are difficult to quantify, though there is a large body of literature exhorting business to adopt measures beyond financial ones (e.g., Deming's Fourteen Points, balanced scorecards). Orlitzky, Schmidt, and Rynes[35]found a correlation between social/environmental performance and financial performance. However, businesses may not be looking at short-run financial returns when developing their CSR strategy. Intel employs a 5-year CSR planning cycle.[36] The definition of CSR used within an organization can vary from the strict "stakeholder impacts" definition used by many CSR advocates and will often include charitable efforts and volunteering. CSR may be based within the human resources, business development or public relations departments of an organisation,[37] or may be given a separate unit reporting to the CEO or in some cases directly to the board. Some companies may implement CSR-type values without a clearly defined team or programme. The business case for CSR[38] within a company will likely rest on one or more of these arguments: Triple bottom line People planet profit, also known as the triple bottom line, are words that should be used and practiced in every move an organization makes. People relates to fair and beneficial business practices toward labour, the community and region where corporation conducts its business. Planet refers to sustainable environmental practices. A triple bottom line company does not produce harmful or destructive products

such as weapons, toxic chemicals or batteries containing dangerous heavy metals for example. Profit is the economic value created by the organization after deducting the cost of all inputs, including the cost of the capital tied up. It therefore differs from traditional accounting definitions of profit. [39][40] Despite the fact that adopting this triple measure has helped some companies be more conscious of their social[41] and moral responsibilities,[42] the triple bottom line has its critics. The first criticism is that the reporting of environmental and social/moral responsibilities is selective and ignores some real moral demands, thus substituting the adopted list for a company or its members paying attention to its myriad moral obligations. The second criticism is that there is no guaranteed-upon way to carry out the environmental and social/moral audits comparable to the way that companies carry out their financial audits-much of which is governed by government requirements. An inherent difficulty with any social reporting is that it is not quantifiable in the way that a financial report is. There is no quantitative method that captures what is significantly at issue and no agreed-upon way to represent qualitative measures.[43] Human resources A CSR program can be an aid to recruitment and retention,[44] particularly within the competitive graduate student market. Potential recruits often ask about a firm's CSR policy during an interview, and having a comprehensive policy can give an advantage. CSR can also help improve the perception of a company among its staff, particularly when staff can become involved through payroll giving, fundraising activities or community volunteering. CSR has been found to encourage customer orientation among frontline employees.[45] Risk management Managing risk is a central part of many corporate strategies. Reputations that take decades to build up can be ruined in hours through incidents such as corruption scandals or environmental accidents. [46] These can also draw unwanted attention from regulators, courts, governments and media. Building a genuine culture of 'doing the right thing' within a corporation can offset these risks. [47] Brand differentiation In crowded marketplaces, companies strive for a unique selling proposition that can separate them from the competition in the minds of consumers. CSR can play a role in building customer loyalty based on distinctive ethical values.[48] Several major brands, such as The Co-operative Group, The Body Shop and American Apparel[49] are built on ethical values. Business service organizations can benefit too from building a reputation for integrity and best practice. Engagement plan An engagement plan will assist in reaching a desired audience. A corporate social responsibility team, or individual is needed to effectively plan the goals and objectivesof the organization. Determining a budget should be of high priority. The function of corporate social responsibility planning: 1. To add discussion and analysis of a new set of risks into corporate decision-making. 2. To represent issues within the corporation that watchdogs, NGOs and advocates represent within society. 3. To assess the future. An organizations long term and short term future needs to be thought of. 4. To help prioritize consideration of socially and environmentally friendly projects that might otherwise lack a corporate advocate. 5. To keep corporations aware of potential major societal impacts even when a negative impact may not be immediate, and thus lessen liability. 6. To positively influence decision making where societal impacts are maximized, whilst ensuring efforts are within a given budget. Developing an engagement plan Commit to coming up with and improving on your companies goals. CSR commitments communicate the nature and direction of the firm's social and environmental activities and, will help others understand how the organization is likely to behave in a particular situation 1. Do a scan of CSR commitments 2. Hold discussions with major stakeholders

3. 4. 5. 6. 7. 8.

Create a working group to develop the commitments Prepare a preliminary draft Consult with affected stakeholders Revise and publish the commitments Consider what is feasible within the budget To ensure employee buy-in, include employees in the process of developing the vision and values. To spark the process, create a CSR working group or hold a contest for the best suggestions, encouraging employees and their representatives to put some thought into their submissions. 9. Host a visioning session and ask participants to think about what the firm could look like in the future as a CSR leader. 10.Review the CSR priorities to determine which codes of ethics or conduct fit best with the firm's goals. Consultants are recommended when planning for CSR activities involving small, medium and large sized corporations. All levels of management should be on board, and the support of high ranking corporate officials should be given. License to operate Corporations are keen to avoid interference in their business through taxation or regulations. By taking substantive voluntary steps, they can persuade governments and the wider public that they are taking issues such as health and safety, diversity, or the environment seriously as good corporate citizens with respect to labour standards and impacts on the environment. Supplier relations Businesses are constantly relying on suppliers to reduce overall costs, while improving the quality of their goods or services. Many North American companies have downgraded the volume of suppliers they do business with, and award contracts to a select few, in order to lower operating costs. By establishing a strong supply chain, companies are able to push for continuous quality improvements, and price reductions. The long-term benefits of the listed above create a better value for stakeholders. Some multi-national companies like General Motors can shift suppliers, if a lower offer is made by the competition. As a result, competitiveness, and greater profits are created, in turn contributing to a stronger market The strategic use of supplier relations can benefit single, double and triple bottom-lines. Corporations excelling in supply relations include Wal-Mart, Ford, General Motors, Toyota and Nestle. All companies listed above have gained tangible results through the practice of ensuring sound supply chains, and sourcing materials from ethical sources. Emphasizing the importance of practicing CSR to suppliers, researching their existing supply chain, and sending out CSR check-sheets to existing suppliers is important to staying on-track of a companys implemented CSR activity. Common Types of Corporate Social Responsibility Actions There are many aspects of corporate social responsibility; whether a company decides to develop one area of CSR, or multiple, the end result is a more profitable company experiencing a higher level of employee engagement.[50] The following is a list of common ways corporate social responsibility is implemented by organizations. 1. Environmental Sustainability: Areas include recycling, waste management, water management, using renewable energy sources, utilizing reusable resources, creating 'greener' supply chains, using digital technology instead of hard copies, developing buildings according to Leadership in Energy and Environmental Design(LEED) standards, etc.[51][52] There is a business sector dedicated to specifically to environmental sustainability consulting for businesses of any size to utilize. The highest ranked sustainability consulting firm is Ernst & Young [53]

2. Community Involvement: This can include raising money for local charities, supporting community volunteerism, sponsoring local events, employing people from a community, supporting a community's economic growth, engaging in fair trade practices, etc.[54] Starbucks is an example of a company that focuses on community involvement and engagement; since these programs began the company has seen higher profits and greater employee engagement.[55] 3. Ethical Marketing Practices: Companies that ethically market to consumers are placing a higher value on their customers and respecting them as people who are ends in themselves. They do not try to manipulate or falsely advertise to potential consumers. This is important for companies that want to be viewed as ethical. Criticisms and concerns Critics of CSR as well as proponents debate a number of concerns related to it. These include CSR's relationship to the fundamental purpose and nature of business and questionable motives for engaging in CSR, including concerns about insincerity and hypocrisy. Nature of business Milton Friedman and others have argued that a corporation's purpose is to maximize returns to its shareholders, and that since only people can have social responsibilities, corporations are only responsible to their shareholders and not to society as a whole. Although they accept that corporations should obey the laws of the countries within which they work, they assert that corporations have no other obligation to society. Some people perceive CSR as incongruent with the very nature and purpose of business, and indeed a hindrance to free trade. Those who assert that CSR is contrasting with capitalism and are in favor of the free market argue that improvements in health, longevity and/or infant mortality have been created by economic growth attributed to free enterprise.[56] Critics of this argument perceive the free market as opposed to the well-being of society and a hindrance to human freedom. They claim that the type of capitalism practiced in many developing countries is a form of economic and cultural imperialism, noting that these countries usually have fewer labour protections, and thus their citizens are at a higher risk of exploitation by multinational corporations. [57] A wide variety of individuals and organizations operate in between these poles. For example, the REALeadership Alliance asserts that the business of leadership (be it corporate or otherwise) is to change the world for the better.[58] Many religious and cultural traditions hold that the economy exists to serve human beings, so all economic entities have an obligation to society (see for example Economic Justice for All). Moreover, as discussed above, many CSR proponents point out that CSR can significantly improve long-term corporate profitability because it reduces risks and inefficiencies while offering a host of potential benefits such as enhanced brand reputation and employee engagement. Motives Some critics believe that CSR programs are undertaken by companies such as British American Tobacco (BAT),[60] the petroleum giant BP (well known for its high-profile advertising campaigns on environmental aspects of its operations), andMcDonald's (see below) to distract the public from ethical questions posed by their core operations. They argue that some corporations start CSR programs for the commercial benefit they enjoy through raising their reputation with the public or with government. They suggest that corporations which exist solely to maximize profits are unable to advance the interests of society as a whole.[61] Another concern is that sometimes companies claim to promote CSR and be committed to sustainable development but simultaneously engage in harmful business practices. For example, since the 1970s, the McDonald's Corporation's association with Ronald McDonald House has been viewed as CSR and relationship marketing. More recently, as CSR has become mainstream, the company has beefed up its CSR programs related to its labor, environmental and other practices[62]All the same, in McDonald's Restaurants v Morris & Steel, Lord Justices Pill, May and Keane ruled that it was fair comment to say that McDonald's

employees worldwide 'do badly in terms of pay and conditions'[63] and true that 'if one eats enough McDonald's food, one's diet may well become high in fat etc., with the very real risk of heart disease.'[64] Royal Dutch Shell has a much-publicized CSR policy and was a pioneer in triple bottom line reporting, but this did not prevent the 2004 scandal concerning its misreporting of oil reserves, which seriously damaged its reputation and led to charges of hypocrisy. Since then, the Shell Foundation has become involved in many projects across the world, including a partnership with Marks and Spencer (UK) in three flower and fruit growing communities across Africa. Critics concerned with corporate hypocrisy and insincerity generally suggest that better governmental and international regulation and enforcement, rather than voluntary measures, are necessary to ensure that companies behave in a socially responsible manner. A major area of necessary international regulation is the reduction of the capacity of corporations to sue states under investor state dispute settlement provisions in trade or investment treaties if otherwise necessary public health or environment protection legislation has impeded corporate investments.[65] Others, such as Patricia Werhane, argue that CSR should be considered more as a corporate moral responsibility, and limit the reach of CSR by focusing more on direct impacts of the organization as viewed through a systems perspective to identify stakeholders. For a commonly overlooked motive for CSR, see also Corporate Social Entrepreneurship, whereby CSR can also be driven by employees' personal values, in addition to the more obvious economic and governmental drivers. Principles The main principles involving corporate social responsibility involve economic, legal, ethical and discretionary aspects. A corporation needs to generate profits, while operating within the laws of the state. The corporation also needs to be ethical, but has the right to be discretional about the decisions it makes. Levels of corporate social responsiveness to an issue include being reactive, defensive, responsive and interactive. All terms are useful in issues management. Selecting when and how to act can make a difference in the outcome of the action taken. Ethical consumerism The rise in popularity of ethical consumerism over the last two decades can be linked to the rise of CSR. As global population increases, so does the pressure on limited natural resources required to meet rising consumer demand (Grace and Cohen 2005, 147). Industrialization, in many developing countries, is booming as a result of both technology and globalization. Consumers are becoming more aware of the environmental and social implications of their day-to-day consumer decisions and are therefore beginning to make purchasing decisions related to their environmental and ethical concerns. [66] However, this practice is far from consistent or universal. Globalization and market forces As corporations pursue growth through globalization, they have encountered new challenges that impose limits to their growth and potential profits. Government regulations, tariffs, environmental restrictions and varying standards of what constitutes "labor exploitation" are problems that can cost organizations millions of dollars. Some view ethical issues as simply a costly hindrance, while some companies use CSR methodologies as a strategic tactic to gain public support for their presence in global markets, helping them sustain a competitive advantage by using their social contributions to provide a subconscious level of advertising. (Fry, Keim, Meiners 1986, 105) Global competition places a particular pressure on multinational corporations to examine not only their own labor practices, but those of their entire supply chain, from a CSR perspective. that all government is controlling. Social awareness and education The role among corporate stakeholders is to work collectively to pressure corporations that are changing. Shareholders and investors themselves, through socially responsible investing are exerting pressure on corporations to behave responsibly. The extension of SRI bodies driving corporations to include an element of ethical investment into their corporate agendas generates socially embedded issues. The main issue

correlates to the development and overall idea of ethical investing or SRI, a concept that is constructed as a general social perspective.[67] The problem becomes defining what is classified as ethical investing. The ethics or values of one SRI body will likely different from the next since ethical opinions are inherently paradoxical. For example, some religious investors in the US have withdrawn investment from companies that fail to fulfill their ethical expectations.[67] The Non-governmental organizations are also taking an increasing role, leveraging the power of the media and the Internet to increase their scrutiny and collective activism around corporate behavior. Through education and dialogue, the development of community awareness in holding businesses responsible for their actions is growing.[68] In recent years,[when?] the traditional conception of CSR is being challenged by the more community-conscious Creating Shared Value concept (CSV), and several companies are refining their collaboration with stakeholders accordingly. Ethics training The rise of ethics training inside corporations, some of it required by government regulation, is another driver credited with changing the behavior and culture of corporations. The aim of such training is to help employees make ethical decisions when the answers are unclear. Tullberg believes that humans are built with the capacity to cheat and manipulate, a view taken from Trivers (1971, 1985), hence the need for learning normative values and rules in human behavior.[69] The most direct benefit is reducing the likelihood of "dirty hands" (Grace and Cohen 2005), fines and damaged reputations for breaching laws or moral norms. Organizations also see secondary benefit in increasing employee loyalty and pride in the organization.[citation needed] Caterpillar and Best Buy are examples of organizations that have taken such steps.[70] Increasingly, companies are becoming interested in processes that can add visibility to their CSR policies and activities. One method that is gaining increasing popularity is the use of well-grounded training programs, where CSR is a major issue, and business simulations can play a part in this.[citation needed] One relevant documentary is The Corporation, the history of organizations and their growth in power is discussed. Corporate social responsibility, what a company does in trying to benefit society, versus corporate moral responsibility (CMR), what a company should morally do, are both important topics to consider when looking at ethics in CSR. For example, Ray Anderson, in The Corporation, takes a CMR perspective in order to do what is moral and he begins to shift his company's focus towards the biosphere by utilizing carpets in sections so that they will sustain for longer periods. This is Anderson thinking in terms of Garret Hardin's "The Tragedy of the Commons," where if people do not pay attention to the private ways in which we use public resources, people will eventually lose those public resources. Geography[ In a geographical context, CSR is fundamentally an intangible populist idea without a conclusive definition.[71] Corporations who employ CSR behaviors are empirically dissimilar in various parts of the world.[72] The issue of CSR diversity is produced through the perpetual differences embedded in the social, political, cultural, and economic structures within individual countries. [72] The immense geographical separations feasibly contribute to the loosely defined concept of CSR and difficulty for corporate regulation. Public policies CSR has inspired national governments to include CSR issues into their national public policy agendas. The increased importance driven by CSR, has prompted governments to promote socially and environmentally responsible corporate practices.[73] Over the past decade governments have considered CSR as a public issue that requires national governmental involvement to address the very issues relevant to CSR. The heightened role of government in CSR has facilitated the development of numerous CSR programs and policies.[73] Specifically, various European governments have implemented public policies on CSR enhancing their competence to develop sustainable corporate practices.[74] CSR critics such as Robert Reich argue that governments should set the agenda for social responsibility by the way of laws and regulation that will allow a business to conduct themselves responsibly. Actors engaged in CSR:

governments corporations civil societies

Recently,[when?] 15 European Union countries have actively engaged in CSR regulation and public policy development.[74] Recognizably, the CSR efforts and policies are vastly different amongst countries resultant to the complexity and diversity of governments, corporations, and civil societies roles. Scholars have analyzed each body that promotes CSR based policies and programs concluding that the role and effectiveness of these actors are case-specific.[73] Global issues so broadly defined such as CSR generate numerous relationships between the different socio-geographic players. A key debate in CSR is determining what actors are responsible to ensure that corporations are behaving in a socio-economic and environmentally sustainable manner. Regulation The issues surrounding corporate regulation pose several problems. The concept of regulation is inherently difficult to address because of the numerous corporations that exist are vastly dissimilar in terms of corporate behavior and nature. Thus, regulation in itself is unable to cover every aspect in detail of a corporation's operations. For example, This leads to burdensome legal processes bogged down in interpretations of the law and debatable grey areas (Sacconi 2004). For example, General Electricfailed to clean up the Hudson River after contaminating it with organic pollutants. The company continues to argue via the legal process on assignment of liability, while the cleanup remains stagnant. (Sullivan & Schiafo 2005). Government regulation or public institutional regulation is difficult to achieve. Depending on the political regime and form of government democracy, parliamentary, presidential issues of governmental ineffectiveness may transpire. As a result, attempts at CSR policy development and implementation may be unattainable. The second issue is the financial burden that regulation can place on a nation's economy. This view shared by Bulkeley, who cites the Australian federal government's actions to avoid compliance with the Kyoto Protocol in 1997, on the concerns of economic loss and national interest. The Australian government took the position that signing the Kyoto Pact would have caused more significant economic losses for Australia than for any other OECD nation (Bulkeley 2001, pg 436). On the change of government following the election in November 2007, Prime Minister Kevin Rudd signed the ratification immediately after assuming office on 3 December 2007, just before the meeting of the UN Framework Convention on Climate Change. Critics of CSR also point out that organizations pay taxes to government to ensure that society and the environment are not adversely affected by business activities. The government of Canada has adopted a national position that expects Canadian corporations to practice behaviors parallel to CSR. In 2007, Prime Minister Harper was aware of Canadas abundant investment into the resource/mineral extractive sector and encouraged the Canadian mining companies to meet Canadas newly developed CSR standards and expectations.[75] The method of developing and implementing CSR policies was achieved through government-company consultation and government stakeholder cooperation.[75] The successful relationship between the CSR actors wit hin Canadas government and country, may advocate that cooperation amongst constituencies is the most imperative element to CSR regulation. The European Union has recently[when?] done extensive work to try and find the best form of regulation. Some critics argue that the creation of a CSR organization with a democratically appointed minister focused solely on monitoring and enforcing socially responsible behaviour will be extremely effective. [74] Laws In the 1800s,the government in the primary establishment of corporate legislation could take away a firm's license if it acted socially irresponsible.This was due to corporations being viewed as "creatures of the state" under the law. However in 1819, The United States Supreme Court in the Dartmouth College vs. Woodward case established a corporation as an fictitious being.This new ruling not only allowed

corporations to be protected under the Constitution but also limited states from enforcing restrictions on firms that did not act in the public good.[76] The laws legally binding the corporations behavior and activity are quite insignificant in relation to the global consequences. Only recently have countries included CSR policies in government agendas legislature.[74] Common types of countries who have implemented legislation and CSR laws generally consist of socio-economic and politically sophisticated countries. The level of political stability and effectiveness is inextricably linked to a countries capacity to ensure national CSR policies. The increasing ability and influence corporations have on the economic, political, and social dynamics of society correlate to the recent studies by the UN Commission on Human Rights.[77] More research and international political instruments are being explored to protect and prevent corporations from violating human rights.[78] Denmark has a law on CSR. On 16 December 2008, the Danish parliament adopted a bill making it mandatory for the 1100 largest Danish companies, investors and state-owned companies to include information on corporate social responsibility (CSR) in their annual financial reports. The reporting requirements became effective on 1 January 2009.[79] The required information includes:

information on the companies policies for CSR or socially responsible investments (SRI) information on how such policies are implemented in practice, and information on what results have been obtained so far and managements expectations for the future with regard to CSR/SRI.

CSR/SRI is still voluntary in Denmark, but if a company has no policy on this it must state its positioning on CSR in their annual financial report. More on the Danish law can be found at CSRgov.dk[dead link] Crises and their consequences Often it takes a crisis to precipitate attention to CSR. One of the most active stands against environmental mismanagement is the CERES Principles that resulted after the Exxon Valdez incident in Alaska in 1989 (Grace and Cohen 2006). Other examples include the lead poisoning paint used by toy giant Mattel, which required a recall of millions of toys globally and caused the company to initiate new risk management and quality control processes. In another example, Magellan Metals in the West Australian town of Esperance was responsible for lead contamination killing thousands of birds in the area. The company had to cease business immediately and work with independent regulatory bodies to execute a cleanup. Odwalla also experienced a crisis with sales dropping 90%, and the company's stock price dropping 34% due to several cases of E. coli spread through Odwalla apple juice. The company ordered a recall of all apple or carrot juice products and introduced a new process called "flash pasteurization" as well as maintaining lines of communication constantly open with customers. Stakeholder priorities Increasingly, corporations are motivated to become more socially responsible because their most important stakeholders expect them to understand and address the social and community issues that are relevant to them. Understanding what causes are important to employees is usually the first priority because of the many interrelated business benefits that can be derived from increased employee engagement (i.e. more loyalty, improved recruitment, increased retention, higher productivity, and so on). Key external stakeholders include customers, consumers, investors (particularly institutional investors), communities in the areas where the corporation operates its facilities, regulators, academics, and the media. Branco and Rodrigues (2007) describe the stakeholder perspective of CSR as the inclusion of all groups or constituents (rather than just shareholders) in managerial decision making related to the organizations portfolio of socially responsible activities.[80] This normative model implies that the CSR collaborations are positively accepted when they are in the interests of stakeholders and may have no effect or be detrimental to the organization if they are not directly related to stakeholder interests. The stakeholder perspective suffers from a wheel and spoke network metaphor that does not acknowledge the complexity

of network interactions that can occur in cross sector partnerships. It also relegates communication to a maintenance function, similar to the exchange perspective.[81] Industries considered void of CSR Several industries are often absent from CSR research. The absence is due to the presumption that these particular industries fail to achieve ethical considerations of their consumers. Typical industries include tobacco and alcohol producers ("sin industry" manufacturers), as well as defense firms[82]

INTERNAL AND EXTERNAL STAKEHOLDERS, RESPONSIBILITY TO VARIOUS STAKEHOLDER GROUPS, (Case study) Internal stakeholders Reed Elseviers internal stakeholders have a range of interests in the different parts of the company and its activities. Shareholders are key internal stakeholders. As investors, they take a financial stake in the company by purchasing shares. They will look for the best return on investment which is usually made in the form of a share of the profits.

CR strategies benefit shareholders by making the business attractive to investors and improving its share value. By reducing costs and therefore improving revenues and efficiency, Reed Elsevier steadily increases the dividends paid to its shareholders.

Authors who provide the journal articles for Elseviers scientific publications are also internal stakeholders. They have the opportunity to put the final version of their work on their own institutions website as well as having it published through Elsevier. Employees Employees at all levels are an important internal stakeholder group. Reed Elsevier needs to retain its diverse and talented employees who bring professionalism and energy to their roles. This helps the business to provide the highest levels of customer service, attract new customers and retain existing ones. To encourage this, Reed Elsevier has set up various initiatives internally, for example:

All employees are offered training on the Reed Elsevier Code of Ethics and Business Conduct to ensure best practice. 100% had completed the course by the end of 2012. By the end of 2012, 100% of employees had completed anti-bribery training. Flexible or home working across the business supports the work-life balance of employees, enhances performance and productivity and reduces employee stress. Boundarylessness the companys different divisions act as one organisation providing opportunities for staff to take advantage of internal transfers and promotions to develop. This enables them to make a contribution to the whole of Reed Elsevier.

External stakeholders

External stakeholders are those individuals or groups outside a business. To differentiate the company from other information providers, Reed Elsevier focuses on CR performance. Customers Customers expect good value, high-quality products and great service. Reed Elsevier achieves this through close relationships and consultation with customers. It conducts widespread surveys of customer opinion. These identify the value customers place on its services and products and highlight potential improvements. In this way, customers have a real role in helping the business to develop and grow. This results in longer-term relationships where customers feel they have an input into the services offered. It builds loyalty and creates the potential for increased business. Reed Elsevier customers come from the public, commercial and academic sectors, from many professions and geographic regions, which is reflected in the spread of its business divisions, for example:

Elseviers scientific publications provide critical research information to support innovation and development. They have enormous social value and may affect lives across the world. The divisions online medical data provides vital information to doctors in hospitals. Video, text and animation of medical procedures help doctors and students learn. LexisNexis provides online solutions to help professional users to access a wealth of information quickly to support their jobs on a daily basis. For example, a lawyer may prepare for a legal trial using earlier case law.

Suppliers Suppliers also hold a stake in the company to which they provide materials and services. For example:

As part of the companys Socially Responsible Supplier programme, suppliers are asked to sign the Reed Elsevier Supplier Code of Conduct. This sets out the standards which it expects its suppliers to meet. Suppliers must follow all relevant laws, promote best practice and respect environmental conditions, such as using sustainable sources for paper or dealing responsibly with waste products.

Partners Reed Elsevier has established partnerships across its different divisions. For example:

Elsevier promotes science, technology and medical information programmes. The Elsevier Foundation promotes the work of libraries and scholars in science, technology and medicine. Over the last nine years, Reed Exhibitions has given free space at the London Book Fair to Book Aid International which annually provides over 500,000 books including those donated from across Reed Elsevier to readers in the developing world. This enables the charity to engage with a wide range of potential book and financial donors. Partners in the supply chain, such as one of Reed Elseviers printers in China, also benefit from its responsible approach to production. By applying the Supplier Code of Conduct, the printer found that improved conditions led to better quality output, lower turnover of staff and greater employee loyalty.

Community Reed Elseviers initiatives make a difference to communities around the world. The RE Cares programme is supported both centrally and in all business divisions. This programme encourages staff to work together to make a difference in local communities. More than 30% of employees volunteered through RE Cares in 2012:

It supports education for disadvantaged young people. Initiatives range from reading support to charity fundraising. RE Cares Champions awarded nearly $400,000 to more than 50 charities in 2012. In 2012, Reed Elsevier announced the winners of the second RE Cares Recognising Those Who Care Awards to highlight the outstanding contributions to RE Cares of eight colleagues and four staff teams. Reed Elsevier has a formal policy of donating unwanted book stock to institutions to provide more access to information.

Society Reed Elseviers CR approach impacts on society in several ways:

In line with its Code of Ethics, it promotes responsible advertising and a transparent editorial policy for its publications. Reed Elsevier is committed to reducing use of energy, water and paper in its publishing processes and using sustainable materials wherever possible. It has seen a 33% reduction in paper between 2008 and 2012, sourced 33% of its electricity from renewable sources and prevented an increase in water consumption despite growing business revenue by nearly 15%. The company uses video conferences and webseminars to save on travel costs and reduce its carbon emissions. It has a network of Environmental Champions and employee-led Green Teams to promote greater recycling and reduced energy use throughout the business. Reed Exhibitions drives forward sustainable practice in the global meetings and events industry, working to improve environmental performance at its shows through implementation of the BS 8901 standard, which became an internationally recognised ISO 20121. In 2012, 69 office locations gained green status by achieving five environmental standards as part of the Reed Elsevier Standards programme. 13 locations achieved seven or more standards and were designated as green+, meaning they are the best performing locations in the business.

INTEREST AND INFLUENCE OF VARIOUS STAKEHOLDER GROUPS

WHAT DO WE MEAN BY STAKEHOLDERS AND THEIR INTERESTS?

Stakeholders are those who may be affected by or have an effect on an effort. They may also include people who have a strong interest in the effort for academic, philosophical, or political reasons, even though they and their families, friends, and associates are not directly affected by it. One way to characterize stakeholders is by their relationship to the effort in question.

Primary stakeholders are the people or groups that stand to be directly affected, either positively or negatively, by an effort or the actions of an agency, institution, or organization. In some cases, there are primary stakeholders on both sides of the equation: a regulation that benefits one group may have a negative effect on another. A rent control policy, for example, benefits tenants, but may hurt landlords. Secondary stakeholders are people or groups that are indirectly affected, either positively or negatively, by an effort or the actions of an agency, institution, or organization. A program to reduce domestic violence, for instance, could have a positive effect on emergency room personnel by reducing the number of cases they see. It might require more training for police to help them handle domestic violence calls in a different way. Both of these groups would be secondary stakeholders. Key stakeholders, who might belong to either or neither of the first two groups, are those who can have a positive or negative effect on an effort, or who are important within or to an organization, agency, or institution engaged in an effort. The director of an organization might be an obvious key stakeholder, but so might the line staff those who work directly with participants who carry out the work of the effort. If they dont believe in what theyre doing or dont do it well, it might as well not have begun. Other examples of key stakeholders might be funders, elected or appointed government officials, heads of businesses, or clergy and other community figures who wield a significant amount of influence.

While an interest in an effort or organization could be just that intellectually, academically, philosophically, or politically motivated attention stakeholders are generally said to have an interest in an effort or organization based on whether they can affect or be affected by it. The more they stand to benefit or lose by it, the stronger their interest is likely to be. The more heavily involved they are in the effort or organization, the stronger their interest as well. Stakeholders interests can be many and varied. A few of the more common:

Economics. An employment training program might improve economic prospects for low-income people, for example. Zoning regulations may also have economic consequences for various groups. Social change. An effort to improve racial harmony could alter the social climate for members of both the racial or ethnic minority and the majority. Work. Involving workers in decision-making can enhance work life and make people more satisfied with their jobs. Time. Flexible work hours, relief programs for caregivers, parental leave, and other efforts that provide people with time for leisure or taking care of the business of life can relieve stress and increase productivity.

Environment. Protection of open space, conservation of resources, attention to climate change, and other environmental efforts can add to everyday life. These can also be seen as harmful to business and private ownership. Physical health. Free or sliding-scale medical facilities and other similar programs provide a clear benefit for low-income people and can improve community health. Safety and security. Neighborhood watch or patrol programs, better policing in high-crime neighborhoods, work safety initiatives all of these and many other efforts can improve safety for specific populations or for the community as a whole. Mental health. Community mental health centers and adult day care can be extremely important not only to people with mental health issues, but also to their families and to the community as a whole.

As well discuss in more depth further on, both the nature and the intensity of stakeholder interests are important to understand. WHY IDENTIFY AND ANALYZE STAKEHOLDERS AND THEIR INTERESTS? The most important reason for identifying and understanding stakeholders is that it allows you to recruit them as part of the effort. The Community Tool Box believes that, in most cases, a participatory effort that involves representation of as many stakeholders as possible has a number of important advantages:

It puts more ideas on the table than would be the case if the development and implementation of the effort were confined to a single organization or to a small group of like-minded people. It includes varied perspectives from all sectors and elements of the community affected, thus giving a clearer picture of the community context and potential pitfalls and assets. It gains buy-in and support for the effort from all stakeholders by making them an integral part of its development, planning, implementation, and evaluation. It becomes their effort, and theyll do their best to make it work. Its fair to everyone. All stakeholders can have a say in the development of an effort that may seriously affect them. It saves you from being blindsided by concerns you didnt know about. If everyone has a seat at the table, concerns can be aired and resolved before they become stumbling blocks. Even if they cant be resolved, they wont come as surprises that derail the effort just when you thought everything was going well. It strengthens your position if theres opposition. Having all stakeholders on board makes a huge difference in terms of political and moral clout. It creates bridging social capital for the community. Social capital is the web of acquaintances, friendships, family ties, favors, obligations, and other social currency that can be used to cement relationships and strengthen community. Bridging social capital, which creates connections among diverse groups that might not otherwise interact, is perhaps the most valuable kind. It makes possible a community without barriers of class or economics, where people from all walks of life

can know and value one another. A participatory process, often including everyone from welfare recipients to bank officers and physicians, can help to create just this sort of situation.

It increases the credibility of your organization. Involving and attending to the concerns of all stakeholders establishes your organization as fair, ethical, and transparent, and makes it more likely that others will work with you in other circumstances. It increases the chances for the success of your effort. For all of the above reasons, identifying stakeholders and responding to their concerns makes it far more likely that your effort will have both the community support it needs and the appropriate focus to be effective.

WHO ARE POTENTIAL STAKEHOLDERS? As we discussed, there are primary and secondary stakeholders, as well as key stakeholders who may or may not fall into one of the other two categories. Lets examine possible stakeholders using that framework. PRIMARY STAKEHOLDERS Beneficiaries or targets of the effort Beneficiaries are those who stand to gain something services, skills, money, goods, social connection, etc. as a direct result of the effort. Targets are those who may or may not stand to gain personally, or whose actions represent a benefit to a particular (usually disadvantaged) population or to the community as a whole. Some examples are:

A particular population a racial or ethnic group, a socio-economic group, residents of a housing project, etc. Residents of a particular geographic area a neighborhood, a town, a rural area. People experiencing or at risk for a particular problem or condition homelessness, lack of basic skills, unemployment, diabetes. People involved or participants in a particular organization or institution students at a school, youth involved in the justice system, welfare recipients. People whose behavior the effort aims to change delinquent youth, smokers, people who engage in unsafe sex, people who dont exercise. Policy makers and agencies that are the targets of advocacy efforts.

SECONDARY STAKEHOLDERS Those directly involved with or responsible for beneficiaries or targets of the effort These might include individuals and organizations that live with, are close to, or care for the people in question, and those that offer services directly to them. Among these you might find:

Parents, spouses, siblings, children, other family members, significant others, friends.

Schools and their employees teachers, counselors, aides, etc. Doctors and other medical professionals, particularly primary care providers. Social workers and psychotherapists. Health and human service organizations and their line staff youth workers, welfare case workers, etc. Community volunteers in various capacities, from drivers to volunteer instructors in training programs to those who staff food pantries and soup kitchens.

Those whose jobs or lives might be affected by the process or results of the effort Some of these individuals and groups overlap with those in the previous category.

Police and other law or regulation enforcement agencies. New approaches to violence prevention, dealing with drug abuse or domestic violence, or other similar changes may require training and the practice of new skills on the part of members of these agencies. Emergency room personnel, teachers, and others who are legally bound to report possible child abuse and neglect or other similar situations. Landlords. Landlords legal rights and responsibilities may be altered by laws brought about by campaigns to stop discrimination in housing or to strengthen tenants rights. Contractors and developers. Open-space laws, zoning regulations, and other requirements, as well as incentives, may affect how, where, and what contractors and developers choose to build. Employers. A workplace safety initiative or strengthened workplace safety regulations, health insurance requirements, and other mandates may affect employers costs. Those that hire and make a commitment to workers from at-risk populations may also have to institute worker assistance programs (personal and drug/alcohol counseling, for example, as well as basic skills and other training). Ordinary community members whose lives, jobs, or routines might be affected by an effort or policy change, such as the location of a homeless shelter in the neighborhood or changes in zoning regulations.

KEY STAKEHOLDERS Government officials and policy makers These are the people who can devise, pass, and enforce laws and regulations that may either fulfill the goals of your effort or directly cancel them out.

Legislators. Federal and state or provincial representatives, senators, members of parliament, etc. who introduce and pass laws and generally control public budgets at the federal and state or provincial levels.

Governors, mayors, city/town councilors, selectmen, etc. The executives that carry out laws, administer budgets, and generally run the show can contribute greatly to the success or failure of an effort. Local board members. Boards of health, planning, zoning, etc., through their power to issue permits and regulations, can be crucial allies and dangerous opponents. State/federal agencies. Government agencies often devise and issue regulations and reporting requirements, and can sometimes make or break an effort by how they choose to regulate and how vigorously they enforce their regulations. Policy makers. These people or groups often have no official power they may be advisers to those with real power but their opinions and ideas are often followed closely. If theyre on your side, thats a big plus.

Those who can influence others

The media People in positions that convey influence. Clergy members, doctors, CEOs, and college presidents are all examples of people in this group. Community leaders people that others listen to. These might be people who are respected because of their position of leadership in a particular population, or may be longtime or lifelong residents who have earned the communitys trust over years of integrity and community service.

Those with an interest in the outcome of an effort Some individuals and groups may not be affected by or involved in an effort, but may nonetheless care enough about it that they are willing to work to influence its outcome. Many of them may have a following or a natural constituency business people, for instance and may therefore have a fair amount of clout.

Business. The business community usually will recognize its interest in any effort that will provide it with more and better workers, or make it easier and more likely to make a profit. By the same token, it is likely to oppose efforts that it sees as costing it money or imposing regulations on it. Advocates. Advocates may be active on either or both sides of the issue youre concerned with. Community activists. Organizations and individuals who have a philosophical or political interest in the issue or population that an effort involves may organize to support the effort or to defeat it. People with academic or research interests related to a targeted issue or population. Their work may have convinced them of the need for an intervention or initiative, or they may simply be sympathetic to the goals of the effort and understand them better than most. Funders. Funders and potential funders are obvious key stakeholders, in that, in many cases, without their support, the effort wont be possible. Community at large. When widespread community support is needed, the community as a whole may be the key stakeholder.

WHEN SHOULD YOU IDENTIFY STAKEHOLDERS AND THEIR INTERESTS?

Regardless of the purpose of your effort, identifying stakeholders and their interests should be among the first, if not the very first, of the items on your agenda. Its generally the fairest course you can take, and the one that is most likely to keep your effort out of trouble.

If you want to involve stakeholders in a participatory process, the reasons are obvious. They should be part of every phase of the work, so that they can both contribute and take ownership. Their knowledge of the community and understanding of its needs can prove invaluable in helping you to avoid mistakes in your approach and in the people you choose to involve. If your intent is a participatory action research project, stakeholders should be included in any assessment and pre-planning activities as well as planning and implementation. That way, theyll understand the research process and project much more clearly, and can add to them. If you want your process to be regarded as transparent, stakeholder involvement from the beginning is absolutely necessary. The community will only believe in an open process if its truly open. If your effort involves changes that will affect people in different ways, its important that they be involved early so that any concerns or barriers show up early and can be addressed. In situations where there are legal implications, such as the building of a development, involving stakeholders from the beginning is both fair and can help stave off the possibility of lawsuits down the road.

In short, in most cases, the earlier in the process stakeholders can be involved, the better. HOW DO YOU IDENTIFY AND ANALYZE STAKEHOLDERS AND THEIR INTERESTS? The first step in identifying and addressing stakeholder interests is, not surprisingly, identifying the stakeholders. Weve discussed in general terms the categories that stakeholders might fall into, but the list is different for each community and each effort. Its an important part of your job to determine who all your stakeholders are, and to try to involve them in a way that advances your goals. Once youve identified stakeholders, the next task is to understand their interests. Some will have an investment in carrying the effort forward, but others may be equally intent on preventing it from happening or making sure its unsuccessful. Stakeholder analysis (also called stakeholder mapping) will help you decide which stakeholders might have the most influence over the success or failure of your effort, which might be your most important supporters, and which might be your most important opponents. Once you have that information, you can make plans for dealing with stakeholders with different interests and different levels of influence. IDENTIFYING STAKEHOLDERS In identifying stakeholders, its important to think beyond the obvious. Beneficiaries, policy makers, etc. are easy to identify, whereas indirect effects and, as a result, secondary stakeholders are sometimes harder to see. A push for new regulations on a particular industry, for instance, might entail greatly increased paperwork or the purchase of new machinery on the part of that industrys suppliers. Traffic restrictions to control speeding in residential neighborhoods may affect commuters that use public transportation. Try to think of as many ways as possible that your effort might bring benefits or problems to people not directly in its path.

Given that, there are a number of ways to identify stakeholders. Often, the use of more than one will yield the best results.

Brainstorm. Get together with people in your organization, officials, and others already involved in or informed about the effort and start calling out categories and names. Part of the point of brainstorming is to come out with anything that comes to mind, even if it seems silly. On reflection, the silly ideas can turn out to be among the best, so be as far-ranging as you can. After 10 or 15 minutes, stop and discuss each suggestion, perhaps identifying each as a primary, secondary, and/or key stakeholder. Collect categories and names from informants in the community (if theyre not available to be part of a brainstorming session), particularly members of a population or residents of a geographic area of concern. Consult with organizations that either are or have been involved in similar efforts, or that work with the population or in the area of concern. Get more ideas from stakeholders as you identify them. If appropriate, advertise. You can use some combination of the media often free, through various community service arrangements community meetings, community and organizational newsletters, social media, targeted emails, announcements by leaders at meetings and religious gatherings, and word of mouth to get the word out. You may find people who consider themselves stakeholders whom you havent thought about.

DISCOVERING AND UNDERSTANDING STAKEHOLDER INTERESTS As weve mentioned several times, stakeholder interests may vary. Some stakeholders interests may be best served by carrying the effort forward, others by stopping or weakening it. Even among stakeholders from the same group, there may be conflicting concerns. Some of the many ways that stakeholder interests may manifest themselves:

Potential beneficiaries may be wildly supportive of an effort, seeing it as an opportunity or the pathway to a better life or they may be ambivalent or resentful toward it. The effort or intervention may be embarrassing to them (e.g., adult literacy) or may seem burdensome. They may not understand it, or they may not see the benefit that will come from it. They may be afraid to try something new, on the assumption that theyll fail, or will end up worse off than they are. They may be distrustful of any people or organizations engaged in such an effort, and feel theyre being looked down on. Some stakeholders may have economic concerns. Sometimes these concerns are merely selfish or greedy as in the case of a corporation with billions in annual profits unwilling to spend a small part of that money to stop its factories from polluting but in most cases, they are legitimate.

A classic case is that of the conflict between open space preservation and the opportunity to sell land for development. Farmers and other rural residents often have almost no other assets but their land. If, by selling it, they can become instant millionaires and live comfortably in retirement after working very hard for very little all their lives, why should they be expected to pass up that opportunity in favor of open space preservation?

In some U.S. states, farmland has been preserved by the states paying farmers the development value of their land (or something close) in return for a legal agreement to always keep the land in cultivation or open space. Conservation easements agreements never to develop the land, no matter how many owners it goes through sometimes are negotiated on the same basis.

Economic concerns may also work in favor of an effort. An initiative to build one or more community clinics can provide construction jobs, orders for medical equipment, jobs for medical professionals and paraprofessionals, and economic advantages for the community. It might be backed, therefore, by unions, equipment manufacturers, professional associations, and local government, largely for economic reasons. Business people may have concerns about such things as universal health care or regulation. While these may be good for the larger society, they may actually hurt some businesses. Especially for very small business, where a slight change in profits may mean not a drop in share price, but the inability to sustain ones livelihood, this is a big issue. Businesses may have economic concerns in the opposite direction as well. Violence prevention might bode well for businesses in areas that people are hesitant to frequent because of the threat of violence, and it might also reduce the risk of losses and physical harm to the business owners themselves. Thus their positive interest in an effective violence prevention effort. Organizations, agencies, and institutions may have a financial stake in an effort because of funding concerns. Their ability to be funded for conducting activities related to the effort may mean the difference between laying off and keeping staff members, or even between survival and closing the doors. Efforts that concern issues that are controversial for cultural reasons, such as abortion and gay marriage, may be enthusiastically supported by some segments of the community and fiercely opposed by others. While such hot-button issues may not be resolvable, its important to understand the positions of stakeholders on both sides. Ideological as well as cultural differences may also drive stakeholder interests. Those who believe that government shouldnt be seen as the source of anything but the most basic services that people obviously cant provide for themselves the military, roads, police, public education might oppose government-funded programs to help the poor, maintain public health, or provide other services that others deem necessary for the well-being of the community. Legislators and policy makers may be concerned with public perceptions that theyre wasting public money by funding a particular effort. (On the other hand, they can be convinced to spend the money by the perception that an effort is one the public is greatly in favor of, or one that will return more than is being spent.) The jobs of organization staff members engaged in carrying out an effort can be drastically changed by the necessity to learn new methods, increases in paperwork, or any number of other requirements. Depending on the situation, they may be more than willing to take on these responsibilities, may have ideas about how they can be made less burdensome, or may resent and dislike them.

Mandates that dont directly affect various professionals may affect them indirectly. The jobs of police, teachers, therapists, medical personnel, and others can be changed by changes in laws, regulations, or

policy. Increased or decreased emphasis on enforcement or treatment for drug-related offenses can place new obligations on police and others, even if they havent been involved in deciding on the changes. Reporting requirements for child abuse and neglect, domestic violence, and other types of crimes may affect the work of teachers, doctors, nurses, therapists, and others.

Family concerns may enter into stakeholder interests as well. Parents in many places can now be reported for child abuse for applying punishments like spankings with a brush or belt that their own parents may have used as a matter of course. Without discussing the rights or wrongs of the issue, its important to understand that some people will see this as protecting children and others as interfering with parental rights.

You dont have to and in fact shouldnt guess what stakeholder interests are. Ask them whats important to them. If there are stakeholders that arent willing to be involved, try to talk to them anyway. If that isnt possible, try to find out their concerns from others who are likely to know. Most stakeholders will be more than willing to tell you how they feel about a potential or ongoing effort, what their concerns are, and what needs to be done or to change to address those concerns. STAKEHOLDER ANALYSIS/STAKEHOLDER MAPPING Lets suppose, then, that youve identified all the stakeholders, and that you understand each of their concerns. Now what? They all have to understand what you want to do, you have to respond to their concerns in some way at least by acknowledging them, whether you can satisfy them or not and you have to find a way to move forward with as much support from stakeholders as you can muster. Stakeholder analysis (stakeholder mapping) is a way of determining who among stakeholders can have the most positive or negative influence on an effort, who is likely to be most affected by the effort, and how you should work with stakeholders with different levels of interest and influence. Most methods of stakeholder analysis or mapping divide stakeholders into one of four groups, each occupying one space in a four-space grid:

As you can see, low to high influence over the effort runs along a line from the bottom to the top of the grid, and low to high interest in the effort runs along a line from left to right. Both influence and interest can be either positive or negative, depending on the perspectives of the stakeholders in question. The lines describing them are continuous, meaning that people can have any degree of interest from none to as high as possible, including any of the points in between. The people weve described as key stakeholders would generally appear in the upper right quadrant. The purpose of this kind of diagram is to help you understand what kind of influence each stakeholder has on your organization and/or the process and potential success of the effort. That knowledge in turn can help you decide how to manage stakeholders how to marshal the help of those that support you, how to involve those who could be helpful, and how to convert or at least neutralize those who may start out feeling negative. An assumption that most proponents of this analysis technique seem to make is that the stakeholders most important to the success of your effort are in the upper right section of the grid, and those least important are in the lower left. The names in parentheses are another way to define the same stakeholder characteristics in terms of how they relate to the effort.

Promoters have both great interest in the effort and the power to help make it successful (or to derail it). Defenders have a vested interest and can voice their support in the community, but have little actual power to influence the effort in any way. Latents have no particular interest or involvement in the effort, but have the power to influence it greatly if they become interested. Apathetics have little interest and little power, and may not even know the effort exists.

The World Bank, which is responsible for this characterization, couches it in generally positive terms, assuming that those in the upper right will promote the effort. In fact, they could be either promoters or staunch opponents, and the same with different degrees of power and interest goes for the other three sections of the grid. In many cases, there will be people in both camps in each quadrant, and among the tasks of the organization(s) conducting the effort are to turn negative influential stakeholders to positive, and to move as many current and potential supporters as possible closer to the top right of the chart. Interest here means one or both of two things: (1) that the individual, organization, or group is interested intellectually or philosophically in the effort; and/or (2) she or it is affected by it. The level of interest, in this second sense, corresponds to how great the effect is. A welfare recipient who stands to receive increased benefits, child care, and employment training from a back-to-work program, for example, has a greater interest in the effort than someone who simply thinks the program is a good idea, but has no intention of being involved in it in any way. Influence can be interpreted in several ways:

An individual or group can wield official power in some way as a government official or agency, for example.

As an administrator, board member, or funder, an individual or group has some power over the organization conducting the effort. Another possibility is influence as a community leader a college president, hospital CEO, clergy member, bank president, etc. These people are often listened to as a result of their positions in the community, and may hold one or more actual or honorary positions that give them even more influence: chair of the United Way campaign, officer of one or more corporate or non-profit boards, etc. Key stakeholders are often connected to large networks, and thus can both reach and sway many community members. Such connections can be through work, family, long generations or years of residency, membership in many clubs and organizations, or former official status. Great influence can be exercised by people (or, occasionally, organizations) that are simply respected in the community for their intelligence, integrity, concern for others and the common good, and objectivity. Some people and organizations exercise influence through economics. The largest employer in a community can exert considerable control over its workforce, for example, or even over the community as a whole, using a combination of threats and rewards.

Influence and interest can be either internal or external to the organization or the community. Most of the descriptions above pertain to external influence and interest, but they could be internal as well. Organizations and institutions as well as communities have official and unofficial leaders, people in positions that confer power or influence, people with large networks, etc. In addition, those who actually carry out the effort usually staff people in an organization can have a great deal of control over whether an effort is conducted as intended, and therefore over its effectiveness. STAKEHOLDER MANAGEMENT Stakeholder analysis is only useful if its used. Stakeholder management is where analysis and practice meet. It allows you to use the analysis to help gain support and buy-in for your effort. Although, as well see, it can be quite helpful in health and community work, the stakeholder analysis model were using comes out of business, and is largely meant to help people make sure to get the power on their side for any project they attempt. Community-based and community-focused organizations and institutions may be more likely to have other purposes in mind when the issue of stakeholder management arises. A big question here is whether the whole concept of stakeholder management is in fact directly opposed to the idea of participatory process, where everyone has a voice. In practice, we all try to manage people constantly, from attempting to convince a skeptical three-year-old that broccoli tastes good to motivating students and employees to do their best. If management turns into manipulation, without any respect for the other person or organization involved, its definitely not in the spirit of participation. Persuasion, negotiation, education, and other methods of managing stakeholders that acknowledge their concerns, however, do not violate that spirit, and are often a necessary part of making a participatory process work. The first step in stakeholder management is to understand clearly where each stakeholder lies in the grid. Someone that has both a major interest in and considerable power over the organization and/or the effort

 a funder, for example, or a leader of a population of concern would go in the upper right-hand corner of the upper right quadrant. Stakeholders with neither power nor interest would go in the lower left-hand corner of the lower left quadrant. Those with a reasonable amount of power and interest would go in the middle of the upper-right quadrant, etc. Eventually, the grid will be filled in with the names of stakeholders occupying various places in each of the quadrants, corresponding to their levels of power and interest. The next step is to decide who needs the most attention. In general, the business people who use this model would say that you should expend most of your energy on the people who can be most helpful, i.e., those with the most power. Powerful people with the highest interest are most important, followed by those with power and less interest. Those in the lower right quadrant high interest, less power come next, with those with low interest and low power coming last. Another way to look at stakeholder management and remember that all the people and groups were talking about here are stakeholders, those who can affect and are affected by the effort in question is that the most important stakeholders are those most dramatically affected. Some of those, at least before the effort begins, may be in the lower left quadrant of the grid. They may be too involved in trying to survive either financially or physically from day to day to think about an effort to change their situation. Soyour stakeholder management depends on what your purpose is in involving stakeholders. If your purpose is to marshal support for the effort or policy change, then each group each quadrant of the grid calls for one kind of attention. If your purpose is primarily participatory, then each quadrant calls for another kind of attention. Stakeholder management for marshaling support for the effort, especially for advocacy or policy change:

The promoters the high influence/high interest folks are the most important here. Theyre the ones who can really make the effort go, and they care about and are invested in the issue. If theyre positive, they need to be cultivated and involved. Find jobs for them (not just tasks) that theyll enjoy, and that contribute substantively to the effort, so they can feel responsible for part of whats going on. Pay attention to their opinions, and accede to them where its appropriate. If their ideas arent acted on, make sure they know why, and why an alternative seems like the better course. As much as possible, make them integral parts of the team.

When people who could be promoters are negative, the major task is to convert them. If you cant, they become the most powerful opponents of your effort, and could make it impossible to succeed. Thus, they need to be treated as potential allies, and their concerns should be addressed to the extent possible without compromising the effort.

The latents high influence/low interest. These are people and organizations largely unaffected by the effort that could potentially be extremely helpful, if they could be convinced that the effort is important either to their own self-interest or to the greater good. You have to approach and inform them, and to keep contact with them over time. Offer them opportunities to weigh in on issues relating to the effort, and demonstrate to them how the effort will have a positive effect on issues and populations theyre concerned with. If you can shift them over to the promoter cat egory, youve gained valuable allies.

Once again, theres the possibility that these folks could be negative and oppositional. If thats the case, it might be best not to stir a sleeping dragon. If theyre not particularly affected by or concerned about th e effort, even if they disapprove of it, the chances are that theyll simply leave it and you alone, and it might

be best that way. If they begin to voice opposition, then your first attempt might be at conversion or neutralization, rather than battle. If that doesnt work, then you might have to fight.

The defenders low influence/high interest. In the business model, since these people and organizations cant help you much, you can simply keep them informed and not worry too much about involving them further. In health and community building, however, they can often provide the volunteer time and skills that an effort particularly an advocacy initiative needs to survive. These are often the foot soldiers who stuff envelopes, make phone calls, and otherwise make an initiative possible. They are also often among those most affected by an effort, and thus have good reason to work hard for or against it, depending on how it affects them. The apathetics those with low interest and low influence. These people and organizations simply dont care about your effort one way or the other. They may be stakeholders only through their membership in a group or their position in the community; the effort may in fact have little or no impact on them. As a result, they need little or no management. Keep them sporadically informed by newsletter or some similar device, and dont offend them, and they wont bother you or get in the way.

While this formulation is no more compelling than other similar ones, it has the advantage of giving a label to each quadrant. Well use these labels in the rest of the section for convenience. Stakeholder management for developing a participatory process or including marginalized populations: The model of stakeholder management described above isnt applicable only to business. Organizations must cultivate supporters in support of any effort. Deciding whom to cultivate by analyzing how much they can help is a standard part of health and community service work, as well as of advocacy. If your purpose is primarily to create a participatory process, however, youll try to create an effort that takes all perspectives into consideration, hashes out differences, and makes participants its owners. Stakeholder management in that situation means trying to attract representatives of all stakeholders, and treating them all as equals and colleagues, while at the same time leveling the field as much as possible by providing training and support to those who need it. The four-cell grid is still useful here, but the attention given to those in each quadrant will be different from that in the other model. Here, the largest amount of attention may go to the people in the two lower quadrants, since those with little power often have less experience in such areas as meeting and planning, and less confidence in their ability to engage in them. Theyll definitely need information about what theyre being invited to do, and they might need training, mentoring, and/or other support in doing it. A successful participatory process may require that the people in the upper right quadrant the promoters understand and buy into the process fully. They can then help to bring stakeholders in the other positions on board, and to encourage them to participate in planning, implementing, and evaluating the effort. That means working with the promoters to explain the concept of participation fully and to convince them that pulling all stakeholders in is the best way to accomplish your and their goals. They might also serve as mentors or partners to those who are not used to having seats at the table. Obviously, not all stakeholders in the lower two quadrants are low-income, unused to managing things, or lacking in educational and organizational skills. Some simply dont see th emselves as much affected by the effort. Others may have no influence in this particular situation, though they may have a great deal in other circumstances.

Very often, however, those who do lack skills and experience find themselves in those two lower quadrants. When thats the case, they may need training and other support in order to participate fully. That may be one aspect of stakeholder management, and it may help to move them into positions of more influence and teach them how to exercise it. The tasks of converting the negative or skeptical still exist in this situation, as does the need to create interest among the latents those stakeholders who could be helpful, but dont have a strong investment in the effort. Often, the stories of those who have or will benefit from the effort can be effective motivators for people who might otherwise be indifferent. Such stories are particularly powerful if the listeners know the people involved, but never suspected the difficulties they face. If the latents become involved, their influence can help to greatly strengthen the effort. The more people, groups, institutions, and organizations with influence that are involved, the greater the chances are for success. The task with latents is to convince them that they are true stakeholders, and that the effort will benefit them either directly or indirectly. If its not direct, the benefit in question may be as removed from them as increasing the communitys tax base by making more people employable, or creating a mo re just community by eliminating discrimination. Bringing people and organizations into the process and moving them toward the upper right quadrant of the stakeholder grid generally demands that you keep them involved and informed by:

Treating them with respect Providing whatever information, training, mentoring, and/or other support they need to stay involved Finding tasks or jobs for them to do that catch their interest and use their talents Maintaining their enthusiasm with praise, celebrations, small tokens of appreciation, and continual reminders of the efforts accomplishments Engaging them in decision-making Employing them in the conception, planning, implementation, and evaluation of the effort from its beginning In the case of those who start with little power or influence, helping them learn how to gain and exercise influence by working together and developing their personal, critical thinking, and political skills

EVALUATION OF THE STAKEHOLDER PROCESS As with anything else you do, its important to monitor and evaluate how well stakeholders have been identified, understood, and involved in the course of your effort. Its obviously best to involve stakeholders from the very beginning, but its never too late to learn from what youve done so that y ou can improve your work. Evaluation of the stakeholder process should be an integral part of the overall evaluation of the effort, and stakeholders themselves should be involved in developing that evaluation. They can best tell you what did and didnt work to pull them in and keep them engaged. Here are some evaluation questions you might consider:

What could you have done to better identify stakeholders? Which strategies worked best to involve different populations and groups? How successful were you in keeping people involved? Did you provide any training or other support? Was it helpful? How could it have been improved? Did your stakeholder analysis and management efforts have the desired effect? Were they helpful? Did stakeholder involvement improve the work, effectiveness, and/or political and community support of the effort?

The answers to these and similar questions could both help you improve the current effort and make a big difference the next time and there will be a next time you involve stakeholders. KEEPING AT IT TO KEEP STAKEHOLDERS INVOLVED That brings us to the final piece of working with stakeholders. As with any other community building activity, you have to keep at it indefinitely, or at least as long as the effort goes on. New stakeholders may need to be brought in as time goes on. Old ones may cease to be actual stakeholders, but may retain an interest in the effort and may therefore continue to be included. You have to maintain stakeholders and supporters motivation, keep them informed, and/or continue to find meaningful work for them to do if you want to keep them involved and active. Understanding and engaging stakeholders can be tremendously helpful to your effort, but only if it results in their ownership of it and long-term commitment to it. And that depends on your continuing attention. IN SUMMARY Stakeholders of an effort are those who have a vested interest in it, either as those who develop and conduct it, or as those whom it affects directly or indirectly. Identifying and involving stakeholders can be a large part of ensuring the efforts success. In order to gain stakeholder participation and support, its important to understand not only who potential stakeholders are, but the nature of their interest in the effort. With that understanding, youll be able to invite their involvement, address their concerns, and demonstrate how the effort will benefit them. Managing stakeholders keeping them involved and supportive can be made easier by stakeholder analysis, a method of determining their levels of interest in and influence over the effort. Once you have that information, you can then decide on the appropriate approach for each individual and group. Depending on your goals for the effort, you may either focus on those with the most interest and influence, or on those who are most affected by the effort. As with any community building activity, work with stakeholders has to continue for the long term in order to attain the level of participation and support you need for a successful effort. BOTTOM OF THE PYRAMID OPPORTUNITIES: ISSUES AND OPPORTUNITIES FOR BUSINESS IN SOCIALLY AND ENVIRONMENTALLY SENSITIVE WORLD, With the end of the Cold War, the former Soviet Union and its allies, as well as China, India, and Latin America, opened their closed markets to foreign investment in a cascading fashion. Although this

significant economic and social transformation has offered vast new growth opportunities for multinational corporations (MNCs), its promise has yet to be realized. First, the prospect of millions of middle-class consumers in developing countries, clamoring for products from MNCs, was wildly oversold. To make matters worse, the Asian and Latin American financial crises have greatly diminished the attractiveness of emerging markets. As a consequence, many MNCs worldwide slowed investments and began to rethink riskreward structures for these markets. This retreat could become even more pronounced in the wake of the terrorist attacks in the United States last September. The lackluster nature of most MNCs emerging-market strategies over the past decade does not change the magnitude of the opportunity, which is in reality much larger than previously thought. The real source of market promise is not the wealthy few in the developing world, or even the emerging middle-income consumers: It is the billions of aspiring poor who are joining the market economy for the first time. This is a time for MNCs to look at globalization strategies through a new lens of inclusive capitalism. For companies with the resources and persistence to compete at the bottom of the world economic pyramid, the prospective rewards include growth, profits, and incalculable contributions to humankind. Countries that still dont have the modern infrastructure or products to meet basic human needs are an ideal testing ground for developing environmentally sustainable technologies and products for the entire world. Furthermore, MNC investment at the bottom of the pyramid means lifting billions of people out of poverty and desperation, averting the social decay, political chaos, terrorism, and environmental meltdown that is certain to continue if the gap between rich and poor countries continues to widen. Doing business with the worlds 4 billion poorest people two-thirds of the worlds population will require radical innovations in technology and business models. It will require MNCs to reevaluate price performance relationships for products and services. It will demand a new level of capital efficiency and new ways of measuring financial success. Companies will be forced to transform their understanding of scale, from a bigger is better ideal to an ideal of highly distributed small-scale operations married to world-scale capabilities. In short, the poorest populations raise a prodigious new managerial challenge for the worlds wealthiest companies: selling to the poor and helping them improve their lives by producing and distributing products and services in culturally sensitive, environmentally sustainable, and economically profitable ways. Four Consumer Tiers At the very top of the world economic pyramid are 75 to 100 million affluent Tier 1 consumers from around the world. (See Exhibit 1.) This is a cosmopolitan group composed of middle- and upper-income people in developed countries and the few rich elites from the developing world. In the middle of the pyramid, in Tiers 2 and 3, are poor customers in developed nations and the rising middle classes in developing countries, the targets of MNCs past emerging-market strategies.

Now consider the 4 billion people in Tier 4, at the bottom of the pyramid. Their annual per capita income based on purchasing power parity in U.S. dollars is less than $1,500, the minimum considered necessary to sustain a decent life. For well over a billion people roughly one-sixth of humanity per capita income is less than $1 per day. Even more significant, the income gap between rich and poor is growing. According to the United Nations, the richest 20 percent in the world accounted for about 70 percent of total income in 1960. In 2000, that figure reached 85 percent. Over the same period, the fraction of income accruing to the poorest 20 percent in the world fell from 2.3 percent to 1.1 percent. This extreme inequity of wealth distribution reinforces the view that the poor cannot participate in the global market economy, even though they constitute the majority of the population. In fact, given its vast size, Tier 4 represents a multitrillion-dollar market. According to World Bank projections, the population at the bottom of the pyramid could swell to more than 6 billion people over the next 40 years, because the bulk of the worlds population growth occurs there. The perception that the bottom of the pyramid is not a viable market also fails to take into account the growing importance of the informal economy among the poorest of the poor, which by some estimates accounts for 40 to 60 percent of all economic activity in developing countries. Most Tier 4 people live in rural villages, or urban slums and shantytowns, and they usually do not hold legal title or deed to their assets (e.g., dwellings, farms, businesses). They have little or no formal education and are hard to reach via conventional distribution, credit, and communications. The quality and quantity of products and services available in Tier 4 is generally low. Therefore, much like an iceberg with only its tip in plain view, this massive segment of the global population along with its massive market opportunities has remained largely invisible to the corporate sector. Fortunately, the Tier 4 market is wide open for technological innovation. Among the many possibilities for innovation, MNCs can be leaders in leapfrogging to products that dont repeat the environmental mistakes of developed countries over the last 50 years. Todays MNCs evolved in an era of abundant natural resources and thus tended to make products and services that were resource-intensive and excessively polluting. The United States 270 million people only about 4 percent of the worlds population consume more than 25 percent of the planets energy resources. To re -create those types of consumption patterns in developing countries would be disastrous. We have seen how the disenfranchised in Tier 4 can disrupt the way of life and safety of the rich in Tier 1 poverty breeds discontent and extremism. Although complete income equality is an ideological pipe dream, the use of commercial development to bring people out of poverty and give them the chance for a better life is critical to the stability and health of the global economy and the continued success of Western MNCs.

The Invisible Opportunity Among the top 200 MNCs in the world, the overwhelming majority are based in developed countries. U.S. corporations dominate, with 82; Japanese firms, with 41, are second, according to a list compiled in December 2000 by the Washington, D.C.based Institute for Policy Studies. So it is not surprising that MNCs views of business are conditioned by their knowledge of and familiarity with Tier 1 consumers. Perception of market opportunity is a function of the way many managers are socialized to think and the analytical tools they use. Most MNCs automatically dismiss the bottom of the pyramid because they judge the market based on income or selections of products and services appropriate for developed countries. To appreciate the market potential of Tier 4, MNCs must come to terms with a set of core assumptions and practices that influence their view of developing countries. We have identified the following as widely shared orthodoxies that must be reexamined:

Assumption #1 The poor are not our target consumers because with our current cost structures, we cannot profitably compete for that market. Assumption #2 The poor cannot afford and have no use for the products and services sold in developed markets. Assumption #3 Only developed markets appreciate and will pay for new technology. The poor can use the previous generation of technology. Assumption #4 The bottom of the pyramid is not important to the long-term viability of our business. We can leave Tier 4 to governments and nonprofits. Assumption #5 Managers are not excited by business challenges that have a humanitarian dimension. Assumption #6 Intellectual excitement is in developed markets. It is hard to find talented managers who want to work at the bottom of the pyramid.

Each of these key assumptions obscures the value at the bottom of the pyramid. It is like the story of the person who finds a $20 bill on the sidewalk. Conventional economic wisdom suggests if the bill really existed, someone would already have picked it up! Like the $20 bill, the bottom of the pyramid defies conventional managerial logic, but that doesnt mean it isnt a large and unexplored territory for profitable growth. Consider the drivers of innovation and opportunities for companies in Tier 4. (See Exhibit 2.) MNCs must recognize that this market poses a major new challenge: how to combine low cost, good quality, sustainability, and profitability.

Furthermore, MNCs cannot exploit these new opportunities without radically rethinking how they go to market. Exhibit 3 suggests some (but by no means all) areas where an entirely new perspective is required to create profitable markets in Tier 4.

Tier 4 Pioneers Hindustan Lever Ltd. (HLL), a subsidiary of Great Britains Unilever PLC and widely considered the best managed company in India, has been a pioneer among MNCs exploring markets at the bottom of the pyramid. For more than 50 years, HLL has served Indias small elite who could afford to buy MNC products. In the 1990s, a local firm, Nirma Ltd., began offering detergent products for poor consumers, mostly in rural areas. In fact, Nirma created a new business system that included a new product formulation, lowcost manufacturing process, wide distribution network, special packaging for daily purchasing, and value pricing. HLL, in typical MNC fashion, initially dismissed Nirmas strategy. However, as Nirma grew rapidly, HLL could see its local competitor was winning in a market it had disregarded. Ultimately, HLL saw its vulnerability and its opportunity: In 1995, the company responded with its own offering for this market, drastically altering its traditional business model. HLLs new detergent, called Wheel, was formulated to substantially reduce the ratio of oil to water in the product, responding to the fact that the poor often wash their clothes in rivers and other public water systems. HLL decentralized the production, marketing, and distribution of the product to leverage the abundant labor pool in rural India, quickly creating sales channels through the thousands of small outlets where people at the bottom of the pyramid shop. HLL also changed the cost structure of its detergent business so it could introduce Wheel at a low price point. Today, Nirma and HLL are close competitors in the detergent market, with 38 percent market share each, according to IndiaInfoline.com, a business intelligence and market research service. Unilevers own analysis of Nirma and HLLs competition in the detergent business reveals even more about the profit potential of the marketplace at the bottom of the pyramid. (See Exhibit 4.)

Contrary to popular assumptions, the poor can be a very profitable market especially if MNCs change their business models. Specifically, Tier 4 is not a market that allows for the traditional pursuit of high margins; instead, profits are driven by volume and capital efficiency. Margins are likely to be low (by current norms), but unit sales can be extremely high. Managers who focus on gross margins will miss the opportunity at the bottom of the pyramid; managers who innovate and focus on economic profit will be rewarded. Nirma has become one of the largest branded detergent makers in the world. Meanwhile, HLL, stimulated by its emergent rival and its changed business model, registered a 20 percent growth in revenues per year and a 25 percent growth in profits per year between 1995 and 2000. Over the same period, HLLs market capitalization grew to $12 billion a growth rate of 40 percent per year. HLLs parent company, Unilever, also has benefited from its subsidiarys experience in India. Unilever transported HLLs business principles (not the product or the brand) to create a new detergent market among the poor in Brazil, where the Ala brand has been a big success. More important, Unilever has adopted the bottom of the pyramid as a corporate strategic priority. As the Unilever example makes clear, the starting assumption must be that serving Tier 4 involves bringing together the best of technology and a global resource base to address local market conditions. Cheap and low-quality products are not the goal. The potential of Tier 4 cannot be realized without an entrepreneurial orientation: The real strategic challenge for managers is to visualize an active market where only abject poverty exists today. It takes tremendous imagination and creativity to engineer a market infrastructure out of a completely unorganized sector. Serving Tier 4 markets is not the same as serving existing markets better or more efficiently. Managers first must develop a commercial infrastructure tailored to the needs and challenges of Tier 4. Creating such an infrastructure must be seen as an investment, much like the more familiar investments in plants, processes, products, and R&D. Further, contrary to more conventional investment strategies, no firm can do this alone. Multiple players must be involved, including local governmental authorities, nongovernmental organizations (NGOs), communities, financial institutions, and other companies. Four elements creating buying power, shaping aspirations, improving access, and tailoring local solutions are the keys to a thriving Tier 4 market. (See Exhibit 5.) Each of these four elements demands innovation in technology, business models, and management processes. And business leaders must be willing to experiment, collaborate, empower locals, and create new sources of competitive advantage and wealth. Creating Buying Power According to the International Labor Organizations World Employment Report 2001, nearly a billion people roughly one-third of the worlds work force are either underemployed or have such low-paying jobs that they cannot support themselves or their families. Helping the worlds poor elevate themselves above this desperation line is a business opportunity to do well and do good. To do so effectively, two interventions are crucial providing access to credit, and increasing the earning potential of the poor. A few farsighted companies have already begun to blaze this trail with startlingly positive results. Commercial credit historically has been unavailable to the very poor. Even if those living in poverty had access to a bank, without collateral it is hard to get credit from the traditional banking system. As Peruvian

economist Hernando de Soto demonstrates in his pathbreaking work, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, commercial credit is central to building a market economy. Access to credit in the U.S. has allowed people of modest means to systematically build their equity and make major purchases, such as houses, cars, and education. The vast majority of the poor in developing countries operate in the informal or extralegal economy, since the time and cost involved in securing legal title for their assets or incorporation of their microenterprises is prohibitive. Developing countries have tried governmental subsidies to free the poor from the cycle of poverty, with little success. Even if the poor were able to benefit from government support to start small businesses, their dependence on credit from local moneylenders charging usurious rates makes it impossible to succeed. Local moneylenders in Mumbai, India, charge interest rates of up to 20 percent per day. This means that a vegetable vendor who borrows Rs.100 ($2.08) in the morning must return Rs.120 ($2.50) in the evening. Extending credit to the poor so they can elevate themselves economically is not a new idea. Consider how I.M. Singer & Company, founded in 1851, provided credit as a way for millions of women to purchase sewing machines. Very few of those women could have afforded the steep $100 price tag, but most could afford a payment of $5 per month. The same logic applies on a much larger scale in Tier 4. Consider the experience of the Grameen Bank Ltd. in Bangladesh, one of the first in the world to apply a microlending model in commercial banking. Started just over 20 years ago by Muhammad Yunus, then a professor in the Economics Department at Chittagong University, Bangladesh, Grameen Bank pioneered a lending service for the poor that has inspired thousands of microlenders, serving 25 million clients worldwide, in developing countries and wealthy nations, including the United States and Great Britain. Grameen Banks program is designed to addresses the problems of extending credit to lowest-income customers lack of collateral, high credit risk, and contractual enforcement. Ninety-five percent of its 2.3 million customers are women, who, as the traditional breadwinners and entrepreneurs in rural communities, are better credit risks than men. Candidates for loans must have their proposals thoroughly evaluated and supported by five nonfamily members of the community. The banks sales and service people visit the villages frequently, getting to know the women who have loans and the projects in which they are supposed to invest. In this way, lending due diligence is accomplished without the mountain of paperwork and arcane language common in the West. With 1,170 branches, Grameen Bank today provides microcredit services in more than 40,000 villages, more than half the total number in Bangladesh. As of 1996, Grameen Bank had achieved a 95 percent repayment rate, higher than any other bank in the Indian subcontinent. However, the popularity of its services has also spawned more local competitors, which has cut into its portfolio and shrunk its profits over the past few years. In addition, Grameen Banks rate of return is not easy to assess. Historically, the bank was an entirely manual, field-based operation, a structure that undercut its efficiency. Today, spin-offs such as Grameen Telecom (a provider of village phone service) and Grameen Shakti (a developer of renewable energy sources) are helping Grameen Bank build a technology infrastructure to automate its processes. As the bank develops its online business model, profitability should increase dramatically, highlighting the importance of information technology in the acceleration of the microcredit revolution.

Perhaps the most pertinent measure of Grameen Banks success is the global explosion of institutional interest in microlending it has stimulated around the world. In South Africa, where 73 percent of the population earns less than R5,000 ($460) per month, according to a 2001 World Bank study, retail banking services for low-income customers are becoming one of the most competitive and fast-growing mass markets. In 1994, Standard Bank of South Africa Ltd., Africas leading consumer bank, launched a low -cost, volume-driven e-banking business, called AutoBank E, to grow revenue by providing banking services to the poor. Through the use of 2,500 automated teller machines (ATMs) and 98 AutoBank E-centres, Standard now has the largest presence in South Africas townships and other under -serviced areas of any domestic bank. As of April 2001, Standard served nearly 3 million low-income customers and is adding roughly 60,000 customers per month, according to South AfricasSunday Times. Standard does not require a minimum income of customers opening an AutoBank E account, although they must have some regular income. People who have never used a bank can open an account with a deposit of as little as $8. Customers are issued an ATM card and shown how to use it by staff who speak a variety of African dialects. A small flat fee is charged for each ATM transaction. An interest-bearing savings purse is attached to every account to encourage poor customers to save. Interest rates on deposits are low, but superior to keeping cash in a jar. Sunday Times also reported that Standard Bank is considering a loan program for low-income clients. Computerization of microlending services not only makes the overall operation more efficient, but also makes it possible to reach many more people lending money to individuals with no collateral and no formal address. Since there is lower overhead and little paperwork, AutoBanks costs are 30 to 40 percent lower than those at traditional branches. At the 1999 Microcredit Summit, the United Nations, in conjunction with several major MNCs, such as Citigroup Inc. and Monsanto Company, set a goal of making basic credit available to the 100 million poorest families in the world by the year 2005. Unfortunately, the success of this undertaking has been slowed by high transaction costs, a lack of automation, and poor information and communications infrastructures in rural areas. To address these issues and accelerate the development of microlending, French banker Jacques Attali, the founding president of the European Bank for Reconstruction and Development and a former chief aide of French President Franois Mitterand during the 1980s, has created PlaNet Finance. Its Web site, www.planetfinance.org, links thousands of microcredit groups worldwide into a network to help microbanks share solutions and lower costs. Ultimately, the development of an automated solution for tracking and processing the millions of small loans associated with microlending should be possible. If processing and transaction costs can be reduced enough, they can then be bundled together and sold in the secondary market to multinational financial institutions like Citigroup. This would greatly expand the capital available for microlending beyond the current pool from donors and governments. In the United States, microlending has also taken root over the past decade in poor urban neighborhoods. For example, the ShoreBank Corporation, formerly South Shore Bank, has demonstrated the profitability of banking for the poor in Chicagos troubled South Side. Project Enterprise, a Grameen-like program based in New York City, is aimed at minority entrepreneurs.

Several multinational banks are beginning to offer microbanking services in developing countries. Citigroup, for instance, is experimenting in Bangalore, India, with 24/7 services for customers with as little as a $25 on deposit. Initial results are very positive. Shaping Aspirations Sustainable product innovations initiated in Tier 4, and promoted through consumer education, will not only positively influence the choices of people at the bottom of the pyramid, but may ultimately reshape the way Americans and others in Tier 1 live. Indeed, in 20 years, we may look back to see that Tier 4 provided the early market pull for disruptive technologies that replaced unsustainable technologies in developed countries and advanced the fortunes of MNCs with foresight. For example, Unilevers HLL subsidiary has tackled the lack of practical, inexpensive, low -energy-consuming refrigeration in India. HLLs laboratories developed a radically different approach to refrigeration that allows ice cream to be transported across the country in standard nonrefrigerated trucks. The system allows quantum reductions in electricity use and makes dangerous and polluting refrigerants unnecessary. As a bonus, the new system is cheaper to build and use. Electricity, water, refrigeration, and many other essential services are all opportunities in developing countries. A U.S.-based NGO, the Solar Electric Light Fund (SELF), has creatively adapted technology and applied microcredit financing to bring electrical service to people in remote villages in Africa and Asia who otherwise would spend money to burn hazardous kerosene, candles, wood, or dung for their light and cooking. SELFs rural electrification system is based on small-scale on-site power generation using renewable resources. A revolving loan fund gives villagers the financial means to operate these electrical systems themselves, also creating jobs. Since its founding in 1990, SELF has launched projects in China, India, Sri Lanka, Nepal, Vietnam, Indonesia, Brazil, Uganda, Tanzania, South Africa, and the Solomon Islands. The success of SELF and other NGOs focused on small-scale distributed energy solutions has begun to attract the attention of Western companies such as the U.S.s Plug Power Inc. (fuel cells) and Honeywell Inc. (microturbines). They see the logic in moving into a wide-open market in Tier 4 rather than trying to force their technology prematurely into applications for the developed markets, where incumbents and institutions stand in their way. With several billion potential customers around the world, investments in such innovations should be well worth it. Improving Access Because Tier 4 communities are often physically and economically isolated, better distribution systems and communication links are essential to development of the bottom of the pyramid. Few of the large emerging-market countries have distribution systems that reach more than half of the population. (Hence the continued dependence of the poorest consumers on local products and services and moneylenders.) As a consequence, few MNCs have designed their distribution systems to cater to the needs of poor rural customers. Creative local companies, however, lead the way in effective rural distribution. In India, for instance, Arvind Mills has introduced an entirely new delivery system for blue jeans. Arvind, the worlds fifth -largest denim manufacturer, found Indian domestic denim sales limited. At $40 to $60 a pair, the jeans were not affordable to the masses, and the existing distribution system reached only a few towns and villages. So Arvind introduced Ruf & Tuf jeans a ready-to-make kit of jeans components (denim, zipper, rivets, and a patch) priced at about $6. Kits were distributed through a network of thousands of local tailors, many in

small rural towns and villages, whose self-interest motivated them to market the kits extensively. Ruf & Tuf jeans are now the largest-selling jeans in India, easily surpassing Levis and other brands from the U.S. and Europe. MNCs can also play a role in distributing the products of Tier 4 enterprises in Tier 1 markets, giving bottomof-the-pyramid enterprises their first links to international markets. Indeed, it is possible through partnerships to leverage traditional knowledge bases to produce more sustainable, and in some cases superior, products for consumption by Tier 1 customers. Anita Roddick, CEO of The Body Shop International PLC, demonstrated the power of this strategy in the early 1990s through her companys trade not aid program of sourcing local raw material and products from indigenous people. More recently, the Starbucks Corporation, in cooperation with Conservation International, has pioneered a program to source coffee directly from farmers in the Chiapas region of Mexico. These farms grow coffee beans organically, using shade, which preserves songbird habitat. Starbucks markets the product to U.S. consumers as a high-quality, premium coffee; the Mexican farmers benefit economically from the sourcing arrangement, which eliminates intermediaries from the business model. This direct relationship also improves the local farmers understanding and knowledge of the Tier 1 market and its custom er expectations. Information poverty may be the single biggest roadblock to sustainable development. More than half of humanity has yet to make a single phone call. However, where telephones and Internet connections do exist, for the first time in history, it is possible to imagine a single, interconnected market uniting the worlds rich and poor in the quest for truly sustainable economic development. The process could transform the digital divide into a digital dividend. Ten years ago, Sam Pitroda, currently chairman and CEO of London-based Worldtel Ltd., a company created by a telecommunications union to fund telecom development in emerging markets, came to India with the idea of rural telephones. His original concept was to have a community telepho ne, operated by an entrepreneur (usually a woman) who charged a fee for the use of the telephone and kept a percentage as wages for maintaining the telephone. Today, from most parts of India, it is possible to call anyone in the world. Other entrepreneurs have introduced fax services, and some are experimenting with low-cost e-mail and Internet access. These communication links have dramatically altered the way villages function and how they are connected to the rest of the country and the world. With the emergence of global broadband connections, opportunities for information-based business in Tier 4 will expand significantly. New ventures such as CorDECT in India and Celnicos Communications in Latin America are developing information technology and business models suited to the particular requirements of the bottom of the pyramid. Through shared-access models (e.g., Internet kiosks), wireless infrastructure, and focused technology development, companies are dramatically reducing the cost of being connected. For example, voice and data connectivity typically costs companies $850 to $2,800 per line in the developed world; CorDECT has reduced this cost to less than $400 per line, with a goal of $100 per line, which would bring telecommunications within reach of virtually everyone in the developing world. Recognizing an enormous business and development opportunity, Hewlett-Packard Company has articulated a vision of world e-inclusion, with a focus on providing technology, products, and services

appropriate to the needs of the worlds poor. As part of this strategy, HP has entered into a venture with the MIT Media Lab and the Foundation for Sustainable Development of Costa Rica led by former President Jose Maria Figueres Olsen to develop and implement telecenters for villages in remote areas. These digital town centers provide modern information technology equipment with a high-speed Internet connection at a price that is affordable, through credit vehicles, at the village level. Bringing such technology to villages in Tier 4 makes possible a number of applications, including teleeducation, telemedicine, microbanking, agricultural extension services, and environmental monitoring, all of which help to spur microenterprise, economic development, and access to world markets. This project, named Lincos, is expected to spread from todays pilot sites in Central America and the Caribbean to Asia, Africa, and Central Europe. Tailoring Local Solutions As we enter the new century, the combined sales of the worlds top 200 MNCs equal nearly 30 percent of total world gross domestic product. Yet these same corporations employ less than 1 percent of the worlds labor force. Of the worlds 100 largest economies, 51 are economies internal to corporations. Yet scores of Third World countries have suffered absolute economic stagnation or decline. If MNCs are to thrive in the 21st century, they must broaden their economic base and share it more widely. They must play a more active role in narrowing the gap between rich and poor. This cannot be achieved if these companies produce only so-called global products for consumption primarily by Tier 1 consumers. They must nurture local markets and cultures, leverage local solutions, and generate wealth at the lowest levels on the pyramid. Producing in, rather than extracting wealth from, these countries will be the guiding principle. To do this, MNCs must combine their advanced technology with deep local insights. Consider packaging. Consumers in Tier 1 countries have the disposable income and the space to buy in bulk (e.g., 10-pound boxes of detergent from superstores like Sams Club) and shop less frequently. They use their spending money to inventory convenience. Tier 4 consumers, strapped for cash and with limited living space, sho p every day, but not for much. They cant afford to stock up on household items or be highly selective about what they buy; they look for single-serve packaging. But consumers with small means also have the benefit of experimentation. Unburdened by large quantities of product, they can switch brands every time they buy. Already in India, 30 percent of personal care products and other consumables, such as shampoo, tea, and cold medicines, are sold in single-serve packages. Most are priced at Rs. 1 (about 1). Without innovation in packaging, however, this trend could result in a mountain of solid waste. Dow Chemical Company and Cargill Inc. are experimenting with an organic plastic that would be totally biodegradable. Such packaging clearly has advantages in Tier 4, but it could also revolutionize markets at all four tiers of the world pyramid. For MNCs, the best approach is to marry local capabilities and market knowledge with global best practices. But whether an initiative involves an MNC entering Tier 4 or an entrepreneur from Tier 4, the development principles remain the same: New business models must not disrupt the cultures and lifestyles of local people. An effective combination of local and global knowledge is needed, not a replication of the Western system.

The development of Indias milk industry has many lessons for MNCs. The transformation began around 1946, when the Khira District Milk Cooperative, located in the state of Gujarat, set up its own processing plant under the leadership of Verghese Kurien and created the brand Amul, today one of the most recognized in the country. Unlike the large industrial dairy farms of the West, in India, milk originates in many small villages. Villagers may own only two to three buffaloes or cows each and bring their milk twice a day to the village collection center. They are paid every day for the milk they deliver, based on fat content and volume. Refrigerated vans transport the milk to central processing plants, where it is pasteurized. Railroad cars then transport the milk to major urban centers. The entire value chain is carefully managed, from the village-based milk production to the world-scale processing facilities. The Khira District cooperative provides such services to the farmers as veterinary care and cattle feed. The cooperative also manages the distribution of pasteurized milk, milk powder, butter, cheese, baby food, and other products. The uniqueness of the Amul cooperative is its blending of decentralized origination with the efficiencies of a modern processing and distribution infrastructure. As a result, previously marginal village farmers are earning steady incomes and being transformed into active market participants. Twenty years ago, milk was in short supply in India. Today, India is the worlds largest producer of milk. According to Indias National Dairy Development Board, the countrys dairy cooperative network now claims 10.7 million individual farmer memberowners, covers 96,000 village-level societies, includes 170 milk-producer unions, and operates in more than 285 districts. Milk production has increased 4.7 percent per year since 1974. The per capita availability of milk in India has grown from 107 grams to 213 grams per day in 20 years. Putting It All Together Creating buying power, shaping aspirations, improving access, and tailoring local solutions the four elements of the commercial infrastructure for the bottom of the pyramid are intertwined. Innovation in one leverages innovation in the others. Corporations are only one of the actors; MNCs must work together with NGOs, local and state governments, and communities. Yet someone must take the lead to make this revolution happen. The question is, Why should it be MNCs? Even if multinational managers are emotionally persuaded, it is not obvious that large corporations have real advantages over small, local organizations. MNCs may never be able to beat the cost or responsiveness of village entrepreneurs. Indeed, empowering local entrepreneurs and enterprises is key to developing Tier 4 markets. Still, there are several compelling reasons for MNCs to embark on this course: Resources. Building a complex commercial infrastructure for the bottom of the pyramid is a resourceand management-intensive task. Developing environmentally sustainable products and services requires significant research. Distribution channels and communication networks are expensive to develop and sustain. Few local entrepreneurs have the managerial or technological resources to create this infrastructure. Leverage. MNCs can transfer knowledge from one market to another from China to Brazil or India as Avon, Unilever, Citigroup, and others have demonstrated. Although practices and products have to be customized to serve local needs, MNCs, with their unique global knowledge base, have an advantage that is not easily accessible to local entrepreneurs.

 Bridging. MNCs can be nodes for building the commercial infrastructure, providing access to knowledge, managerial imagination, and financial resources. Without MNCs as catalysts, well-intentioned NGOs, communities, local governments, entrepreneurs, and even multilateral development agencies will continue to flounder in their attempts to bring development to the bottom. MNCs are best positioned to unite the range of actors required to develop the Tier 4 market. Transfer. Not only can MNCs leverage learning from the bottom of the pyramid, but they also have the capacity to transfer innovations up-market all the way to Tier 1. As we have seen, Tier 4 is a testing ground for sustainable living. Many of the innovations for the bottom can be adapted for use in the resource- and energy-intensive markets of the developed world. It is imperative, however, that managers recognize the nature of business leadership required in the Tier 4 arena. Creativity, imagination, tolerance for ambiguity, stamina, passion, empathy, and courage may be as important as analytical skill, intelligence, and knowledge. Leaders need a deep understanding of the complexities and subtleties of sustainable development in the context of Tier 4. Finally, managers must have the interpersonal and intercultural skills to work with a wide range of organizations and people. MNCs must build an organizational infrastructure to address opportunity at the bottom of the pyramid. This means building a local base of support, reorienting R&D to focus on the needs of the poor, forming new alliances, increasing employment intensity, and reinventing cost structures. These five organizational elements are clearly interrelated and mutually reinforcing. Build a local base of support. Empowering the poor threatens the existing power structure. Local opposition can emerge very quickly, as Cargill Inc. found in its sunflower-seed business in India. Cargills offices were twice burned, and the local politicians accused the firm of destroying locally based seed businesses. But Cargill persisted. Through Cargills investments in farmer education, training, and supply of farm inputs, farmers have significantly improved their productivity per acre of land. Today, Cargill is seen as the friend of the farmer. Political opposition has vanished. To overcome comparable problems, MNCs must build a local base of political support. As Monsanto and General Electric Company can attest, the establishment of a coalition of NGOs, community leaders, and local authorities that can counter entrenched interests is essential. Forming such a coalition can be a very slow process. Each player has a different agenda; MNCs have to understand these agendas and create shared aspirations. In China, this problem is less onerous: The local bureaucrats are also the local entrepreneurs, so they can easily see the benefits to their enterprise and their village, town, or province. (See Profits and Perils in China, Inc., First Quarter 2002.) In countries such as India and Brazil, such alignment does not exist. Significant discussion, information sharing, the delineation of benefits to each constituency, and sensitivity to local debates is necessary. Conduct R&D focused on the poor. It is necessary to conduct R&D and market research focused on the unique requirements of the poor, by region and by country. In India, China, and North Africa, for example, research on ways to provide safe water for drinking, cooking, washing, and cleaning is a high priority. Research must also seek to adapt foreign solutions to local needs. For example, a daily dosage of vitamins can be added to a wide variety of food and beverage products. For corporations that have distribution and brand presence throughout the developing world, such as Coca-Cola Company, the bottom of the pyramid offers a vast untapped market for such products as water and nutritionals.

Finally, research must identify useful principles and potential applications from local practices. In Tier 4, significant knowledge is transmitted orally from one generation to the next. Being respectful of traditions but willing to analyze them scientifically can lead to new knowledge. The Body Shops creative CEO, Ms. Roddick, built a business predicated on understanding the basis for local rituals and practices. For example, she observed that some African women use slices of pineapple to cleanse their skin. On the surface, this practice appears to be a meaningless ritual. However, research showed active ingredients in pineapple that cleared away dead skin cells better than chemical formulations. MNCs must develop research facilities in emerging markets such as China, India, Brazil, Mexico, and Africa, although few have made a big effort so far. Unilever is an exception; it operates highly regarded research centers in India, employing more than 400 researchers dedicated to the problems of India-like markets. Form new alliances. MNCs have conventionally formed alliances solely to break into new markets; now they need to broaden their alliance strategies. By entering into alliances to expand in Tier 4 markets, MNCs gain insight into developing countries culture and local knowledge. At the same time, MNCs improve their own credibility. They may also secure preferred or exclusive access to a market or raw material. We foresee three kinds of important relationships: Alliances with local firms and cooperatives (such as the Khira District Milk Cooperative); alliances with local and international NGOs (like Starbuckss alliance with Conservation International in coffee); and alliances with governments (e.g., Merck & Companys recent alliance in Costa Rica to foster rain forest preservation in exchange for bioprospecting rights). Given the difficulty and complexity of constructing business models dependent on relationships with national or central governments (e.g., large infrastructure development), we envision more alliances at the local and regional level. To succeed in such alliances, MNC managers must learn to work with people who may not have the same agenda or the same educational and economic background as they do. The challenge and payoff is how to manage and learn from diversity economic, intellectual, racial, and linguistic. Increase employment intensity. MNCs accustomed to Tier 1 markets think in terms of capital intensity and labor productivity. Exactly the opposite logic applies in Tier 4. Given the vast number of people at the bottom of the pyramid, the production and distribution approach must provide jobs for many, as in the case of Ruf & Tuf jeans from Arvind Mills: It employed an army of local tailors as stockers, promoters, distributors, and service providers, even though the cost of the jeans was 80 percent below that of Levis. As Arvind demonstrated, MNCs need not employ large numbers of people directly on their payroll, but the organizational model in Tier 4 must increase employment intensity (and incomes) among the poor and groom them to become new customers. Reinvent cost structures. Managers must dramatically reduce cost levels relative to those in Tier 1. To create products and services the poor can afford, MNCs must reduce their costs significantly to, say, 10 percent of what they are today. But this cannot be achieved by fine-tuning the current approaches to product development, production, and logistics. The entire business process must be rethought with a focus on functionality, not on the product itself. For example, financial services need not be distributed only through branch offices open from 9 a.m. to 5 p.m. Such services can be provided at a time and place convenient to the poor consumer after 8 p.m. and at their homes. Cash-dispensing machines can be placed in safe areas police stations and post offices. Iris recognition used as a security device could substitute for the tedious personal-identification number and card for identification.

Lowering cost structures also forces a debate on ways to reduce investment costs. This will inevitably lead to greater use of information technology to develop production and distribution systems. As noted, villagebased phones are already transforming the pattern of communications throughout the developing world. Add the Internet, and we have a whole new way of communicating and creating economic development in poor, rural areas. Creative use of IT will emerge in these markets as a means to dramatically lower the costs associated with access to products and services, distribution, and credit management. A Common Cause The emergence of the 4 billion people who make up the Tier 4 market is a great opportunity for MNCs. It also represents a chance for business, government, and civil society to join together in a common cause. Indeed, we believe that pursuing strategies for the bottom of the pyramid dissolves the conflict between proponents of free trade and global capitalism on one hand, and environmental and social sustainability on the other. Yet the products and services currently offered to Tier 1 consumers are not appropriate for Tier 4, and accessing this latter market will require approaches fundamentally different from those even in Tiers 2 and 3. Changes in technology, credit, cost, and distribution are critical prerequisites. Only large firms with global reach have the technological, managerial, and financial resources to dip into the well of innovations needed to profit from this opportunity. New commerce in Tier 4 will not be restricted to businesses filling such basic needs as food, textiles, and housing. The bottom of the pyramid is waiting for high-tech businesses such as financial services, cellular telecommunications, and low-end computers. In fact, for many emerging disruptive technologies (e.g., fuel cells, photovoltaics, satellite-based telecommunications, biotechnology, thin-film microelectronics, and nanotechnology), the bottom of the pyramid may prove to be the most attractive early market. So far, three kinds of organizations have led the way: local firms such as Amul and Grameen Bank; NGOs such as the World Resources Institute, SELF, The Rainforest Alliance, The Environmental Defense Fund, and Conservation International, among others; and a few MNCs such as Starbucks, Dow, Hewlett-Packard, Unilever, Citigroup, DuPont, Johnson & Johnson, Novartis, and ABB, and global business partnerships such as the World Business Council for Sustainable Business Development. But to date, NGOs and local businesses with far fewer resources than the MNCs have been more innovative and have made more progress in developing these markets. It is tragic that as Western capitalists we have implicitly assumed that the rich will be served by the corporate sector, while governments and NGOs will protect the poor and the environment. This implicit divide is stronger than most realize. Managers in MNCs, public policymakers, and NGO activists all suffer from this historical division of roles. A huge opportunity lies in breaking this code linking the poor and the rich across the world in a seamless market organized around the concept of sustainable growth and development. Collectively, we have only begun to scratch the surface of what is the biggest potential market opportunity in the history of commerce. Those in the private sector who commit their companies to a more inclusive capitalism have the opportunity to prosper and share their prosperity with those who are less fortunate. In a very real sense, the fortune at the bottom of the pyramid represents the loftiest of our global goals.