Policy Innovations Digital Magazine (2006-2016): Innovations: Hybrid Value Chains

Rodrigo Alvarez owns three hectares of lemon trees in Guerrero, Mexico, barely enough to keep his family alive. Erratic rain patterns in Guerrero cause low yields and irregular crop quality. Local "coyotes" are Rodrigo's connection to the marketplace. They buy his lemons at a low price and make a hefty margin selling them in nearby Acapulco.

A loan of 75,000 Pesos ($6,800)—the market price for an effective irrigation system—would allow Rodrigo to triple his revenues. The investment would pay for itself in eighteen months, and he could then send his children to school and change his family's prospects forever.

So what is preventing Rodrigo from making such a profitable investment? How is the market failing him? Subsidies are available from the central Mexican government, but there is no financial distribution system to reach small farmers such as Rodrigo.

Other obstacles also stand in his way. The traditional intermediaries are sometimes corrupt and charge triple the market price for an irrigation system. Due to basic infrastructure requirements such as water supply, an effective irrigation system covers a minimum of fifty hectares, necessitating agreement and coordination among many small farmers. And increased output requires new markets beyond the local area.

Tens of thousands of Mexican family farms are discouraged from making investments that would bump them up the socioeconomic ladder. In addition to keeping these families in poverty, the situation has negative environmental and economic impacts in the form of wasted water and dependence on agricultural imports.

Is there a way to overcome these systemic obstacles, for the lemon farmers of Guerrero and all small farmers in developing countries?

We believe at Ashoka that part of the answer lies in Hybrid Value Chains, a new approach that combines the capabilities of the business and citizen sectors. To test this concept over the past three years, Ashoka has been conducting a pilot project with Amanco, a corporation that manufactures irrigation systems in Latin America. Citizen sector organizations* (CSOs) led by Ashoka Fellows are also involved.

Amanco's link in the chain is design, manufacture, and installation of the irrigation systems. The CSOs act as distributors, marketing and selling the systems to small farmers, whom they serve already as part of their social work. In addition to this distributor role, the CSOs provide a range of complementary services that enable the irrigation equipment market—facilitating access to credit, subsidies, and technical services.

Ashoka acts as a coach and consultant to both parties and designs critical structural solutions. We developed a financing system in conjunction with Asociación Mexicana de Uniones de Crédito del Sector Social (the leading Mexican microcredit institution, which is also led by an Ashoka Fellow), and secured a marketing arrangement with Wal-Mart in the case of Guerrero.

The pilot project is starting to bear fruit: the HVC has generated $550,000 in sales and reached nearly one hundred small farmers.

Through this work, we have learned that Hybrid Value Chains are economically sustainable models. Prices are set at a level that enables Amanco to make a fair profit, justifying their investment. In fact, a broader rollout would generate $30 to 45 million in annual sales of irrigation equipment for Amanco, benefiting more than 12,000 additional farmers every year.

The CSOs benefit from a sustainable source of financing that enhances their social mission and reduces their dependence on grant money from foundations.

As we plan to scale up the pilot program in Mexico, one of the key challenges is the fragmentation and weak organizational readiness of CSOs in rural Mexico. The second major challenge is the inherited cultural differences that years of ignorance and mistrust have created between businesses and citizen sector organizations. The vision, commitment, and deep capabilities of Amanco will be key to reaching the scale required.

Ashoka is pursuing similar pilot projects in Brazil and India in the housing and health insurance industries. The objective is to demonstrate the feasibility of HVCs, convince other companies to follow suit, and develop a knowledge base to help them.

Encouraged by C. K. Prahalad to explore market opportunities at the Bottom of the Pyramid, corporations worldwide are attending seminars, engaging consultants, and launching pilot programs. A recent and highly publicized example is the production of low-cost yogurt in Bangladesh through a joint venture of Danone and Muhammad Yunus's Grameen Bank.

We believe that the most enlightened companies will follow Danone's example and recognize that they are entering a market that they have historically ignored and where their usual business practices are costly and ineffective. Cooperating with citizen sector organizations to forge Hybrid Value Chains is challenging in the short term, but the soundest route to success in these previously untapped markets.

With today's corporations under pressure to find new sources of growth and to demonstrate their corporate social responsibility, the emergence and spread of Hybrid Value Chains may well be the long-awaited inflection point in international economic development.

* Citizen sector organizations are traditionally referred to as nonprofit or nongovernmental organizations, defining them by what they are not. We prefer to define them by what they are. [Return to article]