The future of cities - urban development for sustainable transformation
Insight by Nora Holz
Eco-inclusive small and medium-sized enterprises (SMEs) focus on providing socially inclusive and environmentally sustainable impacts and are important agents in the global confrontation against environmental degradation as well as for the inclusion of socioeconomically marginalised communities in global value chains. To provide some insights into the business journeys and characteristics of these enterprises, this report delivers a comprehensive typology on eco-inclusive SMEs.
Just like conventional SMEs, eco-inclusive enterprises similarly play an important role for socioeconomically marginalised communities in low- and middle-income economies by including low-income and vulnerable groups in their value chains as employees, suppliers, distributors, or consumers. What makes them different from conventional SME, are the green products and services they provide, enabling them to have greater social and environmental impacts.
As research on them is limited, the following typology aims to provide a better understanding of the archetypes which make up the eco-inclusive SME subgroup. The typology is informed by over 20 years of supporting more than 1,000 eco-inclusive entrepreneurs in Asia, Africa and the Americas, enriched by in-depth interviews.
While the following SME profiles are idealised enterprise types which do not and cannot capture the diversity and complexity of these SMEs, this simplification might support a better understanding of the realities of eco-inclusive SMEs on their respective journeys to entrepreneurial success.
The core of these enterprises is their product or their service-based innovation of tech-enabled green products/services that disrupt established markets. Usually, this involves multi-year R&D processes as well as numerous financial and research partnerships. While, as a disruptor, these enterprises have the potential for exponential growth, there is also a high risk of failure at the same time.
These enterprises sell products and services which are strongly tied to local wisdoms and environmentally sustainable traditional practices, while raising public awareness through extensive campaigns. By doing that, they create green and socially inclusive movements through their networks of marginalised actors in the value chain.
As these enterprises compete in highly competitive markets with a large demand, they focus on continuously innovating their business processes in order to gain a competitive advantage. With their proven business models, they are not only able to offer large quantities of their green products or services, but also employ most staff among the listed eco-inclusive enterprise types.
Often located in rural areas or informal settlements, these enterprises are based in particularly marginalised and socioeconomically disadvantaged communities. Due to a lack of job opportunities, these SMEs often provide the only viable employment option in these communities. While “steady growers” focus on growth and competitiveness, the main concern of necessity-driven enterprises is mere economic survival.
Even though a typology essentially groups the enterprises and certain characteristics to highlight certain similarities, this methodology first and foremost aims to reveal the diversity of eco-inclusive enterprises and their corresponding support needs. To unlock the full potential of these enterprises, the support needs to be tailored to the respective needs of each enterprise “type”.
To effectively support future enterprises in reaching entrepreneurial success and scale, this report explores the pathways of existing SMEs, deconstructs them and groups the challenges they encountered and solutions for overcoming them. Enterprises are dynamic and might change their pathways over time. However, while acknowledging that the following five journeys are, in reality, often intertwined, they can be leveraged as analytical tools to provide insights into the SMEs’ respective pathways to success.
Growth is most closely associated with an increase in revenue. While taking into consideration that growth can also be manifested in staff development, production milestones or sustainable impact, this report focuses on revenue development over time and the strengths of and challenges to (revenue) growth.
Innovation is a multi-stage process, in which an idea is further developed and turned into a new or improved product, service or process. Hence, for the innovation journey, we a) examine the type or degree of what is being innovated, b) the rate or intensity at which the innovation takes place and c) the tactics which are employed to achieve the set goals.
The three dimensions of impact in this report are: environmental, social and economic. There is a multitude of ways in which eco-inclusive SMEs achieve and increase impact over the course of their business trajectory. These impact fields are often highly interrelated. In order to assess the impact journey, we take into consideration a) how impacts are achieved and relate to each other across different enterprise types and b) which channels can be used in order to tackle certain challenges on the impact journey.
Enterprises may be located in very cooperative ecosystems contributing to their growth, or a lack of this kind of partnership and collaboration. Irrespective of the enterprise, conducive guidelines and legal frameworks, as well as the willingness of key government or policy actors are essential for the success of any enterprise. This report illustrates how:
As eco-inclusive SMEs are mostly impact-driven, have green business models, or offer new products or services, they generally lack financing opportunities tailored to their specific needs, especially during their growth stage. Finance, in this report, relates to both externally obtained funds (equity, loans, grants or blended) and internally generated revenues. Therefore, the report examines:
Despite this report only being a first attempt to understand eco-inclusive SMEs by outlining an idealised typology, it is a first step towards catering for the diverse needs of these enterprises on their journeys to entrepreneurial success. This being only a starting point, research on eco-inclusive SMEs will hopefully expand and validate the claims made in this report.