Social Intermediation as a Means of
Poverty Alleviation
Columbus Social Entrepreneurs 2009
Professor Geoff Kistruck
Fisher College of Business
© Kistruck 2009

The ‘Real’ Face of Poverty
Percentage of Population Living on Less than $1 per Day
Source: 2007/2008 United Nations Human Development Report
© Kistruck 2009

Historical Approaches to Poverty Alleviation
First Wave: Foreign aid at the government level “So what [our organization] was doing, in
– inadequate because of corruption and our previous experience here, was typical
poor execution — trying to work with the poorer people
to just produce something. But they had
Second Wave: ‘Give a man a fish and you feed a problem…they didn’t have a market to
sell it.”
him for a day…teach a man to fish and you
feed him for a lifetime.’ – improvement in
subsistence levels but failed to build “We started to help them to get three
markets times more fish. We created a lot of fish
and then…where’s the market? We just
Third Wave: Actively bridge informal stayed in the first part of the chain. We
developing markets with formal developed [now] want to help them to coordinate
the second part of the supply chain.”
markets – just beginning to gain traction
© Kistruck 2009

Why is ‘bridging’ required?
• Current trading channels dominated by
exploitative middlemen or ‘coyotes’
• Lack of competition results in oligopolistic
situation in which virtually all economic rents
accrue to ‘coyotes’
• As a results, social enterprise (organizations with
a mixed social and financial purpose) are
becoming involved in mediating these markets
© Kistruck 2009

Overview of Social Intermediary Cases
Case Location Age (Yrs) Scope of Clients Scope of Suppliers Product
Microfinance Zimbabwe 10 5,000 borrowers and 7,000 1 large domestic bank Small, short-term loans of
jobs between $1,000 – $25,000
Tableware Swaziland 15 1 local retail store and 550 660 women from 14 villages Tablemats, napkins, bowls
stores internationally
Palm Hearts Brazil 3 1 large local distributor 346 co-op members Palm hearts
Organic Grains Bolivia 20 14 franchises, 3 super-markets, 100 co-op members 77 different products in total
foreign clients
Coffee Honduras 6 1 large Canadian distributor 5 co-ops with a total of 324 High-grown coffee beans
members
Handicrafts Brazil 2 1 large local buyer with several 9 co-ops with a total of 450 Baskets primarily but also
small buyers and 1 small retail members brooms, honey, eggs,
outlet vegetables, etc.
Pastoralists Western Kenya 4 1 large local buyer with several 9 co-ops with a total of 561 Primarily cattle but also sheep
small ones members
Shrimp Farm El Salvador 5 Many small local middlemen 20 co-ops with a total of 600 Only shrimp
members
Fish Farm Brazil 4 2 large local buyers 1 co-op with 48 members Only Fish - experimenting with
oysters
Horticulturalists Eastern Kenya 7 2 large local buyers with 16 co-ops with 500 members Asian vegetables
several small ones
© Kistruck 2009

Alternative Bridging Approaches
1. Bypass the middleman
• Domestically
• Internationally
2. Find a bigger, better middleman
3. Use the same middleman, but change the rules of the game
4. Become the middleman, distributor, and retailer
© Kistruck 2009

Bypass the Middleman - Domestically
Product: Fish Farming
Location: Bahia Region, Brazil
Size: 1 Cooperative with 48 members
Key Lessons:
When the truck came, everything was wrong. It took
two days to get everything right, and when they
opened the truck, everything was spoiled because the
truck was broken and nobody had known…it was not
freezing temperature inside.”
“So…if we buy from them, we can help them as
well as make more profit for us…and for them.
Our business is selling to others, so we have to
make money with that. We can help with a lot of
things just to make the process easier…but we
still have to make some profit.”
© Kistruck 2009

Bypass the Middleman - Internationally
Product: Coffee Beans
Location: Tegucigalpa, Honduras
Size: 5 Cooperatives with 324 members
Key Lessons:
“So [the social intermediary] was audited, and they were
like, you guys should be depreciating — but no, there’s
still no depreciation.
“So what happened, when [the social enterprise] quit
buying coffee? The next day the coffee price in the
community go down…the next day. So, when MV keepsin
business, dealing in the community, the middleman has
to compete so there’s a benefit — they can get a better
price with the middleman. The competition, you know, is
good in a way — when MV is buying, coyotes pay better
prices. And, when MV is not buying coffee, coyotes pay
lower prices.”
© Kistruck 2009

Find a Bigger, Better Intermediary
Product: Palm Hearts
Location: Baxio Sul, Brazil
Size: 1 Cooperative with 346 members
Key Lessons:
“You do not construct the ideal project with a community,
because if they cannot appropriate the project, they
cannot assume a portion of the responsibility for it.”
“Over 80 percent of the producers
were illiterate and possessed no
knowledge of elementary
arithmetic, thereby making it difficult
to transact efficiently”
© Kistruck 2009

Use the same middleman…but change the rules
Product: Shrimp Farming
Location: Usulatan, El Salvador
Size: 20 Cooperatives with 600 members
Key Lessons:
“We had a worker, one person [follow] the coyote…where he sold. [He found out] to how many
persons, what pounds, and what price. We have this data and we think this project has improved [because
of it]. Per pound, they are now paying more.”
“Now when the coyote come, I call
other cooperatives to find out what
price he pay.”
© Kistruck 2009

Become the Middleman, Distributor, and Retailer
Product: Organic Grains
Location: La Paz, Bolivia
Size: 100 producers, 14 franchises
Key Lessons:
“The organic grains intermediary just got 3,000. And I ask
[the producers], ‘what happened to the other 2,000?’
They say, ‘well…it went to [the coyote].’ Why? Because
sometimes people cannot wait two months to keep all
their production, so they have to go over and sell it.” –
buyer representative
“Producers, when they deal with the price, they forget that we give
them training workshops, we give all that…taught them how to
even treat their soil. Now they say, ‘that's the same. We just deal
with the price. Why you are not paying us five more Boliviano?’
They don't remember that we trained them, gave them all the
technology... all the preparation. But that's how producers are.”
© Kistruck 2009

Which Bridging Approach is Best?
• As with most things in life, the answer is … “it depends”
– Cultural Norms
– Transaction Frequency
– Product Durability
– Level of Financial Capital
– Contract Enforceability
• However, most important
factor was the form and
structure of the social
enterprise
© Kistruck 2009

Alternative Forms
• Two different types;
– Enterprising Nonprofits (nonprofit)
– Social Purpose Businesses (for-profit)
• Very often, social intermediation involves the shift of either a
nonprofit or for-profit towards the “middle”
– Path Dependence
© Kistruck 2009

Which Form is Better?
• On average, social enterprises with for-profit origins
outperformed those with nonprofit origins
• Embeddedness
– Cognitive (two-hats, social dissonance)
– Network (unidirectional to bi-directional)
– Cultural (institutionalized trust)
© Kistruck 2009

Structural Combinations of Social and Financial
Activities
INTEGRATED SEPARATED
Internal Cross-Divisional Partial Complete Joint-Venture Formal External
Informal External
Operation Coordination Subsidiary Subsidiary Subsidiary Partnership
Partnership
© Kistruck 2009

The Interplay of Form and Structure
Organizational Form
Nonprofit For-Profit
Integrated
Organizational Structure
Moderately Unsuccessful
Unsuccessful
Separated
Moderately Successful
Successful
© Kistruck 2009

Current Project
• Microfranchising in BOP Markets
– How to gain scale at successful ventures
– McDonalds as exemplar?
• Comparative case studies of franchised pharmacies
in Kenya and the U.S.
© Kistruck 2009

“Every single pressing social and global issue of our time is a business opportunity.”
Peter F. Drucker
© Kistruck 2009