Nov. 9, 1999
By Steve Waddell

Sr. Consultant and Researcher
Organizational Futures
One Allens Avenue
Providence, RI 02903
Phone: 617/247-7836
E-mail: swaddell@prodigy.net

Relationships between civil society (nonprofit) organizations and for-profit companies are becoming increasingly common, complex and productive. However, business generally develops these on an opportunistic and reactive basis in response to a relatively narrowly defined issue or proposal-such as a crisis in corporate reputation or a project proposal from a civil society organization. Moreover, the relationships face organizational barriers to their natural development by being relegated to a non-core business department such as ones dealing with philanthropy, public relations, or community relations. This paper develops the argument that these barriers are based upon stereotypes and poor mutual understanding of the opportunities for mutual gain. This argument is developed by bringing together two schools of thought-strategic business focus and sectoral analysis-to create a strategic framework for building more comprehensive and productive relationships between business and civil society. The framework is then explored through examples of business-civil society collaboration around the world.

1. Introduction

Many eyebrows were raised in 1997 when an activist environmental group called the Conservation Law Foundation (CLF) and the multi-billion dollar U.S. power utility AES made a joint bid for the $1.1 billion power generating capacity of New England Electric Company. After all, the two organizations were better known as adversaries than partners. In proposing to become joint owners of the region's largest power utility, the two had different goals, but they united in action. AES was focused upon traditional business expansion, whereas CLF's goal was to shut down the dirtiest electricity generating plants of the grid. By joining with CLF, AES was demonstrating its commitment to the public policy priority of cleaning up the environment. By joining with AES, CLF was gaining an opportunity to be at the Board table to directly affect the policies that generate pollution. Although the partnership was outbid, it was considered a very competitive proposal.

Around the world this unusual type of partnership is becoming increasingly common (Austin, 1998; Fiszbein & Lowdin, 1998; Logan, 1997; Nelson, 1996; Nelson, 1998; Waddell, 1997c). Businesses and civil society ¹ (nonprofit/activist) organizations are discovering that despite very different goals, they often can produce more impressive outcomes in collaboration than they can on their own. For-profit corporations are more effectively achieving their core corporate goals by working with non-governmental organizations (NGOs) ranging from the Girl Scouts to the South African NGO network, and from religious groups to community development organizations. This new type of relationship is based in the concept of mutual gain and exchange systems, in contrast with traditional business-civil society relationships based upon concepts of philanthropy (gift systems), corporate responsibility (obligation systems) or corporate citizenship (systems of rights and responsibilities). A mutual gain framework draws from traditional business concepts that link strategy to distinctive resources, capabilities and competencies. Understanding how NGOs and businesses are distinctive by using this strategic perspective helps reveal the potential for these relationships and how to develop them further.

The strategy framework based in distinctive resources, capabilities, and competencies is a standard part of business school curriculum, (Hitt, Ireland, & Hoskisson, 1996) and gives rise to concepts of core competencies (Prahalad & Hamel, 1990) and competitive advantage (Porter, 1998). It arose with the demise of the holding companies and conglomerates so popular in the 1960s and 1970s that combined many enterprises from diverse industries with the rationale that the diversity would help avoid the down cycles of any one industry. When business discovered that this led to a watering down of management focus to a point of worse returns than before, the strategic focus framework was born with phrases such as "keeping to the knitting" and "understanding the core business." This new strategic framework led to divestitures and corporate restructurings. The value of this redirection is perhaps best supported by the results in the American economy where the strategy took particularly broad hold, and that restructurings based upon this rationale continue today around the world.

The concepts of resources, capabilities and competencies present a way to better understand the distinctions between the three organizational sectors of business, government and NGOs, the rationale for collaborations among them, and the way they can be more successfully formed. The mutual gain framework is based upon the assumption that for the collaborations to endure and develop their potential, all the parties must derive some benefits from them. Success is associated with optimizing gain for the parties in the collaboration. This is, it is worth noting, a utilitarian perspective of "what's in it for us" as opposed, for example, to the normative one behind corporate social responsibility of "what do people think is right to do;" however, as a mutual gain framework it is not just "what's in it for me."

Organizational Sectors

What is an organizational sector? In this case, a sector is not associated with an industry; rather, it is associated with a distinct type of organization. From a sectoral perspective, all organizations in the world are represented graphically in Figure 1.²  Organizations can be classified as either belonging to the state (government), market (business) or civil society (NGO) sectors -- or a hybrid of them. Understanding the sectors' basic differences and comparative strengths is the basis for building productive relationships between them. Although the focus here is upon business and NGOs, to understand their relationships requires also understanding the role of the state.

There is still considerable confusion about the important differences between the sectors. For example, it is common to think of the legal form is the key distinguishing factor and some people refer to civil society as the "nonprofit" sector. But the legal form of an organization is only one indicator of whether an organization might truly be considered a civil society NGO as some writers have pointed out (Brown & Korten, 1991; Etzioni, 1961; Najam, 1996). Table 1 proposes a group of characteristics that can indicate the degree to which an organization might be considered an NGO, a business, or a government agency. An environmentalist group that depends upon volunteer membership support for funding and its operations is a classic example of a civil society organization; however, civil society includes labor unions, churches, arts organizations and community development organizations. A good example of a hybrid of the market and civil society sectors (and also the state sector in some countries like India) is with cooperatives that produce goods and services, but have an active membership. However, in most cases an organization has characteristics that place it dominantly in one sector.

This is a systems analysis of organizations that says there are basically three different organizational logics or imperatives. This systems analysis sees government's primary sphere of activity is with a political system focusing upon the creation of rules that can be enforced through the (coercive) vehicles of the police and courts. Businesses' primary playing field is with economic systems where owners are given pre-eminent power and the principle mechanism to induce people to do what an organization desires is through monetary (remunerative) rewards. In contrast, civil society organizations are seen to focus upon social systems and relationships around values and beliefs; these organizations derive their power from their ability to speak to tradition, community good and values -- a normative power base.

Table 1

Some Comparative Distinctive Characteristics of the Sectors

Organizations in the different sectors have several other distinctive attributes, one of the most important being how they assess whether an action and its outcome is "good." Derived from its political system focus and coercive power, the state defines actions and outcomes as acceptable by whether or not they are legal; the market sector focuses upon whether they are profitable, and civil society asks the question about whether they are "just," usually based upon implications for inter-personal relationships and basic rights (not always with equality outcomes, as organizations like the Klu Klux Klan and most ultra-nationalist groups demonstrated). It is important to note that these assessments are different for different organizations and societies. For example, the definition of acceptable "profitability" varies between countries and industries; the definition of "justice" varies between issues and groups; and of course what is legal is established by governmental jurisdictions. In some countries, one sector is clearly dominant, such as the market sector in the United States, the civil society sector in Bangladesh, and the state sector in China.

This sectoral analysis suggests that the balancing of power between these sectors is a powerful force in determining the "success" of a culture in terms of various outcomes. Or, put another way, the relative development of the sectors influences the range of possibilities that face any country and should be considered when undertaking any macro-interventions or building organizational strategies.

Despite these levels of complexity that are associated with the sectors, there does seem to be an emerging consensus that Table 1 has some universal validity. This is recognized, for example, by new institutions such as academic ones that increasingly distinguish between schools of public administration/government, management/business, and nonprofit/third sector management. This suggests that the sectoral division speaks to some very profound needs and human qualities. Learning to work with these qualities and constructing organizational arrangements that respond to them -- rather than ones that fight them -- seems to hold important promise for the creation of more harmonious and wealthy societies that are supportive of diversity.

Sectoral comparative resources, capabilities and competencies

The strategic focus approach that is becoming increasingly dominant in business focuses upon organizations' distinctive resources and capabilities as the basis for developing core competencies (Prahalad & Hamel, 1990) as shown in Figure 2. Applied to the market sector, when a business develops a core competency it obtains a competitive advantage that makes entry into its business and/or market by another firm particularly difficult. In this approach, resources are the inputs to production such as capital equipment, the skills of individual employees, patents, finance, and talented managers. "A competitive advantage can be created through the unique bundling of several resources" (Hitt et al., 1996: 85). The capabilities refer to the ability to bring these resources together effectively; and the core competencies that result are a strategic capability that provides a competitive advantage. "Competitive advantage is driven by what's valuable, rare, costly to imitate and non-substitutable," writes Hitt et al (1996: 99) in their classic American Masters in Business Administration text Strategic Management: Competitiveness and Globalization.

Traditionally this strategic focus approach is mainly applied to individual organizations, but applying it to partnerships, alliances and collaborations can produce some important insights. When applied to sectors, it becomes easy to see that distinctive sectoral attributes result in distinctive resources, capabilities and competencies for the sectors. These are summarized in Table 2.

The resources for government derive from its legislative powers. It can establish a regulatory framework, the rules of the game, and the shape of the playing field. The strength of these is based upon both popular support for them and an apparatus of courts and police to enforce them. The market sector resources, on the other hand, result from its particular skills in making economic systems work effectively; the sector generates and possesses capital, organizes production systems and has specialized knowledge that results from this activity with regards to different industries -- such as car manufacturing and engineering knowledge. Civil society's assets are its comparatively unique ability to inspire people to contribute their time for free or for below-market salaries because people believe in a cause and support the community good that specific initiatives can produce. NGOs more often have the deepest understanding about specific communities -- both geographic and interest-based -- because NGOs are particularly focused upon community values, structures and relationships. And organizations within each sector have networks and reputations that they have constructed to assist in reaching their goals -- networks that are not easily accessible directly to organizations in other sectors because those organizations do not have ltegimacy in terms of other sectors' goals.

These resources gain value from the ability of organizations in the sectors to marshal and organize them into subsystems. This requires specialized skills. For example, to be effective the state sector must develop particular skills around developing public policy. This means not just writing laws and policy, but drawing organizations into the process so that the organizations and individuals will actually adhere to the policy; civil disobedience and black markets are examples of this skill being insufficiently developed. Of course the market sector's core capability involves managing production processes so that they create wealth; the competitive dynamic is a key element to ensure that this is done with efficiency in mind. Civil society's capabilities are around its ability to develop issues in such a way that people will feel inspired to support them through financial donations, contributing time, and pressuring other sectors to support civil society's goals.

Of course these resources and capabilities are possessed to some degree by all the sectors. For example, business has developed tools such as public relations ones to develop support for its issues. However, issue development is not a core capability of business but rather is a capability derived out of its desire to further its wealth creation. As well, businesses often build their issue development skills in response to civil society's skills in this area -- business would be just as happy not to have to deal with public relations whereas for civil society mobilizing publics is a core function. For civil society, issue development is a core part of its work to mobilize and build communities.

This strategic focus framework reasons that interorganizational relationships form in order to combine resources to create a competitive advantage while allowing each organization to focus upon what it does best.³  However, this only tells part of the story about the strategic focus impetus. An equally important and related goal is to address weaknesses or gaps in an organization's inherent ability (as opposed to desire) to access a key resource and capability. The sectoral analysis suggests that there are simply some things that one sector will never do well because inherent imperatives of the sector generate inherent weaknesses and organizational forms with limitations. Table 3 outlines some of these.

* (Brown & Kalegaonkar, 1998)

This concept of weaknesses is drawn from literature on negative externalities and market failures (Cowen, 1988) that chronicles some things that markets cannot do well. Academics working in the interdisciplinary fields such as socio-economics (Bruyn, 1991; Bruyn & Meehan, 1986; Henderson, 1991; Henderson, 1996; Lutz & Lux, 1988) have been particular vocal about identifying these failures. The tendency to monopoly has been the justification for government interventions, particularly around anti-trust legislation in the United States; disregard for impact upon common goods has received increasing attention around pollution; the viscitudes of being responsive to short-term quarterly returns in the United States have only been marginally dampened by alternative capitalization strategies in Europe and Japan; and the market's penchant to produce great winners and disregard the losers has given rise to the welfare state, graduated income tax and other measures. Market activity is based in deal-oriented transactional relationships that promote self-centered and short time horizon outcomes that can also prove problematic.

On the other hand, the weaknesses of government arise from its responsibility to create rules and then enforce them universally that results in many problems over special circumstances; the breadth of government responsibility inherent in production of group goods that results in procedures that are slow; debates over appropriate jurisdiction that often lead to confusion, power fights and issues falling between the cracks; and an apparatus of government departments with over-lapping responsibilities that poses problems in coordination. This rules focus and broad power base also leads to government self-aggrandizement and desire to intervene and control areas and details that would be best left to other sectors.

Civil society has its own failings: a narrow foci that arises for groups with a particular interest or issue in mind; amateurism that comes with a weak resource base and grass-roots focus; difficulty in mobilizing resources to be effective; small scale compared with the other sectors that comes with a grass-roots base; and a tendency of NGOs to have a narrow view of what is the "right" way to act that often leads to such severe criticism of the other civil society organizations and sectors that collaboration is highly problematic (Brown & Kalegaonkar, 1998).

But what does this sort of macro-level theoretical analysis have to do with individual organizations and their relationships? It is these underlying sectoral qualities, usually unrecognized, that are the basic drivers behind many of the burgeoning number and new forms relationships between organizations in different sectors. This analysis also suggests that the "public-private" partnership framework has a fundamental flaw, since there are two distinct groups within the "private" concept. The distinction is critical in building the strategy, structural architecture, and development processes of intersectoral collaborations. Increasingly often these relationships are alliances between different types of organizations that arise with the aim of offsetting each other's weaknesses, bolstering their collective strengths, and building collaborative core strategic advantages.

Because NGO-business collaboration has received such little attention, the following focuses upon their roles in intersectoral collaborations. From the NGO perspective the business-NGO relationships have to do with influencing businesses to be more supportive of civil society goals. But for businesses the relationships increasingly are designed to address core corporate business goals. Core corporate goals are here associated with goals of specific functional units of a business, general management, and corporate-wide goals. Of course some goals are mutually supportive -- risk reduction, for example, lowers the cost of doing business. And some relationships initiated with an NGO to address primarily one corporate goal can also address others.

Risk Management and Reduction

Relationships with NGOs can help corporations reduce general operating risk and risk on specific projects. The NGOs represent stakeholders outside of the core corporate structure, and provide a sort of early warning network of potential problems with a corporations activities. They also provide opportunities to reduce risk in creative ways.

Corporations have learned the hard way about the potential role of NGOs to provide this capacity -- as illustrated by the backlash that Monsanto experienced from insufficiently weighing the opinion of European environmental NGOs about Monsanto's genetically altered seeds. Business also has been beat up in public by NGOs for such things as fleeing American inner cities, failing to ensure suppliers apply human rights standards, and polluting the environment. With environment (Hoffman, 1997) and in the U.S. banking industry (Waddell, 1997e) a cycle of corporate response has been identified. This consists of (1) initial resistance to such NGOs and response as a public relations strategy, (2) government legislation obliging that business be responsive, (3) a more pro-active framework adopted by business such as corporate social responsibility, and often a last stage (4) with identification of how to respond to the NGO-mobilized concerns in ways that recognize them as new business opportunities.

Perhaps two of the best examples of corporations building relationships with civil society organizations in order to reduce general risk come from South Africa and the Philippines. Both those countries the 1970s and 1980s experienced governments with low legitimacy with the general population. Partly out of concern that when change swept out those governments, business would be swept out too, businesses joined together to create the Philippine Business for Social Progress (PBSP) and the predecessors of today's National (South Africa) Business Initiative. These organizations were instrumental in constructing dialogue with groups outside of those favored by the governments, deepening understanding of the social situation, and creating broader social networks. This was achieved by activities making grants to NGOs to undertake specific activity such as community economic development or education, and through meetings with NGOs (including the Catholic Church) categorically aimed at building ties and relationships.

Sometimes general operating risk-reduction is achieved by changing the rules of the game.

In terms of specific projects, corporations are learning that relationship-building with NGOs can reduce their vulnerability to popular criticism and attacks that can make a project unfeasible. This was why Enron negotiated a relationship with CARE to have CARE and its network undertake a range of activities in a community in India where Enron was planning a power project; however, that project turned out badly when some critical issues around diverging goals arose. A more successful example is a relationship between an organization of the poor in San Diego, bankers, and builders; they developed a project that built a 140-unit housing complex from a community-building perspective that ensured long-term maintenance of the investment and loan repayment through strong social structures. In these cases the NGOs are understood to be more than just "organizations to be reckoned with;" they are also sources of community data, communicators of community views, and organizers of community concerns. By their very nature, corporate community affairs departments on their own are incapable of matching a good NGO's ability to evoke trust and reach deep understanding of communities.

Another way to reduce risk is to identify standards and processes to deal with problems that their application causes, in order to support smooth business operation. One of the longest NGO-business traditions in this regard is with labor unions and processes to establish a collective agreement. These standards are often very contentious, but new negotiating forums are emerging that hold some promise. There are several focused upon the environment, including an initiative of CERES, a shareholder activist organization that has engaged major corporations as well as a network of environmentalist organizations. Another example is with the relationships between the environmental NGO Natural Resource Defense Council and a large American utility, Public Service Electricity and Gas (PSE&G); together they produced new environmental regulations that had a positive impact for the environment in general, and because of the type of fuel PSE&G uses the regulations improved the company's market position by increasing comparative costs for competitors. Another area of standard setting that reduces risk of damage to public image is with human rights initiatives, such as the Global Sullivan Principles written with the convening support of the United Nations that brought together NGOs such as Amnesty International, and businesses including General Motors and Colgate-Palmolive. Increasingly these standards include roles for NGOs as monitors and auditors of corporate behavior and corporate subcontractors.

NGOs can also be a good source of information that is useful in both risk management and corporate planning, that corporations would find otherwise difficult to obtain. Sometimes this develops into formal relationships, such as with the brokerage firm Smith Barney that needs information about human rights issues to assess investment risks, and obtains it in part by sponsoring research newsletters and reports prepared by the human rights organization, Vérité. And when Shell did an environmental and social assessment of a pipeline project in Peru, it engaged NGOs to do some of the work -- reasoning that their reputation as advocates and their networks could better inform Shell about the outside bounds of risk.

Cost Reduction and Productivity Gains:

This risk reduction activity also provides good examples of how relationships with civil society organizations can actually reduce costs for a project by building NGO relationships. For example, in the San Diego housing case building projects in the inner city were notoriously expensive because of theft and vandalism. Rather than simply build buildings, however, under the NGO leadership the focus included building a community with the construction being a tool to do this. By more directly tying the benefits of the building to the community, vandalism and theft were virtually eliminated (Waddell, 1997a). The lender, Bank of America, has built a profitable strategic core competency around funding such community-building housing projects not just with the local San Diego NGO, but with similar NGOs in many communities across America.

Relationships with NGOs also can produce cost savings for corporations by their ability to mobilize volunteer energy. Volunteers can reduce project costs and make projects viable from a profitability perspective that would otherwise be impossible. What under business control would be considered exploitive, under collaboration and real partnership with NGOs becomes a civil society process to gain access to market resources. One of the most amazing examples of this is with the Orangi project, involving a suburb of one million people outside of Karachi in Pakistan. Under the leadership of NGOs and with support from government, business providing construction materials for water and sanitation projects found themselves able to provide the materials in part because NGOs mobilized volunteers to undertake labor-intensive construction activities. In the end, the project was estimated to cost only 10 percent of what it would have cost using traditional methods (Khan, 1998). Similar initiatives in places as different as South Africa (Palmer, 1998) (Waddell, 1998a) and Argentina (Fiszbein & Lowdin, 1998) have given a more central role to NGOs in consortia that have undertaken water and sanitation projects.

And still another way NGOs can help reduce costs is through their potential for enhancing transparency and reducing corruption. NGOs in general place a higher emphasis upon transparency than business or government, largely because a membership-based organization that depends upon volunteer support has a much greater need to be transparent itself. When an NGO is involved in an undertaking, there is a whole additional network of people to whom the project has some accountability. Sometimes this dynamic can produce substantial payoffs; for example, in the case of road-building in Madagascar which intimately involved local NGO road user associations, it was estimated that reducing corruption reduced costs for company bids for road rehabilitation and construction by as much twenty-five percent (Waddell, 1998b).

New Product Development

More corporations are recognizing that NGOs have particularly important role in research and development (R&D). This derives in part because of NGO's knowledge about their communities, their ability to inspire commitment and reduce costs, their longer time horizon, and the benefits of their tax status.

Community knowledge is critical in creating new products for particular demographic and psychographic profiles. Corporate-NGO relationships are bound to become increasingly important as competition and globalization leads corporations to focus more upon the low-income communities of developing countries. Unilever, one of the world's largest and most global manufacturers of household products, has tapped NGOs knowledge as it takes a lead in developing new products for very low-income communities in India, Brazil and elsewhere.

Some of the earliest large-scale collaboration between NGOs and business to create new products began in the 1970s in the U.S. banking industry (Waddell, 1997a; Waddell, 1997d; Waddell, 1997e). Under pressure from the federal and state governments to improve services for the low-income, many bankers have developed important, on-going advisory groups with community-development, religious and other NGOs. These groups advocate for their communities which, when the relationships are successful, produces new profitable products that integrate government programs, include NGOs as peer groups to ensure repayment, and more closely respond to the characteristics and needs of poorer communities. In North Carolina, one such initiative developed to address needs of migrant workers, one of the most difficult types of markets for banks.

In this new product development process with NGOs, marketing departments move away from their reliance upon telephone surveys and focus groups. These customer research vehicles actually provide quite shallow information, since the conversations are ad-hoc and short. Moreover, they depend upon people having good language skills and telephones. In contrast, conversations with NGOs in the new product development strategy are on-going. This means the NGOs learn more about the business of the corporation and what it is actually capable of doing, and can participate in a much deeper dialogue about continually improving products based upon community feed-back. NGOs often take the initiative to suggest new products that prove good business ideas.

Sometimes NGOs find themselves with particular assets that can make them very attractive partners in emerging businesses. For example, The Nature Conservancy, a U.S.-based environmental organization with affiliates throughout Latin America, has focused upon assembling land for eco-reserves throughout the western hemisphere. In Belize, TNC, a local NGO, and a large British travel company Abercrombie and Kent have struck a deal to build a small eco-tourism site on one of the world's largest tropical rainforest reserves owned by the local NGO. The industry will provide jobs and increasing revenues as the local NGO becomes a substantial shareholder in the project; all of this creates added reason for local people to ensure the on-going protection of the reserve.

In some cases NGOs mobilize community resources and influence to create what are essentially new products. This type of energy often has proven critical to pressure government regulators and quasi-public utilities to become more flexible in the type of product that companies can provide. This is essentially what happened in the cases of water and sanitation projects referred to earlier, and in several locations it has been important in opening up new types of business for power utilities. In developing countries poor communities cannot pay for such utilities based upon traditional building approaches that are usually imported from developed countries. Revising these approaches and standards can produce new building processes and products to meet this market's particular needs and capacity.

The corporate-NGO collaborations often have an R&D aspect that is being integrated into common business practice. For example, there is significant intertwining between commercial pharmaceutical companies and universities, where the universities focus more upon long-term and exploratory research and the pharmaceutical companies upon the application. Another interesting example is the U.S. theater and entertainment industry. Commercial theater is focused upon profit, whereas the nonprofit theater is more mission driven and focused upon issues, innovation and excellence. A sophisticated menu of legal arrangements have been developed to support the transfer of financial resources from the commercial to non-commercial theaters, where the latter play an R&D role in developing entertainment products. Large entertainment corporations such as Disney now have directly entered the commercial theater market and are developing relationships with non-commercial houses to develop products that can be films or television shows. Costs are a significant factor in these types of R&D relationships, since non-commercial theatres have much lower overhead and save on tax costs (Cherbo, 1999).

New Market Development

NGOs' ties with poor and marginalized communities are a particularly important asset for businesses that aim to provide goods and services for them -- and as Unliver has concluded, most companies should be considering the poor as a target market. Traditional delivery structures, such as bank branches, pharmacies and salesforces often are simply too expensive for companies to provide profitable services. But sometimes the biggest problem is lack of understanding about communities and their potential. Harvard's Michael Porter has been particularly vocal about pointing out that although individual incomes are low, within poor communities there is often more buying power per square foot than in ones where individuals are much more wealthy. NGOs in these communities can help address these issues through their own knowledge about communities and ability to organize them.

A particularly critical role of NGOs is their ability to aggregate small markets into a scale that is meaningful for a business. This is part of the key to Grameen Bank's success in Bangladesh where it developed micro-finance lending as part of its banking strategy, and with changing strategies by other traditional and new financial institutions. Rather than use tellers and staff to monitor loans, micro-finance aggregates people into NGO-style groups of five or more, with members supporting one another as they develop their businesses. This peer-lending model, growing out of local social dynamics, was first analyzed in the early 1960s (Gertz, 1962) and has been developed by Accion International's network to the point that it has generated a new, forprofit bank and is accessing money markets with competitive returns. CitiGroup and other major banks are now seeing these types of activities as critical to building a base for their commercial markets, and are actively supporting micro-finance NGOs that know how to develop low-income communities in more cost-effective ways than corporations.

Monsanto gained access to 14,000 small farmers in one region of Indonesia alone through its relationship with Winrock, an international development NGO working with small farmers mainly in western Africa and southeast Asia. Partly through this relationship, Monsanto aims to move from five percent annual growth in Indonesia to more than 25 percent. This growth is predicated upon moving from a plantation market to one that includes small crop producers. Monsanto's tradional salesforce was simply too expensive, and too unfamiliar (and uncomfortable) with the small farmers. The relationship with Winrock involves funding by Monsanto's product line manager for Roundup (a herbicide) and the Monsanto foundation over a three year period. Part of Winrock's education work with small farmers includes the use of herbicides; although controversial in some quarters, Winrock finds that benefits of herbicides to small farmers can be so significant (allowing, for example, an additional crop a year in some locations) that small farmers are moving to use the herbicides on their own. Without proper education about their use, there will be health and environmental disasters. Proper use of Roundup is part of the education program of Winrock -- and Winrock will include other such corporate products, as well.

Market aggregation through NGOs also played a critical role in Integra Bank's (now National City Corporation) ability to be the primary retail bank in the city of Pittsburgh in the U.S., with over 60 percent of its population being customers (Waddell, 1997a). However, 32 neighborhood NGOs first had to form a coalition to represent a large enough market that it made sense for the Bank to spend considerable resources to develop its relationship with the coalition. Also critical was the coincidence that the coalition's geographic region almost exactly matched an internal market division for the Bank, and that head of the division understood the value of the relationship.

Sometimes NGOs take a very direct role in creating demand for a company's products, because that demand can also contribute to community economic development. Such an example is unfolding in Brazil since Latin America's largest stainless steel producer, Acesita, was privatized in 1994. As commonly occurs, the privatization was accompanied with a large number of lay-offs; however Acesita created a foundation to, in part, address these resulting employment issues. The foundation has picked up on the fact that almost all of the stainless steel production was exported, since there were no intermediate stainless steel processors in the country. By working with the retirees association (which includes laid-off workers), a local NGO Artisans Institute has been developed to train people in manufacturing of stainless steel products. These small manufacturers are creating the first significant indigenous demand for the raw stainless steel product.

Human Resources

NGO-business relationships are proving beneficial to human resource concerns for two particular groups: those people directly hired by corporations, and those working with subcontractors.

Direct employees are being trained by NGOs on topics and in skills that have been developed by NGOs over many years. Sometimes this is in skills in working with the poor and marginalized and with people in specific communities. Language and culture present barriers not just for individuals, but for entire groups of people that the business sector often has trouble working with; often the problem is that corporate employees simply do not understand how to speak with people outside of their own social group. Low-income community-based NGOs are teaching bankers in the U.S. about informal barriers the poor face, such as imposing formal bank branches that are physically intimidating. And PACT, an international development NGO, provides its expertise to Cabot, an American chemical company, in developing community programs in Southeast Asia; PACT's presence also gives the programs a higher degree of credibility and connects Cabot to PACT's own community network.

NGOs are proving adept at identifying and developing people to work in business environments. In the United States where there is a labor shortage, corporate human resource departments are partnering with NGOs and building better systems for the task of identifying and preparing people for work who have been unemployed or left outside of the mainstream workforce; NGOs have better networks, skills and knowledge appropriate for the task. Since 1991 such a partnership between the hotel group Marriott International and an NGO called Pathways to Independence have produced remarkable results: 70 percent of Pathways' graduates are still employed after a year, compared with only 45 percent of welfare hires and 50 percent of general hires. Marriott estimates it saves $4 for every $1 dollar spent, through lowering turnover and absenteeism (Kanter, 1999).

NGO connections with business employees also develop through volunteer programs. Hitachi, for example, acculturates its senior management from Japan to local American communities by making them active board members on local non-profit boards that are dominated by local people. This builds both social networks and better understanding of local communities for managers who might only spend a few years in a community and have difficulty learning about it. Volunteer programs are increasingly common with lower level employees, too. The billion-dollar American boot company Timberland, has concluded that they provide an important moral boost for their employees. The esteem of volunteers for their employer increases, and the community work increases employees' self-esteem.

The vertical disintegration of many firms through subcontracting has led to human resource problems that NGOs are helping to address. The scandals of child labor being used to produce soccer balls and below-subsistance wages for subcontracted clothing manufacturers are among the high profile and unintended outcomes this corporate restructuring has generated. Traditional human resource strategies to avoid such problems are impossible to apply to subcontractors. Agitation for improved work standards by NGOs has provoked some heated exchanges and is producing some interesting results. NGOs are actually working with corporations to assist in defining standards, monitoring them, and enforcing them. This is generating a new industry of monitoring and auditing, such as with the ISO 8000 initiative developed by the Center for Economic Priorities and the U.S. President's task force on human rights and labor issues for American companies with overseas operations.

Production Chain Organizing

Many production chains, particularly in Southern countries, have been under-developed. Other production chains that were present within the structure of vertically integrated firms are dissolving with as "companies have gone about...slicing and dicing themselves into pieces" (Wysocki, 1999). As the geographic expanse of production chains grows with globalization, traditional production chain linkages often are proving inadequate. New ways to build and manage production chains with NGOs are evolving under these pressures. As always, all the links have to meet the three key outcomes of quality, quantity and timeliness.

One capability of NGOs that is bringing them more centrally into some production chains is their ability to work with low-income communities. In many cases the chain includes small producers, such as farmers, who are relatively poor and without access to global markets. For example in the Philippines, Dolefil (a Dole Food Company's Philippine subsidiary) and a farmers' NGO have negotiated an agreement to improve the quality of rice production so Dole can sell it to the discriminating Japanese market. In this arrangement a government research institute provides quality seeds, Dolefil guarantees a floor price for the farmers, and the NGO trains the farmers in improved production techniques, processing and packaging; profits are shared equally between the NGO and Dole's subsidiary (Ledesma, 1999). In the past, government might have taken a lead in farmer training, but NGOs are found to be more effective due to their local focus, lack of large bureaucracy, and knowledge of local communities.

Sometimes NGOs take a lead in developing the entire production chain and improving its quality. This role for NGOs emphasizes their ability to work with the poor and is combined with a broader community-building quality that inspires volunteer commitment and trust in a chain that can be pulled apart through competitive pressures. In India in the state of Karnataka a surprising example of this type of NGO-business collaboration is developing in a network headed by an NGO, the Center for Technology Development. It has created five different industry nodes, each with their own NGO lead organization: in new materials (such as new metals), informatics, food processing, and agriculture; as well, there is a small venture capital fund. The NGOs themselves are intersectoral, combining large business such as Hindustan-Lever, governments, research institutes and NGOs. An analysis of the work of the food processing and agriculture NGOs concluded that together their mission can be defined as ensuring continual quality improvement in the entire food industry production chain (Waddell, 1997b). This includes working with research institutes to develop the seeds and growing technologies most appropriate for the local climate, small farmers and their NGOs to ensure appropriate application of the technologies; a farmer's coop to improve transportation of goods, sorting and quality; a women's small business incubator organized as an NGO to establish new food businesses; Hindustan-Lever which provides access to markets and large-scale food processing systems; and Indo-American Hybrids to assist in development of new greenhouse technologies and production. CTD and its NGOs are led by retired Indians who held very senior positions during their worklife; they volunteer their time, often many days a week, with the goal of supporting "the upliftment" of Indians.

Building barriers to entry through distinction

Relationships with NGOs can provide corporations with a distinctive network that makes entry by other companies into its market very difficult. The relationships produce a product or service that people buy because it includes the relationship with the NGO. When products are otherwise difficult to distinguish (such as with highly transactional ones such as banking or telephone services), these networks can be a particularly important factor.

This strategy has been most commonly developed through the affinity or cause-related marketing concept. This concept was popularized through a 1993-1996 partnership between an NGO called Share Our Strength and American Express in a Charge Against Hunger campaign. The campaign generated more than $21 million dollars for the NGO, increased public awareness about hunger and increased usage of the American Express Card and their participating merchants. A study revealed that nearly two-thirds of Americans, approximately 130 million consumers, would be likely to switch brands or retailers to one associated with a good cause (Cone/Roper, 1999). This strategy has grown into big business with sponsorships of major sporting events like the Olympics and arts events such as Edinburgh's international festival.

Traditionally these relationships have been transactional -- they simply access the NGO's reputation and, when mailing lists are purchased, the names of members. In these situations there is little difference from other commercial transactions and the relationships can be quite short-term. However, more long-term strategies building much more integrated actions are beginning to be developed. Cone Communications, a leader in the field of cause-related marketing, reported in 1999 that "(C)ompanies such as Wal-Mart and McDonald's are breaking through the clutter of cause promotion in the marketplace by developing comprehensive programs that are an integral part of their brand's identity. These companies are witnessing win-win-win business related impacts on their employees, customers and communities" (Cone/Roper, 1999).

Deeper and more interesting relationships are becoming a cornerstone of some businesses' strategy. In this era of globalization and increasingly large scale, this strategy holds particular attraction for medium-sized businesses that cannot easily compete in the arenas of price and service/product range. For these businesses, the long-term and local focus of NGOs can make them particularly valuable partners to develop competitive advantages. The long distance phone company Working Assets in the United States and Citizens Bank in Canada are particularly good examples of developing NGO relationships as part of their core strategy. Working Assets is tiny compared to the telephone giants as is Citizens compared with the banks, but both have managed to carve themselves niches by unequivocally attaching themselves to NGOs such as Amnesty International. For the NGO these arrangements involve affinity-type financial arrangements, although the relationships are typically more long-term. A global competitor could strike a similar deal with Amnesty, but because of their much broader and numerous types of relationships they have less credibility in being "a phone company with a conscience," as Working Assets proclaims.

A yet deeper level of relationship with NGOs in a specific community can produce even greater barriers to entry for outside companies, called social capital enterprise (Waddell, 1997a; Waddell, 1997d). For example, VanCity, a $6 billion Canadian financial institution, continues to build strong ties with a number of community organizations such as ones representing the disabled; the focus is not just upon the NGOs, of course, but as was described earlier upon the aggregated market that they represent -- members and families. For VanCity these relationships are growing to be quite integrated and symbiotic, as VanCity develops products more targeted to such audiences and a unique combination of structures including a foundation, community development bank, construction company, and retail banking/insurance/trust arm. When the synergies of these relationships, structures, and products are effectively developed, they represent a very powerful barrier to entry for global firms.

Change and Creativity Support

Perhaps there is no mantra as strong today as one about the need and pressure for change and innovation. One of the greatest powers in generating innovation is by uncovering assumptions that are so embedded in the way an organization works, that they are not even recognized. An outsider who can independently challenge traditions can be a particularly good agent for revealing these assumption and supporting the development of new ways of operating. Given their different world views, this is can be a particularly useful product of NGO-business collaboration. Management guru Rosabeth Moss Kanter has been so impressed by this that she describes the product as corporate social innovation, in contrast to corporate social responsibility (Kanter, 1999). Of course the trick is to manage the interactions so that they can successfully reveal the assumptions and generate new approaches; this means avoiding being superficial and "nice", or simply descending into a pitched battle.

Given that one NGO focus is upon poor communities, one assumption they are challenging is perceptions about the poor as a market. Strategy expert C.K. Prahalad, working with Unilever as the company increases its emphasis upon developing country customers, identifies five assumptions that need to be challenged: (1) the poor are not our target, (2) the poor can not afford products, (3) only developed market will pay for new technology, (4) the bottom of the market is not important for our long-term interests, and (5) the intellectual excitement is in the developed markets (Prahalad, 1999). Challenging these assumptions can be seen in many of the examples already given. For example, in the United States banking has increased its profitability by moving out of its clubby branches and into the streets with staff meeting NGOs and their members -- but this required challenging basic bank assumptions about the profit potential of the low-income market. And in the Orangi water and sanitation project referred to earlier, only six percent of the costs were not covered by the community.

In the NGO-business collaborations, often the traditional assumption about the role of outside "experts" to design, build and manage systems is being challenged through more participative processes involving and developing local leadership. This can be seen in new approaches to water and sanitation systems with local committees taking leadership; with roads in Madagascar where the emerging lead organizations are mass-membership community-based road user associations; and in the eco-tourism models, where local people are having leadership roles in developing sophisticated tourist facilities.

Inclusion is emerging as an important concept in generating change and innovation, particularly as vertically integrated firms give way to network relationships. The examples of production chain reorganizing demonstrate that new ways must be found to involve all the parties associated with production, and that NGOs can make a critical contribution to this organizing when it involves numerous small producers or numerous links in the production chain. The structure and core competencies of NGOs can make them a better connector or arbitrator between the production chain links, and better organizers and developers of small producers. This inclusion, however, requires a commitment to simply listening and learning. For example, Bank of America has spent considerable time listening to and working with poor communities such as in San Diego to learn how to change in ways that integrate some of the basic challenges that NGOs present to the traditional way of doing business.

NGOs' thinking outside of the traditional business box often has created opportunities for businesses that can really listen to critiques and respond effectively. This is perhaps best exemplified with environmental NGOs whose critiques have vastly reduced costs and improved production processes. Increasingly, these critics are being brought inside the company as consultants, such as with the Environmental Defense Fund that is working with British Petroleum to help the company meet its own voluntary reduction targets. Sometimes the presence of an NGO in a collaboration means that a company must reassess its core business. For example, in the Madagascar road-building the road contractors that were most successful moved from being road builders to being educators about road building and builders of a system to build and maintain roads. And in the mid 1990s MicroSoft realized that it had to change its tactics with the elderly, who it noticed use computers least but may well find them of greater benefit than most. The company decided the best approach was to work with NGOs representing the elderly such as the American Association of Retired People. But this required that MicroSoft develop a capacity-building educational approach such as NGOs use, rather than a marketing strategy emphasizing advertising and promotions. At other times listening to NGOs can generate a whole new industry such as with eco-tourism which can be seen as a response to increasing concern about and interest in issues developed by environmental NGOs.

Conclusion

This sectoral strategic framework helps to explain why business and NGOs often come into conflict: they are very different. However, that conflict and difference can also be turned into mutual benefit if the differences can be integrated to address each other's weaknesses and combine competencies, and if parties can live with paradoxes rather than seek to dominate or win. However, the journey to such a synthesis is not easy and requires time, good listening skills, and creative responses. It also requires a powerful framework for guiding the relationship building; the sectoral analysis applied to a strategic focus framework with distinctive resources, capabilities, and competencies can provide this.

The first message of this sectoral strategic focus framework is that business activity should be understood from a systems perspective: business focuses upon the economic systems, but these interact with the political systems of the state and social systems that are the focus of civil society. Thinking of a business issue only from a business perspective can create problems and result in missed opportunities. Problems can arise from the perspective of risk management, and missed opportunities can include development of new markets and building barriers to market entry for competitors.

A second message of this framework is that building relationships with NGOs will make more sense for some businesses and projects than others. For example, the American clothing retailer, TJMAXX, will probably find little value in building NGO relationships since the business' very strategic focus is upon transactional relationships -- it buys quality clothing for the middle income market that becomes available through some unique circumstances such as liquidations.

The strategic focus framework tells us that businesses that produce goods and services for, or want to expand their market to include, low-income groups will find NGO relationships particularly valuable. Business will never be as good as an excellent NGO can be at building relationships with this market and community. NGOs' knowledge and networks provide a valuable resource to provide goods and services profitably to low-income communities. NGO relationships will be important for companies working in areas of high public concern and impact, such as oil and forestry companies, and companies with mass market labels such as clothing manufacturers; although these types of relationships have usually been thought of as defensive, they can be turned into proactive ones to set widely established standards and generate innovative solutions to hard issues. And the relationships will be important for industries where there is a perceived "right" to service and access, such as with banks and utilities.

Coupled with the macro-business trends of privatization and disintegration of vertically-integrated industry, the sectoral strategic focus framework points to some innovative directions for corporations. Businesses growing out of privatization, such as utilities, can understand that a significant portion of their business is with the poor and that through their volunteer and other resources NGO relationships can help evolve for those communities innovative and cost-effective ways to address the particular challenges for building and maintaining large utility systems. The framework also suggests that there are innovative ways to facilitate the links in the production chain, and that the particular ability of NGOs to generate trust can give them important roles in production chain management; moreover, when a production chain involves many small producers, NGO can play an important role in organizing specific parts of the production chain.

Another message of the framework is that NGO relationships give opportunity for global corporations to act locally, and for smaller businesses to develop strategic advantages over their big partners. Involving its staff in NGOs, businesses provide opportunities for global firms to give their local employees a sense of local esteem, and global executives a vehicle for learning about local community. Smaller businesses can create a social market strategy by closely aligning with their local NGOs in ways that will create powerful barriers to entry for global competitors.

This sectoral strategic focus suggests that most businesses will find some value in supplementing NGO relationships based upon philanthropic, social responsibility, and citizenship frameworks, with ones that are more strategically related to core corporate goals. As well as NGO relationships being part of corporate foundation and community relations activity, their potential value should be assessed by core corporate functional units such as marketing, product development, and business strategy. Identifying the distinct resources, capabilities and competencies that are imbedded in the very essence of business and civil society organizations facilitates this assessment and managing the relationships to protect these core distinctions -- for when an NGO begins adopting a business logic, it begins to lose its original partnership value.

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FOOTNOTES

1 - "Civil society" is a term that is becoming increasingly popular to describe a group of organizations referred to variously as the social, NGO, independent, nonprofit or third sector. This explanation of this term is given in detail in the following pages.

2 - This representation is increasingly common today and is used by many organizations dealing with intersectoral collaboration such as The Prince of Wales Business Leaders Forum.

3 - There are various theories about why interorganizational relationships arise. For more complete analysis and review of these, see: (Gray & Wood, 1991; Oliver, 1990) Each of these reviews identified six basic motivations.

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