The Wall Street Journal has an interesting article, "The New Science of Giving", that focuses on the philanthrophy of Houston couple Laura and John Arnold. John Arnold is a former hedge fund operator who accumulated a fortune estimated at $4 billion and who now devotes himself to philanthropy. The difference is in the approach to philanthropy, which is illustrated with the quotes below. (The Foundation website is at http://www.arnoldfoundation.org/front.
The foundation's approach is to "focus on systemic problems without easy answers ". The Arnold's define this focus as "public-policy problems that led to ... "moral inefficiencies". Their methodology is to "spend a lot of time doing research and evaluating data, and then make a handful of big bets, even if they involve considerable risk" (similar to well run hedge funds). Areas of particular interest are K-12 education and the U.S. justice system.
What I like about the Arnold approach is the following:
Focus on the really big problems (the only one's worth working on)
Use a data driven, analytical approach to develop new solutions (don't follow the philanthropy crowd)
Focus on the project results and their measurement
Set aside the "feel good" part of philanthropy and look at the results produced
Recently I was invited to speak at FIU where I teach. The forum was the Honors College Colloquium. I spoke about the relationship between entrepreneurship and design, ways to think about "impossible" problems and a little on OLPC. The hour long video is below.
Everybody should try to read more during summer vacation. Some of the books I am considering for my new course "Entrepreneurship, Design and Thinking" are below.
Marvin Minsky "The Emotion Machine"
Barbara Millman "How to Think Like a Graphic Designer"
Richard Hamming "The Art of Doing Science and Engineering"
CK Prahalad "The Fortune at the Bottom of the Pyramid"
Project Syndicate has an interesting article from Mohammed Yunus--"The Social Business Revolution". Yunus is a Nobel Laureate who was responsible for popularizing micro-finance in Bangladesh through Grameen Bank.
Yunus' argument goes as follows:
"The persistence of many of the world’s social problems reflects our collective misinterpretation of the idea of capitalism"
"As a result, businesses are run for the sole purpose of maximizing profit, and humans are conceived as one-dimensional money-making machines"
"There is a missing component in our conception of the economic marketplace: social business"
"A social business is a non-dividend-paying company whose entire purpose is to solve a particular social or environmental problem. Shareholders can recoup their initial investment over time, but nothing beyond that. All profits are plowed back into the company to increase its reach or to improve the product or service that it provides"
My comments on Yunus' argument are as follows:
One financial crisis is perhaps not sufficient evidence that capitalism has gone awry. Secondly, capitalism has a long history of recovering from financial crisises and then producing considerable social benefits
The concept of a social business as defined by Yunus has two shortcomings:
The scale of "social businesses" to solve problems would be greatly increased by access to traditional financial markets (which is not possible in the "no return" model proposed)
The size of the pool of funds for investment with "no return" is very limited which suggests that it would not have much impact in terms of scale to solve the big problems
I think the better question for Yunus to consider would be why profit making companies devote so few resources to solving social problems. Most shareholder owned companies could devote much more money to social issues without any dramatic decline in share value. Despite the clarity of the writing of Milton Friedman and others, maximizing shareholder return is still subject to interpretation.
Yesterday in my IAP course on social entrepreneurship at MIT Sloan a student asked an interesting question. He asked:
"Should I be a social entrepreneur or an entrepreneur who supports corporate social responsibility?"
My approach to teaching social entrepreneurship is to emphasize entrepreneurship and look at the poor or disadvantaged as a market. This logic parallels the thinking and writing of CK Prahalad, who popularized the phrase "the bottom of the pyramid". (More on Prahalad is here.
My answer to the student was to "follow their passion". Entrepreneurship in all forms requires a passionate founder who overcomes to achieve the objective. Passion is what sustains the ongoing effort. If the passion is to help children or help the disenfranchised then one probably chooses social entrepreneurship. If one is more oriented toward solving a big problem or growing a big company then one probably opts for entrepreneurship with corporate social responsibility.
I began studying and thinking about social entrepreneurship about 3 years ago when I joined OLPC. I have written about 20 posts on the subject for Sophisticated Finance. What I think were two of the best posts are here and here. Teaching and lecturing helped me to advance my thinking. My latest thinking is that social entrepreneurship is not a meaningful distinction within entrepreneurship. In other words, we should just focus on thinking about and teaching entrepreneurship.
In some recent writings the CEO of the Kauffman Foundation, Carl Schramm, has expressed the same view. Some others also share this view, such as this article--"Predicting the Future of Social Entrepreneurship". Despite the hype and increasing popularity, people are coming to realize that social entrepreneurship is not a meaningful distinction in the discussion of entrepreneurship, or perhaps more precisely such a distinction does not contribute to a greater and more meaningful understanding of the subject--entrepreneurship.
I began my study of social entrepreneurship focused on the "social" difference in this form of entrepreneurship. Soon I came to realize that "social" implied some normative judgment. These social entrepreneurs were doing something "better" than typical entrepreneurs. This distinction caused me some concern because I had never thought that for-profit businesses were bad or less admirable than other types of organizations. Curing cancer in Palm Beach seemed as worthwhile as curing malaria in Africa.
Along the way to trying to understand social entrepreneurship I read Michael Porter's new work on "shared value". Porter's thesis seemed obvious to me, but it reminded me that any discussion of a business model needs to be grounded in economics and more precisely in the micro-economic concept of value. This prompted me to look for an economic definition of social entrepreneurship.
This search lead me to the work of Felipe Santos at INSEAD. Santos defined social entrepreneurship as maximizing value creation and satisficing for value capture. In other words, one transfers as much value to a recipient as possible provided that cash flow is sustainable. For the benefit of the recipients, the shareholders or funders foregoe a market rate of return by accepting only sustainable cash flows, cash flows sufficient to stay in business (after some investor return).
I liked this definition because it made no normative judgment, but how did it explain why so many people were "doing good" through social entrepreneurship. Then I realized that the causes of the "do gooders " could be explained as simply product-market decisions. C.K. Prahalad's work on the bottom of the pyramid, the 1 billion people living on $1-2 per day, basically advises one to develop products that poor people can afford to buy as the means to solve their problems.
I feel very comfortable thinking of the bottom of the pyramid as simply another market. Ten years in Indonesia (per capita income $600 at the time) probably made this an easy decision for me. Also, this approach to thinking of the poor as a market is consistent with how Clayton Christensendefines markets in terms of the "underserved".
In summary, "social entrepreneurs" focus on a particular market of needy people and have lower return expectations because they elect to transfer more value to the recipients. These distinctions suggest to me that traditional entrepreneurship can achieve all these ends without the need for a new discipline.
I am co-authoring a book with Chuck Kane for Oxford University Press titled "The Business of Social Entrepreneurship". Chuck is an Instructor at MIT Sloan and he and I have taught courses there for the last two years in January on social entrepreneurship.
Yesterday I was preparing to teach my January class at MIT Sloan (ignore they got my name wrong) and came across an interesting article--Identifying the Drivers of Social Entrepreneurial Impact--by Paul Bloom and Brett Smith (1). I like models, heuristics and other systematic theoretical approaches to business problems. Such theory generally provides a comprehensive starting point to understand an issue.
The article identifies seven capabilities an organization needs to achive scale on social ventures:
Staffing--"the effectiveness of the organization at filling its labor needs, including its managerial posts, with people who have the requisite skills for the needed positions, whether they be paid staff or volunteers"
Communicating--"the effectiveness with which the organization is able to persuade key stakeholders that its change strategy is worth adopting and/or supporting"
Alliance building--" the effectiveness with which the organization has forged partnerships, coalitions, joint ventures, and other linkages to bring about desired social changes
Lobbying--"the effectiveness with which the organization is able to advocate for government actions that may work in its favor"
Earnings generation--"the effectiveness with which the organization generates a stream of revenue that exceeds its expenses"
Replicating--"the effectiveness with which the organization can reproduce the programs and initiatives that it has originated"
Stimulating market force--"the effectiveness with which the organization can create incentives that encourage people or institutions to pursue private interests while also serving the public good"
1 and 5 are not unique to social entrepreneurship and required for every for-profit business model. 2 is a critical insight and the key to establishing "value creation" and "brand" in a "change" strategy. 3 is particularly challenging given the large number of low quality partners available. 4 I tend to ignore in favor of individual empowerment but it may have value. 6 is the real key to scaling and particularly challenging in the developed world when one considers replicating selling, distribution and perhaps manufacturing. 7 is sort of a key performance indicator. When the private sector starts to compete with you then scaling really starts, but the question arises about whether you can still compete. A serious approach to 1-6 will surely help.
For anyone perhaps silly enough to approach social change through a non-profit (except for museums, performing arts centers and a limited number of other projects that cannot attract capital from financial markets), I think the seven capabilities also apply.
(1) Journal of Social Entrepreneurship Vol. 1, No. 1, 126–145, March 2010
@John_Menezes tweeted an interesting article from the BBC News, "Social entrepreneurship takes off in China". The article discusses several successful projects in China using social entrepreneurship. The article makes clear that social entrepreneurship is a more effective model because of the difficulty in using a donative non-profit approach.
I think that social entrepreneurship is the preferred approach over donative models in all cultures because you have more control over cash flow and better access to capital. However, in China the point is even more clear. In China most donations are given to state run charities and not to private charities. There are two possible reasons for this behavior:
Donations to state run charities garner favor with the government
Donors have more confidence in state run charities
In the United States there is a high degree of confidence in organizations, perhaps due to the legal system and reporting requirements for non-profits. In China, for a variety of cultural and historical reasons, trust is based principally on personal relationships and this has not changed for thousands of years. Without a personal relationship, there would be few donations. Government run charities perhaps have a better reputation because of government scrutiny.
Perhaps the conclusion to draw from this article on China is that donative models are likely to be more successful in cultures where organizations are trusted. Otherwise, one is well advised to start with a social entrepreneurship model for a social venture.
In my presentations on social ventures I always make the point that it is the first decision whether to use a donative model or a commercial model for a social venture. I have a strong predjudice in favor of social entrepreneurship and this story from China reinforces that view.
Walter Bender, the Founder of Sugar Labs, recently gave a talk (link to YouTube) in Goa titled "Learning to Change the World". In the talk Walter makes the distinction between education and learning. Education is something that is "done to you" and learning is something "you do". Schools educate but children learn or should learn. This distinction extends to information, where the two choices are creating information and consuming it. Creating information is the active development of content in whatever form and consuming is the more passive processing of what is available. Extending these ideas, learning is a process of creation and education is a process of consuming.
If we consider technology in this framework, we have two choices. We can either focus on education and consuming or we can focus on learning and creation. Many people ask if technology makes a difference in schools. If the technology merely fosters consumption and education then it probably makes only a small difference. We have had excellent techniques for educating students for hundreds of years and the technology makes only a marginal improvement, if any. On the other hand if the technology, and here we mean 1:1 computing, is used to encourage the creativity and exploration of the child then we foster creation and learning.
In Walter's speech he talks about the mistakes and successes of teams at MIT over the last 30 years in trying to foster 1:1 computing and the process of creation and learning by students. Improving education and consumption through technology is easy. It is much more of an ongoing challenge to find effective ways to foster learning.
The risk is that we take the easy road and just try to improve education. The results, although well publicized, will be minimal with a low return on investment (if measured). Projects like OLPC and similar 1:1 initiatives may not be a perfect solution, but they are tackling the hard question of how to foster learning through computers and that's the question we should all be working on.
I have written many posts on related themes (including here and here). In the second link, "Competence and Comprehension", I take a different slant on the same issue and it may be helpful.
NextBillion.net is a nice site focused on social ventures. A friend sent me a recent post that discussed the buy one, give one model (BOGO) popularized by Toms Shoes. The criticisms of the Toms BOGO model were:
"When individuals receive donations, they begin to see themselves as passive recipients of aid rather than active participants in making decisions about their own communities."
"When products are given away (be they shoes or English classes), local businesses that sell those products wither."
"Shoes, no surprise, are not often on the priority lists of the poor. When outsiders choose what gets donated, they often overlook other (more pressing) needs."
In response I would point out:
The needy people appreciate the shoes and economic development theory can be discussed at conferences in the U.S. Also, shoes reduce the transmission of diseases. It's not a shoe program it's a healthcare initiative. Gee, that sounds so much better.
Mom and pop retail is an unsustainable concept. Perhaps the local merchants should appreciate the early warning so they will already be in new businesses when Walmart or Carrefour opens.
If shoes are not a priority teach the recipients to sell the shoes and buy what they need. Then they would be "making decisions about their own communities".
All we need is a shadown NGO that follows Toms around to teach people to sell their shoes. That sounds like it would be responsive to the three criticisms initially listed above. Another alternative would be to have Toms only distribute their shoes in cold climates where shoes are a "priority".
Toms BOGO program is a great idea that helps people. Let's not over complicate one company doing some good.
The "smart city" project is designed to introduce better, more environmentally friendly technology into larger urban areas to improve the overall quality of life. Much of the early work was done in Europe but now the movement is spreading to lesser developed areas including Latin America. This story from Co.EXIST, "Filling South America With Smart Cities", highlights a project in Santiago, Chile.
I think the "smart city" project is a great idea particulalrly given the dramatic growth in urban population. Free ubiquitous Internet access, solar powered everything and better mass transportation all sound attractive. I have only one question? Where are the smart people who will inhabit the the smart city? Without equal emphasis on improving education for the poor and disenfranchised, smart cities will only further exacerbate the class discrimination so prevalent in Latin America and other parts of the world.
Previous thoughts on urbanization are here, here, here, and here.
If you have ever designed a compensation scheme for a sales force, you know that frequently there can be unintended consequences. The sales people find the way to maximize their income regardless of what the corporate objectives were intended to be. The best sales people appear to be the most insightful in identifying the unintended income consequences. While this example might suggest more careful development of salesperson compensation schemes, the other thing it points out is that people behave in ways to maximize their compensation. That might be described as human nature, to state it politely.
Recently I was talking to a senior executive from a Fortune 500 company about their social responsibility programs. They confirmed that each project has to satisfy an ROI target and that the company could afford to do more social projects if leadership was so inclined. As a way to incentivize top management, I suggested that senior manager bonuses be broken down into two parts:
50% of bonus based on financial results such as profit, cash flow or stock performance;
50% of bonus based on the scope and quality of social programs
The executive thought such a scheme would definitely change executive behavior even if evaluation of No. 2 was purely subjective. The definition of "social" could be defined by the board or we could use a concept like Michael Porter's "shared value". I do not think such a scheme would have much negative effect on stock price and might even attract a new group of investors.
Just an idea but if you want to change behavior, change the incentives.
With reduced federal and state support for higher education, higher operating costs (which I do not understand) and the in roads being made by online courses, universities face many challenges. One would hope for some innovative solutions.
A story in The Chronicle of Higher Education reports that Las Positas College in California is seeking donors to underwrite classes at $5500 per class. Maybe a professor could fund their class using Kickstarter. Maybe Walmart would like to underwrite a business class with all the cases based on Walmart. Ahh...the opportunities are endless.
If anyone has a donation and no professor, let me know. I know a few great professors.
The views expressed herein are solely my personal views and are not intended to represent the views of any client, organization or university with whom I am affiliated.
Having taught entrepreneurship now for eight years, I find that many students use words that they cannot actually define. Such a word is "economics". Every business student takes macro and micro-economics, but how many students can give a concise definition. Fortunately Ben Bernanke, Fed Chairman, provides an elegant definition.
In a speech reported in Businessweek, Bernanke defined economics as " the allocation of scarce resources". Bernanke then went on to ask why we do economics, which lead to a discussion of the close relationship between economics and government policy. Bernanke believes that all the focus on economic indicators masks the real objective of economic policy and government. Quoting Adam Smith, Bernanke stated that government should provide "secure tranquility", what some would call happiness. Bernanke then went on to describe the Bhutan government index of happiness as possibly a better way to measure economic performance because it moves away from materialistic measurements in favor of more personal benefits. This concept moves us closer to Robert Schiller's (Yale economist) view of economics as a "moral science" where economics is “driven by the broad moral purpose of improving human welfare.” I like this concept because I find it hard to believe that the great (economic) thinkers have consistently ignored morality. I believe that even Milton Friedman, the "bad boy" of 20th century economics, recognized the need for morality in economic systems.
If we accept this concept of economics, the distinction, for example, between social entrepreneurship and traditional entrepreneurship may become trivial. The implied normative judgment in social entrepreneurship is not necessary if economics is a "moral science". Need to read more Schiller.
This is the link to the full Businessweek story. The story has many other interesting points on the history of economic thought and the changes in economics in periods of crisis.
Silicon Alley Insider has a nice post this morning called "The 7 Principles of Successful Entrepreneurship". What caught my attention was principle 5 "Remember that business model innovation is often as important as tech innovation". They explained this point as follows:
"We’ve never seen any statistics or studies in this regard, but it sure seems that the majority of shareholder value created over the last half century had a lot more to do with companies innovating around their business model than around technology. Think of eBay with online auctions. Store brands and generic drugs. Amazon cutting out the retail middleman. Manufacturers asking suppliers to co-locate. Dell building PCs to order. Social networking typified by sites such as MySpace and Facebook. The way HMOs and PPOs fused insurance and healthcare delivery. Sure, in many cases, technology was involved, but technology was not the strategic driver that created shareholder value. Instead, it was creativity applied to the business model (product/service mix, value proposition, channels, pricing) that made the difference. This kind of thinking needs to be applied not only by entrepreneurs but by corporate new-business professionals as well."
In my classes and workshops on business concept development one of the main themes is the opportunity to improve the value proposition through innovation in pricing, sales and distribution. I think too many entrepreneurs gloss over these decisions and miss the opportunity to build better customer relationships.
In March 2011 I spoke in Barcelona at the "Do Good Do Well" conference and met Jil Van Eyle. Back in 1998 Jil was one of the early developers of what is now commonly called crowd funding. Jil founded Teaming, which he explains as follows:
"Teaming is a simple, but powerful story of how leveraging individuals’ consciousness and creative thinking through teamwork can generate great positive impacts and results for people, business and society."
After its start in Europe, Teaming now has a U.S. website here.
My original post on Teaming, which explains how and why Teaming started, is here. Teaming is a great example of how passion and entrepreneurship can combine for social benefit.
Last week I visited schools in a particular country in Central America. All of the schools had 1:1 computing environments, with the computers donated by a private foundation. Some schools just had laptops and some schools had laptops with Internet connectivity. None of the schools had any textbooks because the government had no budget for textbooks. The computers served as the principal learning device and Wikipedia (loaded on all the laptops) served as the principal source of all student information (not provided orally by the teacher) in the schools without connectivity.
A few observations:
The students were very engaged in class even though they had no textbooks
Discipline problems and absentiism had dropped dramatically after the laptops were introduced
Parents came to the schools for their own computer training, which was scheduled during parent-teacher conferences; parental attendance at such meetings has increased significantly; (the students take the laptops home each night)
The number of laptops stolen is de minimis even though the setting is poor because of community involvement in the project
What has become clearer to me is that the lower the resources available for education, the greater the potential benefit of laptops in classrooms for each student. The higher the resources available the more the laptop becomes just a device for connectivity...to the better educational content online. Resource rich environments perceive a risk the further they diverge from traditional classroom methods for teaching in the use of computers. Such environments also have more controls through testing and curriculum.
Mark advocates in the story and comments for a role for non-profits in social ventures. I, on the other hand, believe that commercial activities can address most social issues. There are certain risks too big for the for-profit sector, but all other projects should be the domain of entrepreneurs. Mark's concern is that many social sectors will be ignored by for-profit organizations. My response to this concern is below:
"When you consider risk, which is where this discussion began, one must also consider economic return. To address the unserved sectors, where the risk is perceived as too high, we must look for agents who will accept lower returns. Social entrepreneurs, by definition, fit this risk-return profile and should be the agents identifying and serving these unserved sectors. With their success economically and socially they will demonstrate that the risks were not as high as perceived and thereby attract traditional capitalists to what will then be considered markets. At that point, the unserved sectors will start to disappear."
Similar to the Becker Posner blog on economics, I think Mark and I should start a blog called Hacker-Hecker to discuss the two sides of social issues. If we could find a Mr. Hocker, then we would add the government view. Hacker-Hecker-Hocker. I think it has a real ring to it.
Note: While Mark and I have philosophical differences, I really like the Reach focus on education in urban settings.
In my theory of business model, I propose three key concepts that need to be considered in each new business concept:
the growth driver
pricing model
distribution
Today's post is on pricing. There are sixteen pricing alternatives, as outlined in my book. Each alternative represents a different way to monetize a transaction or capture the value. The reason that there are so many alternatives for pricing is that there are so many ways to share value with a customer.
As Marco Bertini and John T. Gourville, professors at London Business School and HBS respectively, make clear in their excellent new article, "Pricing to Create Shared Value", pricing is not a zero sum game. "Companies have traditionally treated value in the marketplace as a fixed pie and have reasoned that they must compete with their customers to appropriate as much of it as those customers will relinquish." Thinking of the customer as merely a pocketbook robs the company of the opportunity to understand the customer need, build a better relationship and share the value created.
The notion of "shared value" presented by Bertini and Gourville is attributed to Michael Porter and this article by Porter. Personally I think they have a different notion of shared value from Porter or perhaps they have explained the idea better than Porter did. Bertini and Gourville's notion of shared value is consistent with my view of social entrepreneurship, wherein the company shares as much value with the recipient as possible while still achieving cash flow breakeven.
In February Harvard announced their President's Challenge, a university wide competition to develop innovative solutions to the largest social problems. The problems identified are in five categories--"clean water, personal health, empowered education, global health and clean air". Good list.
What I particularly like about the competition is that it encourages cooperation between the various schools at Harvard. Many universities have a silo structure that inhibits cooperation between schools and administrative procedures to insure it.
Vaxess Technologies is this year's winner for their plan to commercialize unrefrigerated vaccines. A good article on disruptive technologies is here. Vaxess is clearly addressing a 'customer pain point' by eliminating the need for refrigeration.
