I have been thinking a lot recently about self-interest. In a workshop I give on leadership I begin by describing life as a conflict between self-interest and morality. When you take responsibility for other people that dichotomy expands to include a third part " mission", which leads to the concept of leadership.
In an HBS research paper "Naivete and Cynicism in Negotiations and Other Competitive Contexts" the authors discuss the role of self-interest in negotiation in terms of naivete and cynicism. Their concepts are captured in the summary below.
"Naïveté is more than a glut of trust. More broadly, naïve behavior refers to a failure to make the best decision, due to a lack of consideration of other people's strategic and behavioral perspectives. We are likely to make naïve decisions when we don't think through the likely future decisions of other parties. A cynic, on the other hand, may avoid a business transaction due to an assumption that the seller's self-interested motives will be harmful to him or her-even if logic shows that the deal would likely benefit both parties. When people withhold from trusting others, they usually lack opportunities to learn whether their trust would have reaped rewards. But when they offer their trust and are subsequently burned, they learn hard lessons about trust. This unbalanced feedback breeds cynicism."
I have seen many times in negotiation where an excessive concern about the other party's self-interest has clouded judgement and stalled negotiation. What needs to be remembered is the economic definition of an exchange, an exchange being the transfer of a good or service in return for consideration (e.g. cash). As defined, an exchange only takes place when both parties believe that they are receiving appropriate value--the better deal. Therefore, every exchange (or negotiation) is based on self-interest.
Negotiation is simplified by just looking after your own self-interest and letting the other side worry about their self-interest. The skill, of course, is in achieving "value", where the self-interest of the two parties are mutually compatible and the transaction closes.
Image: Diogenes of Sinope, founder of the philosophical school of cynicism. Credit.
In 1997 I lived in Jakarta, Indonesia and experienced first hand the violence and protests that led to the change from an authoritarian regime to a fledling democracy. There the protests began with economic events, the 80% devaluation of the currency and the resultant prohibitive increases in food prices. The protests initially were non-violent but escalated as Suharto tried to quell the mobs using the army. At first the army shot in the air to maintain control, but later army snipers killed 6-8 students with head shots. This event was a tragedy that no one in Indonesia could accept and resulted in senior military leaders forcing Suharto to step down.
As I think about what President Obama should be doing in response to the events in the Middle East and northern Africa, I think the first thing is to be in direct contact with the military in those countries. In certain cases we may need to use allies to make the contacts, but the contacts should be initiated. The military in many of these countries are respected, as they were in Indonesia, and they have the power to maintain or terminate any authoritarian regime. After establishing contact, Washington should offer a package of economic, administrative and military aid in return for military support of free elections. The U.S. govrnment just needs to change the situation enough to have elections and if it takes the temporary military government a year or two to hold elections that is satisfactory. Aid could be matched to milestones to insure compliance with the agreements.
The big question that apparently concerns many Americans is whether anti-American, strict fundamentalist Moslem governments will takeover through the democratic elections. In Indonesia the first President post-Suharto was an Islamic fundamentalist, but he was ineffective and lasted only one term. The next elected President was more moderate and he started to restore the economy and put Indonesia back on a road to progress.
My belief is that more moderate governments will eventually emerge in the Middle East if the military insures fair elections. While the more fundamentalist political groups may be better organized initially and may win the first elections in certain countries, governing is a lot tougher and people will vote for economic results over religion if given the chance through free elections.
The U.S. government needs to be patient and let these new democracies learn. As shown by Indonesia, the Phillipines and even Korea and Taiwan, the transition to democracy is not a simple path.
Last night I listened to Michael Porter on NPR discuss his concept of "shared value". I first wrote about "shared value" here. Today in the email McKinsey announced that Dominic Barton has an article in the March issue of HBR entitled Capitalism for the Long Term. In the article he argues that leading corporations need to restore the public confidence in capitalism by in part taking a longer term view and by focusing on all the stakeholders in a corporation and not just the shareholders. Basically Barton is discussing the same concepts as Porter. It's like there is a big PR machine pushing shared value on us.
If we look at the major areas in which there has been significant improvement in productivity and cost savings in the last 10-20 years, three areas come to mind:
Supply chain and logistics
Customer acquisition and retention
Administration (accounting, human resources, etc.)
I think that most large companies have wrung as much cost savings out of these areas as possible. The economic crisis of 2008 gave them the chance to wring out the last few dollars (and unnecessary jobs). Business schools have gotten very good at teaching this kind of productivity improvement and the resultant executives have learned to implement such approaches well....but we have reached the end of this game. There is not much more benefit to be derived from productivity improvement. So the executives face the hard choice of either learning how to innovate in new products to grow revenue or learning a new toolset called shared value as the way to increase profits.
What is this new frontier of shared value--simply the idea that margins can be improved or competitive advantage strengthened by looking at societal issues. Instead of the old way where people were replaced by APIs, we now look at employees and society as the way to increase profitability. For example, if we teach and encourage employees to behave in a more healthy way, we can reduce the expense of health insurance. Looking for ways to reduce carbon emissions may lead to less fuel consumption. Organizing peasant farmers into cooperatives reduces the expense of managing suppliers. This new approach to business will require a new management philosophy and a new executive toolset.
After listening to Porter and thinking more about shared value, I think that Porter is not contradicting Milton Friedman's maxim that the corporation's role is to maximize shareholder return. In fact, I think that Porter is just proposing a new area in which corporations should focus to increase their profitability. Personally, I am indifferent between whether we start with profit and end up benefiting society or if we start with benefiting society and then figure out the economics (social entrepreneurship). In the end society benefits.
The question that now concerns me is why did it take us until 2011 for someone to articulate an approach whereby focusing on society is consistent with return maximization. I do not think it was that anti-business sentiment finally reached a level at which corporate America had to respond. I rather think that big business can only cope with one big idea at a time and IT/integration/productivity was that idea for the last twenty years. I am sure that over time business school curriculum will be shaped by Porter's shared value concept. What someone should study is the failing in business school education that the graduating executives can only manage one big idea at a time. Shared value is long overdue in corporate America.
Last night I participated as a speaker in the Economics and Social Justice lecture series at Barry University in Miami. The speech begins with a definition of social entrepreneurhsip, followed by a discussion of One laptop per Child as an example of social entrepreneurship and concludes with some lessons learned about social entrepreneurship from my time at OLPC. Slide deck for the talk is here. Video from a previous speech at Nova Southeastern University, which closely follows my lectures at Barry, HBS and Sloan, is here. (Video 1 is a teaser that can be skipped.)
What always sparks the most interest in these speeches is when I discuss an IPO by a social entrepreneurship venture. Next week's speech at the ISES conference in Barcelona--Do Good Do Well--will focus on finance in social entrepreneurship. Scaling is the challenge in social entrepreneurship, assuming one is trying to solve a big problem, and access to capital is the constraint. I will be proposing some solutions to the capital issue which will undoubtedly dismay the folks who focus more on the social rather than the entrepreneurial part of social entrepreneurship, but as we should always remember--accomplish the mission.
For the 13th year the Miami Herald is hosting its business plan challenge, which is open to the South Florida community with a special track for current FIU students and alums. There is also a separate track for high school students. If you would like a rigorous review of your business plan or a chance to meet potential investors, enter the competition.
I will again be a judge and the other judges are describedhere. All the judges are active in the Pino Entrepreneurship Center at FIU. The competition is sponsored by Pino.
Each week in the Herald there will be articles related to the competition and advice from the judges for aspiring entrepreneurs, as shown below.
I will be speaking at the IESE Business School conference in Barcelona February 25-26. The conference is entitled "Doing Good and Doing Well" and is in its 8th year under sponsorship by the University of Navarra.
My speech will be "Finance in Social Entrepreneurship". After the speech I will post the slide deck and discuss the conclusions I have come to about scaling social entrepreneurship projects.
Anti-business sentiment may have increased in the U.S. with the Enron scandal in 2001. It further increased as income inequality started to get news coverage and reached a high degree of notice with the economic crisis of 2008. In response to this trend first social entrepreneurship emerged as a topic of interest to the academic and philanthropic world. This was followed by increased corporate social responsibility (CSR) programs and now the idea of shared value.
Michael Porter, the famous Harvard Business School professor, in the January 2011 HBR has an article entitled "The Big Idea: Creating Shared Value". In the article Porter argues that corproate strategies must be adapted to service social needs. By combining the creation of economic value and serving social needs "shared value" is created. Porter argues that "for profit" companies are well suited to solve social problems while at the same time serving their shareholder's interest to maximize investor returns. In comparison with CSR programs, shared values are an integral part of successful corporate strategies. In contrast with the teachings of Nobel Laureate Milton Friedman, Porter argues that the purpose of the corporation must be redefined from focusing solely on profit to the better concept of shared value.
Porter makes only one reference to social entrepreneurship in the article, stating that such organizations are better able than non-profits to scale their endeavors and achieve sustainability. Setting aside the difference in stage of development and available resources, Porter most likely would see no difference between social entrepreneurship and corporations with strategies to produce shared value. In the end Porter basically argues that for profit companies in a "free" market are the most efficient method to solve social problems and create wealth.
What I like about Porter's concept of shared value is that I think it collapses the distinction between social entrepreneurship and entrepreneurship. There may not be a difference if the entrepreneurial company pursued shared value. I have always thought that the distinction was artificial or not meaningful. Collapsing the distinction also presents an answer to the perplexing question of whether social entrepreneurship organizations can scale to the multi-billion dollar level of revenues required to solve the big social problems. Social entrepreneurship organizations will either morph into for profit companies focused on shared value or they will be acquired by for profit companies who will then pursue shared value strategies.
While intuitively I think Porter's concept of shared value is the correct corporate strategy, I have two concerns:
Will Porter be able to develop a meaningful framework to differentiate CSR and shared value
Will the academic criticism of Porter, especially from the Friedman School, basically accuse him of putting a fashionable label (shared value) on activities which just create economic benefit through enhanced competitive advantage (the examples Porter cites in the article could easily be interpreted that way)
I have always thought that Friedman's views were misinterpreted and included an unstated belief that corporations had to be moral. Much anti-business sentiment is based on Friedman's teachings and perhaps Porter's article will open up a re-examination of Friedman.
I found the new article by Porter on the Entrepreneurialist blog, which provides a European and Middle Eastern perspective on entrepreneurship and social entrepreneurship.
Much has been made recently about the income inequality in the U.S. and the trend for this inequality to worsen. This new story from the Economist documents the trend. What surprised me in the story is that income inequality in China is also increasing.
The Gini Coefficient measures the inequality in a distribution, with 1 being a completely concentrated distribution and 0 representing total equality. The U.S. Gini Coefficient increased from .34 to .38 in the twenty years 1985-2005. China's coefficient has increased from .28 to .40 in the same period. Brazil's Coefficient declined in the same period from a comparatively high .59 to .55.
In looking at China one could speculate that an elite is capturing a bigger share of income. Private business owners are definitely becoming an increasingly important part of the economy, which would also explain the trend for greater income concentration. I think this trend toward income concentration in China bears watching as a possible leading indicator of social unrest in China.
My friends at South Kent School run one of the most innovative college preparatory schools in the U.S. Their new environmental studies program is a program that every educator and philanthropic organization should follow. SKS is turning a 100 acre farm into a classroom for environmental, technology and entrepreneurship programs, as shown in this video. Every student at SKS will use an iPad as part of the focus on IT technology, as described here.
When you consider the leaders of the 21st century, I hope they are all well schooled at an early age in environmental studies, entrepreneurship and IT technology. Throw in an innovative approach to education and the students have exposure to many of the significant themes of this century.
Social media consultants and SEO experts are growing logrithmically, slightly slower than a plague. How is one to decide who has credibility and who is a fake. Now we have the Klout score, which measures the influence of people, brands and companies on the web. I would be reluctant to hire anybody for social media advice with a score below 50. This technique should work for six months until people figure out how to "game" their score.
My friend @janiec, professional real estate broker and social media enthusiast extraordinaire has a Klout score of 59. See her details below. To put the score in perspective well known VC blogger Brad Feld has a 74.
I travel alot for One Laptop per Child and frequently meet foreign government officials and university administrators. After discussing the benefits of primary school education through OLPC, the discussion invariably turns to whether OLPC can help to foster entrepreneurship in their country. The discussion turns to entrepreneurship for two reasons:
Everyone wants to tap into the worldwide open source communities for Linux and Sugar that make OLPC possible and duplicate such programming communities in their countries, universities or organizations
Everyone wants OLPC to facilitate access to MIT and in particular the MIT Media Lab (from which OLPC started) and the MIT Entrepreneurship Center, perhaps the leading academic entrepreneurship program in the world (Disclosure: I taught a course in social entrepreneurship at the MIT Sloan School of Management in January 2011.)
As I read Daniel J. Isenberg's article in Harvard Business Review "How to Start an Entrepreneurial Revolution" I find that I agree with some of his findings but generally I disagree with his conclusions. Isenberg's conclusions about an environment that fosters entrepreneurship in foreign economies are:
Stop emulating Silicon Valley
Shape the Ecosystem Around Local Conditions ("foster homegrown solutions—ones based on the realities of their own circumstances, be they natural resources, geographic location, or culture")
Engage the Private Sector from the Start
Favor the High Potentials (support and foster companies with world class potential)
Get a Big Win on the Board (entrepreneurship is viral and a successful example will spawn further successes )
Tackle Cultural Change Head-On (entrepreneurship needs to lose its stigma and become something supported by society)
Stress the Roots (encourage resourcefulness by rationing capital)
Don’t Overengineer Clusters; Help Them Grow Organically (“pave the footpath by gently encouraging supportive economic activity to form around already successful ventures")
Reform Legal, Bureaucratic, and Regulatory Frameworks
My conclusions to foster entrepreneurship are based on ten years working in Indonesia (a hot bed of entrepreneurship despite a then authoritarian government), eleven years of working with entrepreneurial clients in the Caribbean and Central America, five years of teaching entrepreneurship to many foreign university students and eighteen months representing OLPC. My conclusions are:
1. Capital is King. Many entreprenurs around the world can build $3-10 million companies through Isenberg's "stress the roots" approach, but they cannot achieve "world class" status for lack of access to capital. I was lucky to build a billion dollar publicly traded company in Indonesia, but the reason, in large part was that I was better able to access capital than my competitors. I recently lectured a group of Haitian entrepreneurs through a program spons0red by Digicel Group, Dennis O'brien's telecommunications company. This very optimistic group of Haitian business owners cited access to capital as their biggest problem despite the total devastation of their country by an earthquake. Financing techniques for entrepreneurs was the subject of the lecture.
Isenberg cites the successful Israeli example of combining government funds with management of the monies through professional venture capital and private equity funds. I like this example, which has been used in Florida where some government pension monies are under the management of Hamilton Lane to invest in early stage companies. (Florida, a state with a population of almost 19 million, at last count had less than ten "real" venture capital firms.) I would encourage a portion of the monies in such approaches to be specifically earmarked for "seed" investments and for the VCs not to be disguised private equity investors.
In Indonesia one of the largest untapped pools of capital was the reserves of the local insurance companies. Within reasonable and appropriate asset allocation and risk profiles perhaps insurance reserves in some developing countries could be directed to local investments in secured loans to provide medium term growth capital.
2. Integrate Foreign Investment into the Entrepreneurship Initiative. Foreign multi-nationals provide many benefits to foreign countries, not the least of which is hands on training in professional management to local staff. Due to weaker education systems in many countries, most entrepreneurs have only limited access to the thinking and processes of modern management. This lack of experience is a major factor in limiting the emergence of world class companies.
Perhaps foreign investors must have social responsibility programs that support local entrepreneurship. Programs in education, local suppliers and services and sabbaticals for employees to work for a year in a local company all would qualify. Preferential tax rates might encourage this activity. The Digicel workshops for Haitian entrepreneurs is an example of such a program (albeit with no particular tax incentives).
3. Education is Critical. Several academic studies have shown that a part of the success of Silicon Valley and Boston as entrepreneurship centers is their proximity to great universities. Mayor Bloomberg's recent initiative to attract a world class engineering school to New York City as a means to foster greater entrepreneurship there points out the need for education in certain subjects that tend to produce more entrepreneurs. Of course, if we provide good engineering universities, access to capital and professional venture capital investors, a country would be well on its way to duplicating the critical success factors that explain Silicon Valley or Boston.
Based on conversations with many government officials around the world, the development of intellectual property is going to be the engine of economic growth in the 21st century. This concept is a basic tenet underlying the philosophy of OLPC, which in part explains the success of the program and the approximately 2 million computers distributed to children. Improved education, and in particular science, math and engineering, is a necessary part of any sustainable entrepreneurship program at the country level. Procter & Gamble's social responsibility program in Latin America focuses on education, which suggests that they share my view on the importance of education in emerging markets.
4. Focus on Entrepreneurship. Isenberg cites the example of Malaysia's program to foster entreprenurship in the idigenous population as a failure and support for his concept of "stress the roots" by encouraging resourcefulness. I agree but I think Isenberg fails to draw the more important conclusion. The indigenous population in Malaysia is not some small tribe of nomadic Indians but rather the majority of the population. Malaysia has a history of failed programs to support the indigenous majority while the Chinese minority thrives. Malaysia's entrepreneurship program failed because it did not focus on entrepreneurship but rather addressed a wider range of social and political issues. I see many governments starting good projects only to fail because they have too many social or political objectives. If governments would refrain from discrimination on the basis of culture, race or religion and not try to solve all the problems with one solution, their programs would be much more effective.
An example that supports this view of focus is the Uruguay program to implement OLPC. Uruguay is the first country in the world where every child in primary school (450,000) has a laptop computer (from OLPC) and the program has garnered worldwide acclaim for the country. The reason that this program succeeded, in large part, was that the government had one simple goal--include every child in Urugauy with no exceptions--rather than adopting discriminatory programs or complex, multiple social goals.
5. Liberalize the Legal System. The structure and philosophy of the U.S. legal system has been a major factor to explain the scale of entrepreneurship. The U.S. system is built on the concept that if something is not prohibited by law, it is permitted. Many countries adopt the contrary approach--if it is not permitted by law, it is prohibited. This later controlling view of legal systems greatly inhibits entrepreneurship. I have thirty years of stories where entrepreneurs were stopped by government bureaucrats from expanding their businesses because a law did not permit something. What countries need to do to foster entrepreneurship is to change the philosophy of their legal systems to make them permitting rather than inhibiting.
Professor Isenberg should be applauded for this important article on the importance of entrepreneurship in developing economies. Perhaps our differences of opinion will foster further debate and research on this important topic.
One of the tenets of One Laptop per Child is that the 21st century will be driven by the development of intellectual property rather than traditional approaches and that countries must adapt their education systems to successfully compete. The development of intellectual property requires more emphasis in education on creativity and innovation. The XO laptop and Sugar software from OLPC foster the development of such skills.
No Right Brain Left Behind is a new group that describes itself as a "collective of thinkers, dreamers, doers, creators, educators, and provocateurs in the creative industries". Their mission is to change education to better foster the development of creativity and innovation in students. Their Powerpoint is here. Well worth reading. Everybody who works on creativity and innovation in education always cites Jean Piaget :)
I produce alot of web content--blog posts, tweets, FB, slide decks, a book website, videos--and even some webinars. I always find it interesting to see what information people choose when they promote my events. The flyer below for my speech at Barry University on social entrepreneurship is a really well done piece.
The picture is from the OLPC deployment in Nepal. I always jokingly say that OLPC has saturated all the schools in the world above 4,000 meters and now we are working on schools at 3,000 meters. (We have also saturated all the schools in Peru above 4,000 meters.)
Barry University in Miami has put alot of effort into promoting my speech on February 15 at 6pm and I would encourage you to attend. More details below.
A video of a speech similar to the Barry presentation is here.
Everybody is following the new tablets with great interest. Fact is you are not doing a good job unless you know the site NewPad. DON'T CLICK YET! Let me explain first.
This is a Chinese website in Mandarin, but it covers the hundreds of new tablets being built in China. Some of these tablets are now in their second and third generation.
The way I read this site is with ViewText and it's handy translator. ViewText eliminates all the advertising and just leaves the stories and their related pictures. In other words non-Chinese readers do not have to guess what is the content and what is the fluff. Quality of the translation could be better but the key points in an article can be determined.
What NewPad made very clear to me is that in certain tech areas, if you are not following the Chinese language posts you are not doing a good job. About a hundred new business ideas are spinning in my brain right now, but I'll have to leave that for a later post.
I found the NewPad site through a post on h-online.com.
The video below features a young child from Peru talking about his XO computer from OLPC. (Spanish with English sub-titles) Abel was featured in a documentary shown at the Sundance Film Festival this year.
