Lessons in Entrepreneurship and Wealth Building from the
Developing World
Animal feed in Zambia. Cookies in
South Africa. Medical records systems in Botswana. Peanut processing in
sub-Saharan Africa and Latin America.
In regions scarred by intractable
poverty, innovative programs to build new sources of wealth through these four
businesses are providing lessons for entrepreneurs hoping to create new markets
and economic opportunity. In a paper
titled, "Business Models: Creating New Markets and Societal Wealth", leaders of
Wharton's Societal Wealth Program (WSWP) outline the critical elements of
entrepreneurial wealth building based on nearly 10 years of field research
supported by Wharton alumni.
The
WSWP initiatives are designed to move beyond a charitable aid model for
combating poverty by creating economic enterprises that lead to
self-sufficiency rather than dependency and that will have a major and lasting
impact. "There are plenty of charities doing things for free. What we are
attempting to do is create poverty reducing businesses," says James D.
Thompson, director of the WSWP, who coauthored the paper with Wharton
management professor Ian C. MacMillan.
Uncertainty
is a major element of any entrepreneurial undertaking and the social wealth projects
-- with the goal of improving society in addition to making money -- are all
the more unpredictable. "If you're going to do something that's really
going to make a difference and it's bold and highly innovative, by definition
it's [also] going to be highly uncertain," MacMillan notes.
Since
its launch in 2001, WSWP has been involved in 10 projects and is in the early
stages of evaluating two others. The four cases highlighted in the paper
represent a range of outcomes from success to termination. Many of the other
six projects were disengaged or significantly altered -- a rate Thompson says
is comparable to findings on typical entrepreneurial startups. "You're
likely, if you follow this approach, to encounter more failures than
successes," he notes.
MacMillan
adds that the principles that apply to building societal wealth should not be
limited to use only in poor nations or developing economies. "We have
misery in the United States," he says. "There are many areas of high
unemployment in appalling ghettos, where single mothers are trapped in
environments where the best they can do is eke out a living. It's no joke that
we can apply the same principles here."
The
four projects detailed in the paper range from a highly successful animal feed
effort in Zambia to a proposal to improve nutrition through better peanut
processing that was never put into practice. The feed project used linear
programming to calculate optimal feed mixes resulting in high-quality,
lower-cost feed for farmers who were able to expand chicken production.
Starting with six men mixing feed on a cement floor, the effort is based on a
network of small producers, rather than a conventional high-volume model.
In
South Africa, WSWP backed a project to train uneducated single mothers to work in
bakeries making high-end healthy cookies for sale to tourist hotels. The
authors call this program "marginally successful" and note that it is
now directing sales toward exports to developed countries. The authors write
that the "jury is still out" on a project in Botswana designed to use
electronic medical records to improve care for HIV/AIDS patients by allowing
nurses to make more diagnostic and prescriptive decisions, which in turn frees
up doctors for administering higher-level services.
The
WSWP ultimately dropped a plan to improve nutrition with more effective peanut
processing. The idea was appealing because peanuts could provide high
nutritional value to the diets of people throughout sub-Saharan Africa and in
Latin America. However, an early analysis revealed that high transportation
costs and the likelihood of losses through theft at various points in the
logistics system made it impossible for the project to sustain itself
financially. "This is a great example of one of those ideas that was initially
put to us that we thought had enormous potential," Thompson says.
"But during our due diligence and modeling process, we just couldn't find
a way of getting the business model to make financial sense."
Lessons
for Entrepreneurs
According
to MacMillan, entrepreneurs working in social enterprises need to maintain a
sense of responsibility in addition to factoring in the many business
considerations that typically go into a start-up. Failure in this environment
can be measured in costs to the human spirit as well as financial terms.
"You don't just rush in and say you are going to help without thinking how
you will actually be of help," he points out. "Secondly, if you find
that your program is not working, you need to have preplanned how to exit
without doing harm or leaving people in the lurch."
The
authors suggest that the lessons learned so far through WSWP can carry over to
entrepreneurial work in traditional business sectors and could open the way for
new economic opportunity. They maintain that the ideas raised in the WSWP
business models are relevant to companies introducing new technologies, such as
nanotechnology, or creating sub-markets in rapidly developing economies or
industries -- for example, Chinese and Indian teenage consumers. The principles
would also be useful in coping with social, economic or demographic change,
such as the rise of social networks on the Internet.
MacMillan
says large companies experiencing limited growth should consider putting some
resources into developing new markets in emerging economies, but they should
approach the investment with care. "What you don't want to do is try to
create a whole new market and squander tens of millions of dollars being
wrong."
According
to the paper, successful societal wealth building can lead to a virtuous cycle.
As a business increases profits, it has more incentive to expand, which
alleviates more societal problems, such as poverty and a
lack of health care or educational opportunities, and gives birth to new global
consumers. However, the authors emphasize that success is hard to come by.
"Many of the societal problems referred to above are currently highly
intractable.... As the iconic economist might put it: 'If the problem were
tractable, some profit-seeking enterprise would already be making profits
resolving it,'" MacMillan and Thompson write.
The paper lays out an emerging set
of ideas that Thompson and MacMillan have found useful in evaluating a highly
uncertain environment along many dimensions. Thompson suggests that in this type
of analysis, the only certainty is that the project will not unfold as
originally anticipated. "The mindset going in is that you need to be aware
that, in the event you are successful, the success may be very different than
what you envisioned at the start."
In their paper, the authors identify
seven key principles-in-the-making that apply to social wealth creation:
- Delimit the ballpark, or scope, of the enterprise;
- Incorporate sociopolitical forces into strategy;
- Design a low-cost pilot and plan for scalability;
- Identify or create an appropriate unit of business;
- Preplan a realistic approach to disengagement;
- Anticipate unintended consequences;
- Maximize learning ahead of investment.
The first principle outlined in the
paper is to establish a scope for a project that factors in the level of
uncertainty. The model should specify disqualifying conditions and set clear
performance outcomes and rules for carrying out the program. A disqualifying
condition, for example, might be a lack of potential to reach hundreds if not
thousands of people. The feed project in Zambia, for example, set performance
standards of a minimum regional chicken consumption increase equivalent to at
least one million daily protein servings per year. The WSWP requires that all
enterprises follow U.S. laws, do not accept bribes and pay employees at least
the local minimum wage.
The guidelines also call for a
sociopolitical analysis to identify and factor in the roles of beneficiaries,
potential allies, those who are indifferent but whose support will be needed,
and opponents with the ability to fight a project that might affect them
adversely. In the case of the Botswana project, a large medical software
provider that stood to lose potential future business as a result of the effort
insisted that information sharing would fail because of incompatible databases.
However, only minor integration was necessary to solve that problem, the
researchers note.
Given low odds of success, a costly,
asset-intensive startup should be viewed with skepticism for societal wealth
projects. The WSWP's current approach is to design a low-cost pilot of the
actual business model, with the entrepreneur's input, and a plan for abandoning
the pilot with minimum social damage if need be. WSWP also finds it is useful
to specify a proposed unit of business first, and then build business and
revenue models around that. MacMillan and Thompson acknowledge this can be
difficult and frustrating in a high-uncertainty, uncharted business
environment. At the Khaya Cookie Company in South Africa, for example, the unit
of business is a 130 gram box of all-natural cookies. The entrepreneur leading
the venture has calculated the number of box sales required to create each new
job, and calculated the number of training courses each new hire receives. The
authors also recommend societal wealth endeavors propose a path to reach
meaningful scale. At the animal feeds company in Zambia, expansion has come
with higher output machinery, a larger distribution center and an expanding
network.
Anticipating Change -- and Failure
In addition to mapping out a plan to
succeed, the guidelines developed through the WSWP also recommend a plan to
disengage from societal wealth projects. MacMillan maintains that it is
critical to plan from the start how to get out of a project that is not working
in order to avoid suffering on the part of the people who would have benefited
from a successful program. "The idea here is leave a minimal
footprint," he says. "A lot of these projects go in and fail and
leave a trail of damage behind the abandonment. You just should not do that.
."
Regarding the peanut processing
business in Sub-Saharan Africa and Latin America, early projections showed that
the business would probably lose more than 5% of its production along the way,
making it impossible to earn an acceptable minimum annual income for a local
entrepreneur. Other major problems included bad roads and high transportation
costs. "Our initial proposed mechanisms for creating and distributing the
product were irremediably challenged by practical realities," the authors
write. "We were unable to design a system to cope with them, or to
redirect the project in a manner that would generate sufficient profits to attract
the entrepreneur and the essential management skills, and so, reluctantly, we
terminated the project."
In addition to anticipating failure,
societal wealth entrepreneurs should try to plan for unanticipated second-order
effects. Some are positive, such as improved education and better health care
and nutrition that come with higher wages. Others are negative. For example,
the feeds project has created an odd problem: As chicken production increases,
farmers have chicken feathers to dispose of because there is no existing method
for them to be recycled. The WSWP is now investigating whether the feathers can
be burned as fuel.
The WSWP guidelines also emphasize
discovery driven learning. The authors suggest creating a "protoplan"
with early-stage financial and operations specifications and 10 to 15
assumptions that are continuously revisited and updated. This process converts
uncertainty to business risk ahead of investment by reducing a wide range of
variables. For example, the original business model for The Khaya Cookie
Company was to use local distributors to sell the cookies. In order to scale up
to reach wealthier consumers in countries with more disposable income, the
model was altered to ship container loads of cookies as exports through
socially conscious and health food chains or via the Internet.
"We strike a balance between
planning and acting," says MacMillan. "Rather than succumb to
analysis paralysis, we'd rather start sooner than later but start smaller
rather than bigger and learn our way into success or termination."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2588
No comments:
Post a Comment