Why Entrepreneurs Must Focus on Building Trust
NEW
BOOK:
Legal and social institutions that
support entrepreneurs often aren't well established in developing
countries. Tarun Khanna's new book explains how businesses can make
up for that by building trust
·
AUTHOR INTERVIEW
Why Trust Matters for Building Businesses in Developing Econimies
Interview by Dina Gerdeman
Fear swept across
China in 2008 as six babies died and about 300,000 others got sick from
drinking infant formula that was sprinkled with melamine, an industrial
chemical used in plastics and fertilizers that can cause kidney failure.
The tainted milk
scandal spurred dairy farm entrepreneur Charles Shao to double down on quality
control in the developing country. He harnessed technology to improve the
processing of his herd’s milk, going far beyond what Chinese regulations
required.
Today, all traces
of melamine in baby formula may be gone, but still, cleaning up China’s milk
hasn’t erased a broader problem: The scare made Chinese consumers so skittish
that six years later, people are still paying significantly more for foreign
milk they feel safer about drinking.
So Shao can’t
focus merely on selling milk. Instead, he and other entrepreneurs must take
steps toward rebuilding a broken bond of trust between the Chinese people and
the country’s dairy industry, says Tarun Khanna, the Jorge Lemann Professor at
Harvard Business School, in his book Trust: Creating the Foundation for Entrepreneurship
in Developing Countries.
Systemwide change
is needed,” writes Khanna, who has studied entrepreneurs in developing countries and launched ventures across
Asia. “That will come from relentless experimentation, an understanding of the
specific origins of mistrust in the Chinese food system, and, of course, plenty
of time to sort out which experiments will have a truly lasting impact. It
falls to entrepreneurs like Shao … to weave and maintain a web of trust between
consumers, producers, regulators, and the public at large.”
In his book,
Khanna chronicles the challenges Shao and other entrepreneurs face when trying
to blaze a productive trail in places like Brazil, China, India, and Mexico.
While consumer confidence in developed countries like the United States is
bolstered by enforceable contracts, an impartial legal system, and strict
regulations, none of that is a given in the developing world.
And entrepreneurs
who don’t attempt to allay the mistrust that permeates these countries are
doomed to fail, Khanna says. In this Q&A, Khanna shares advice on exactly
how entrepreneurs should approach the delicate process of building trust in
parts of the world where skepticism runs rampant.
Dina
Gerdeman: You say
entrepreneurs don’t have the luxury to be laser-focused only on the specific
problem they want to solve in the developing world. Do you think many stumble
because they don’t realize they need to build trust before diving into their
product and service solutions?
Tarun
Khanna: Certainly just
having domain competence in where you want to be as an entrepreneur is
insufficient. So many things can trip you up.
In the US, it’s a
fair bet to say you can look at something like the engineering angle, or the
analytics angle, or some specific secret sauce, and you can build a company
around that. The other folks you need—the regulatory side, say, or the delivery
side—can be cobbled together to collectively form a team.
Many of those
pieces would be missing in Johannesburg or another developing country location.
You don’t have the luxury of those supporting structures. So you have to work
on building trust first that will entice others to join you.
Gerdeman: Why is it important for entrepreneurs
to take ownership in weaving their own web of trust without waiting for others
to solve problems related to their goals?
Khanna: Put simply, I feel that the approach I
propose is the most practical. I have spent a lot of time as an entrepreneur in
developing countries. You have to create the conditions to create. Rather than
assuming a set of circumstances will materialize to solve your problems, you
have to realize you’re the one who has to address this problem of pervasive
mistrust. It’s not productive or sufficient to wait for the government or
anyone else to get their act together. Pointing fingers and criticizing the
government usually doesn’t solve anything.
A gut reflex is to
say that these countries don’t work because of corruption. There’s some truth
to that. But it may not be the main story. The main story is usually primarily
a lack of understanding. It’s the practical thing to do to find people who are
willing to work with you and co-create the conditions to create. You have to
hold their hands as you go along.
Critics might say:
You’re putting too much on the shoulder of the entrepreneur with this approach.
They are right! It is harder than building an app in a Harvard dorm, surrounded
by pools of expertise, relatively abundant risk capital, and so on. That’s why
‘development’ is hard. But the alternative is harder, to wait for the
government, even a well-intentioned one, is a fool’s errand and could take
generations.
Gerdeman: In building his dairy farm in China,
Shao offered to train other farmers in how to produce clean milk for free
because he didn’t want to be lumped in with competitors who produced
contaminated milk. Is this kind of sharing of information, even with
competitors, necessary to building trust?
Khanna: With the melamine milk poisoning
crisis, he found that as a lone actor trying to create clean milk in China, it
was a very difficult problem to solve. It was hard as a solitary person to make
that happen. It was like whistling in the wind.
But if there’s a
critical mass of people doing things in a certain way, it allows people to look
at dairy farming differently. If other people are providing complementary
services, (the public) is much more likely to trust in it, rather than if it’s
one solitary actor. So he thought, I have this asset and insight and it can be
used by others, so he made it available to a larger group of people. Getting
that critical mass allows it to become this viable option.
Shao’s alternative
would have been to wait for an industry association to emerge that would then
take on the task of educating others. But who would create that? Instead, he’s
trying to create a constituency for change. It’s an example of an entrepreneur
paying attention to public good creation more than they might have to in
Boston.
Gerdeman: What role do you think technology can
play in helping entrepreneurs build trust?
Khanna: The world’s biggest biometric program
by far is in India. The FBI’s biometric database contains data on 60 to 70 million
people. The Indian database has close to 1.3 billion. Prior to having this
biometric database, there was no way to identify the vast majority of people in
India accurately. When children are born, half of them don’t get a birth
certificate even though it’s the law to do so. So with India’s massive welfare
program, the government would provide assistance but had no way to trust that
it would end up in the poor person’s pocket they intended it for. It might get
stolen. The euphemism is ‘leakage.’
So technology was
used to uniquely identify people and solve this problem. With biometrics
working, the government is able to directly target the person who needs that
aid. You don’t need a card or a fingerprint. You can get your money just by
showing your eye.
That technology
has leapfrogged everything else. It’s an example of technology being used to
address a trust deficit between the government and its citizens. But that same
technology creates other secondary issues that India is under-equipped to deal
with, like privacy issues. So technology is an arrow in your quiver as an
entrepreneur, but it’s not a panacea. When you have this new technology, it’s
your responsibility and in your interest to co-create the infrastructure for that technology to
be used responsibly and profitably.
Gerdeman: Why is it crucial for entrepreneurs to
respect the norms of a society they are building a venture in, rather than
fight against the rules?
Khanna: In these developing countries, you have
a system that has been working for hundreds of years. We have a tendency to say
that everything should be disruptive. I don’t know that that makes much sense
to me. Sometimes going with existing practices may be the right way to do it.
You can swim upstream on some dimensions of a problem, but not all for sure,
and very likely you’re free-riding on some other foundational practices and
norms that you’d rather not see change.
Instead, we should
be looking for ways to build on top of existing practices. That’s better than a
reflex approach that says, ‘I’m going to come in and shake things up.’
In microfinance
today, the best firms in India, Mexico, and elsewhere are layering technology
on top of social norms and practices that have existed for centuries, taking
into account, for example, how poor women come together to pool capital and
deploy it productively.
Gerdeman: It sounds like building trust in a
developing country can take many years. I imagine entrepreneurs need to have a
great deal of patience if they expect to see success, right?
Khanna: Some of the organizations I have
contributed to building in the last decade have involved former students (at
HBS). Their incoming assumption is often that we’re going to build this and
exit in three or four years. They’re captivated by the “Facebook in a Harvard
dorm room” phenomenon. They’re seduced by that.
You could always
get lucky. But that doesn’t even happen in the US very often. That’s one in a
million when the Gods are smiling.
Good entrepreneurs
are judicious risk-takers and big dreamers. You can’t bet on lightning
striking. It takes four or five years for a venture to get traction in the US,
if it does. It’s going to take longer than that in a fast-growing developing
country. So yes, in most cases, you are going to need patience. The payoff is
the satisfaction of building a country’s soft infrastructure, providing
much-needed services and, if you’re so inclined, of course financial success.
15 AUG 2018
https://hbswk.hbs.edu/item/why-entrepreneurs-must-focus-on-bui
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