Monday, June 02, 2008

Radical, Transformative, Unreasonable, Extreme, Leap Frog, Super-Bad Social Entrepreneurship

Allen Hammond recently hosted a blog series on scaling BOP businesses on NextBillion. In it, he proposed that extra effort is needed to scale social enterprises. It is worth reading. Hammond admits that the “numbers haunt” him when it comes to scaling BOP enterprises. Participation by a few well-intentioned, experimental MNC’s, social entrepreneurs and investors is not going to be enough to change the world. Pace is a problem. What is needed, Hammond says, is strategies to transform entire sectors (health care, telecom, etc.).

Derek Newberry had asked me to join the other bloggers in commenting on this series of posts, but I was unable to do so at the requested time. He got some diverse input from others, and I will try not to repeat what they have already said. It is an important, perhaps watershed discussion. So here goes with three points that may be useful in thinking about this challenge of scalability.

First, scaling is being pushed by those who are impatient for results. Why aren’t these ventures scaling faster, having a greater impact on the world’s challenges? When I first started working in this field five years ago, I had very similar feelings. How could Fabio Rosa and Harish Hande come up with similar business models for solar power for poor households in Brazil and India but not combine them into a global company? Why the many different microfinance institutions working in various parts of the world... Grameen, Accion, FINCA? Why not closer collaboration between IDE and Kickstart on marketing treadle pumps around the world and driving down the cost of goods with higher volume? Were relatively small regional businesses the best social enterprise could offer? Is this a systemic problem, for which there is a systemic solution? Hammond thinks so.

I am skeptical. Moving up the chain, to target transforming entire sectors, just isn’t how innovation works. And there seems little about the BOP that would indicate that it would be more amenable to these approaches. Hammond is a market driven guy, but in this article he comes perilously close to sounding more like one of Easterly's “Planners” than a “Searcher.”

Unfortunately, innovation dissemination takes time. It is SO FRUSTRATING as an entrepreneur to be early… “why can’t people see how wonderful our solution is?” Hammond is wisely designing some of his new ventures with scale in mind, but he is competing with others who also wish to offer telecom services and clean water to these markets. It will be interesting to see if his “transformative” businesses scale faster, or whether they are just as much work as plain old business models.

My second, related point is that scaling varies with the technology. Most of the successful scalable models we have seen to date involve scaling up bytes, services or very fungible items (money). So microfinance and mobile phone service (at least in urban markets) have disseminated relatively quickly (although it probably didn't seem that way to the entrepreneurs). These technologies are driven by less friction for scaling… distribution costs are lower than for physical products and the incremental cost of adding additional users drops at a faster rate. As far as tangible products, it has been much harder (and taken much longer) to get diffusion of pumps, laptops, bed nets, or in Envirofit’s case, motorcycle retrofits. Transportation costs, parts and warranty services, user acceptance all take longer and slow the diffusion of these more tangible products. My guess is even with “new DNA,” Hammond’s transformative energy and water purification technologies will encounter similar obstacles.

How to deal with these obstacles? Well, as Hammond has done, it is important to build scalability into the business model. Even more important, however, may be to make sure you are truly building a business by chosing the right launch site. As I say to my students, you don’t get points for the degree of difficulty in designing an enterprise. This is not Olympic diving. So find the markets most likely to need your product that can pay for it. This really sticks in social entrepreneur's throats. They want to go help the poorest of the poor. The starving, sick children. But that doesn’t necessarily lead to scalable or sustainable ventures. I wish it did. Really.

Envirofit is an example of this. We started the two stroke retrofit business in the Philippines, not because we had brilliant market research, but because we were asked by an NGO and some government officials and we saw the horrible air pollution and its effects on public health. Opportunistic? Yes. Market driven? Nope. Has this hurt the scalability of our model. I think so; and we are trying to take a very different approach with our improved cook stoves business. Hammond’s Next Four Billion report provides a tremendous resource for potential entrepreneurs in identifying markets that are most amenable to entrepreneurial solutions. His tranformative sectors are those markets with high potential.

Much of the work in this area calls for the dissemination of leap frog, innovative technologies. This seems to be the basis of Hammond's clean water venture, and the WiFi Mesh demo in Viet Nam. Some words of caution from Peter Drucker seem in order. “Knowledge-based innovations differ from all others in the time they take, in their casualty rates, and in their predictability, as well as in the challenges they pose to entrepreneurs. Like most superstars, they can be temperamental, capricious, and hard to direct. They have, for instance, the longest lead time of all innovations.” This is a deep chasm we are trying to cross. Perhaps bringing radical new technologies to these underserved markets is what is needed to transform the sector; perhaps it is adding too many "degree of difficulty" points to the entry.

Many of the calls for scalability involve “replication.” They are borrowing a term from biotechnology, where once you have identified a protein of interest, you insert DNA into another organism and “voila” you get buckets of it. Unfortunately, communities and cultures don’t really behave much like yeast, e. coli or Chinese hamsters (biotech's expression systems of choice). They are much more diverse and competitive. One popular idea is “microfranchising” which trains microentrepreneurs to run standardized small enterprises around the world. BYU’s Center for Economic Self Reliance is a leader in this area, and Opportunity International is starting work in this area as well. To date, these have been very simple businesses, such as collecting hair for wigs; or service based, primarily around health care (the pharmacy models in Hammond’s article or Scojo's eyeglasses). Leapfrog technologies have been rare (although Grameen Phone helped with rural mobile penetration for a while).

My last point goes to the title of this post. The theme of most that is written on social entrepreneurs these days is the heroic nature of their toils. Writers focus on “radical approaches,” “catalytic disruptive technologies” and the “power of unreasonable people.” It is inspiring, no doubt. But is it true? The Hero Factor is based on an anecdotal methodology. Look for success and work backward. Not so useful for working forward. Just go find those “one in a million” changemakers and help them out. The not so subtle message to those interested in this work? Don’t bother if you aren’t a hero. Go get a job at a bank instead. But what if it is the work that makes the person special, rather than the person that makes the work special?

I recently asked a class of MBA students if they would rather be "entrepreneurs" or "social entrepreneurs." 47 out of 50 chose social entrepreneur. Either I have a very talented class (I do) or these are at odds with the "one in a million" nature of entrepreneurship. Perhaps I should teach them not to try?

We seem to be borrowing the concept of mythic entrepreneurs from the mainstream, despite the data that reveals their rarity in the field (see Shane, Illusions of Entrepreneurship 2008). That we borrow these myths when we are moving to less developed economies perhaps says more about the impatience of the foundations and academics than it does about the nature of entrepreneurs. Entrepreneurship, at least when it comes to economic development, seems to have more to do with the number of people engaged in the journey than the speed of their trip.

In the end, I am a skeptic about wide scale implementation of leap frog, transformative, radical solutions across BOP markets. I expect they will happen, occasionally (as they already have with Grameen Bank, Aravind Eye Hospital, and treadle pumps). And be celebrated broadly, as they should be. Perhaps it will be Hammond, or Paul Polak or Envirofit. But aspiring social entrepreneurs, would do well to remember the words of Peter Drucker: “Effective innovations start small. They are not grandiose. ... In innovation, as in any other endeavor, there is talent, there is ingenuity, and there is knowledge. But when all is said and done, what innovation requires is hard, focused, purposeful work.” The tranformative entrepreneur may have a grand dream in their head, but every morning they put on their underwear one leg at a time (sorry, I don't know a more cross cultural analogy). We still haven't found Clark Kent's phone booth.

I hope that Hammond’s innovations do transform sectors and rapidly change the lives of the poor. I hope they attract new investors to the sector that make attractive returns. I hope that he has figured out a systemic fix to a systemic problem. But if not, I wish that his ventures, customers and investors benefit from patience, flexibility, humility, resilience and persistence as they work through the many execution problems these markets present to innovators and entrepreneurs.

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