Lessons in Entrepreneurship and Wealth Building from the Developing WorldPublished: September 15, 2010 in Knowledge@Wharton
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."