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Forty years ago, in 1975, Steven Kerr published a now infamous paper in the field of organizational behavior entitled "On the Folly of Rewarding for A, While Hoping for B."  The article drew attention to the fact that reward systems in organizations are often well-intended but misguided in that "behaviors which are rewarded are those which the rewarder is trying to discourage, while the behavior he desires is not being rewarded at all."  Tragically, over forty years later, the same unfortunate quality can be ascribed to the now burgeoning industry of corporate sustainability reporting and ratings.
 
Today, there are literally hundreds of corporate sustainability and ESG (Environment, Social and Governance) rating and ranking indices.  Some have achieved a high level of visibility and companies compete to be listed among the leaders on these lists, e.g. Dow Jones Sustainability Index, EIRIS Index, FTSE4Good ESG Ratings, and the Newsweek Green Rankings, to name just a few.  Like their sister industry of Corporate Sustainability Reporting, most ratings systems examine criteria at the corporate or company level--energy use, water use, waste generation, and greenhouse gas emissions, along with risk management, corporate governance, human capital development, labor practices, diversity, and expenditures on CSR projects and community relations.  The objective is to have a set of criteria with which to evaluate and rate all companies against each other.
 
To be clear, these corporate sustainability ratings serve an important function and have gone a long way toward continuously improving the social and environmental performance of corporations throughout the world.  But they have also inadvertently rewarded A, while hoping for B.  How?  In their quest to be consistent, comparable, and easily measureable, the Sustainability Raters have defaulted to quantitative metrics that can be easily aggregated and reported for the entire company.  Recognizing this, companies have staffed up to ensure that they can report healthy improvements in all the key dimensions that make up the rating indices.
 
But in so doing, we have inadvertently put most of our chips on continuous improvement in current businesses and largely forgotten about the critical importance of disruption, innovation and transformational change to corporate sustainability.  Large incumbents in unsustainable industries can rack up big rating points by focusing on incremental reductions in negative impacts from current operations and making positive social contributions through improved labor practices and CSR projects.  Lost in the shuffle are the harder to see and more nascent initiatives to commercialize new, sustainable technologies or develop more inclusive business models that may ultimately disrupt or even replace today's core business.  Yet, it is these more transformational initiatives that hold the key to moving us toward a more sustainable world:  We are, in other words, rewarding for A, while hoping for B.
 
What can we do about it?  In their book, Blue Ocean Strategy, Chan Kim and Renee Mauborgne, emphasize the strategic move (or initiative) as the key to innovation strategy, with the majority of corporate growth (and later, profits) coming from new strategic initiatives rather than from the continuing development and improvement of existing businesses.
 
Consistent with this view, I believe that refocusing our attention on new, transformational strategic moves (or initiatives) holds the key to evaluating corporate sustainability:  Rather than chasing the fantasy of rating entire corporations as to their "sustainability" let us instead shift the "unit of analysis" and spend more time understanding (and driving) new strategic initiatives within corporations focused on leapfrog, clean technology and disruptive new business models that serve and lift the poor. 
 
While we will no longer be able to rely so heavily on secondary data and a consistent set of parameters (as we have increasingly with existing Sustainability Ratings), identifying and evaluating Transformational Sustainability Initiatives (both within existing companies, and as new ventures) is more consistent with our aim to recognize and reward what we aim to create--environmentally sustainable and inclusive business for the 21st century.
 
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This is exactly the focus of our new Sustainable Entrepreneurship MBA (SEMBA) Program at the University of Vermont, where we aim to launch a new SEMBA Transformational Sustainability Award in the coming year.  For a better idea of the types of high-leverage strategic initiatives that we aim to catalyze, read more about the Practicum Projects that form the backbone of the program.  These include new, transformational initiatives with companies like Pepsico, Novelis, Facebook, CEMEX, Seventh Generation, Novozymes, Interface and Native Energy.
 
Transformative change is also the aim of the Base of the Pyramid Global Network, and you will be learning more about the up-coming events and Summits associated with the BoP Global Network. 

Let us end the folly of Rewarding for A (incremental improvement to existing businesses) while hoping for B (transformational change to inherent sustainability and regeneration) by focusing our attention, once and for all, on the new business initiatives and strategic moves that actually have a chance of moving us toward a more sustainable world.
Screen Shot 2014-03-05 at 9.38.20 PM.pngIt has now been more than a decade since C.K. Prahalad and I first published the article "The Fortune at the Bottom of thePyramid" which launched the "BoP" business movement.  Over the past decade, there have been fits and starts: many BoP ventures have failed; others have been converted to philanthropic programs; but only a few have taken root and gathered significant commercial momentum.
This has led some to conclude that the whole concept of enterprise-based solutions to poverty was flawed in the first place-- pronouncing variously BoP business as the latest form of corporate imperialism--focused merely on profiting from the poor; or a quixotic quest for the impossible--a misallocation of valuable investment capital.  

In reality, however, rumors of BoP's demise have been greatly exaggerated (to paraphrase Mark Twain).  Indeed, much has been learned over the 
past ten years and I believe that we are on the verge of taking the BoP business movement to the next level in the coming decade--a BoP 2.0 revolution.

One area of important learning has been the potential for incubating disruptive innovations and business models starting in the underserved space at the base of the pyramid and later having some of these innovations move up-market.  

Clay Christensen and I wrote about this over a decade ago (2002) in an article entitled "The Great Leap: Driving Innovation from the Base of the Pyramid."  The idea has caught on.  Over the past decade, a whole slew of new terms and buzzwords have arisen to describe this phenomenon, including trickle-up innovation, frugal innovation, and the latest incarnation--reverse innovation.  Vijay Govindarajan and his colleagues have led the way in developing the strategic logic for reverse innovation and documented a growing number of cases illustrating this approach from the corporate sector, beginning with GEs development of a low-cost, hand-held ultrasound device in rural India and China.

A key difference between reverse innovation and the earlier work on base of the pyramid strategy is the promise--even expectation--of large and profitable up-market migration for the innovations incubated in the underserved space:  GE's hand-held ultrasound device, for example, has "trickled up" to the US and other developed markets and now constitutes one of the fastest growing and profitable businesses for GE's Healthcare business.  

There is some good news and some bad news regarding this trend.  First the good news:  Reverse innovation provides an attractive internal logic for undertaking such innovation initiatives within large corporations:  Rather than simply focusing on the possibility of opening up new markets among the world's poor and underserved, reverse innovation offers the potential for having your cake and eating it too--by incubating innovations in the underserved space that can migrate up-market bringing new, disruptive,  affordable, and (potentially) more environmentally sustainable products and services.  Witness the growing "trickle-up" success in point-of-care medical devices, mobile telephony, and distributed energy technologies, for example.  Exciting stuff, to say the least.

But now for the bad news--there is a potential dark side as well:  The risk that corporations gradually come to view the world's slums and rural villages primarily as laboratories for incubating innovations for the rich.  The poor, in other words, come to be seen more as guinea pigs than as underserved people and communities with special needs and requirements--a place for corporations to force cost constraints on their innovation process enabling even higher returns in the eventual (ultimate) market at the top of the pyramid.

Should this scenario come to pass, it would represent a double tragedy.  Not only would this damage corporations' reputation and continuing right to operate, but the evidence is also mounting that few innovations incubated in the base of the pyramid space can easily travel up-market without significant modification, threat of imitation, or competitive reaction:  Frugal designs must be upgraded to appeal to the wealthy; low-cost innovations can often be easily imitated, and competitors with lower cost structures can enter as fast seconds after the pioneers have incurred all the development costs.  

Allow this to serve as a cautionary tale to all those large, incumbent corporations thinking reverse innovation is the magic bullet:  Focus on first things first--better serving and lifting those underserved at the base of the income pyramid.  Should some of these disruptive, lower cost, or environmentally sustainable innovations eventually lend themselves to application in the up-market, that is great news for the Corporations and the World.  But let us not look back in ten years and view reverse innovation as yet another classic example of the Law of Unintended Consequences.
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The time has come to end the ideology wars. 

For too long, discussion about environmental and social challenges has been divided into two camps:  The Neo-Malthusians (here and here) and the Cornucopians (here and here).

The former forsee gloom and doom--an imminent global train wreck driven by climate change, resource depletion, ecosystem destruction, and a combination of growing population and inequality.  The latter forsee an unprecedented boom driven by the creativity and innovation of an increasingly sophisticated and interconnected global economy with millions of new, well-educated people from the emerging markets of the world.

The Neo-Malthusians are the ultimate pessimists ("limits to growth"); the Cornucopians are unabashed optimists ("growth of limits"). The Neo-Malthusians project current trends into the future and see disaster.  The Cornucopians assume that technology will always produce the necessary substitutes and solutions when we need them (because scarcity means higher prices and higher prices signal opportunity for innovators).

It turns out both are probably right:  We face unprecedented environmental and social challenges.   Markets get distorted by perverse subsidies and incumbent resistance so that the price signals that should drive innovation are delayed or deferred.  Humans have difficulty perceiving gradual, slow-developing changes and tend to wait for crises before acting (the "boiled frog" syndrome).  So there probably will be major disruptions and unpleasant surprises in the years ahead.

That said, humans are also infinitely adaptable, resilient, and able to mobilize rapidly when a real crisis is finally perceived.  The level of creativity and inventiveness is astonishing, and we are adding millions of creative people to the stock of potential problem solvers every year.  The internet enables connectivity and exchange on a scale that we could not have previously imagined.  The engine of entrepreneurial capitalism is powerful and should not be underestimated.  So, there is every reason to believe that amazing things will happen that totally change the landscape for the better in the coming decade or two.

Just like the Democrats and Republicans in the United States need to set aside their petty ideological differences for the good of the country (and the world), it is also time for reconciliation and synthesis between the Neo-Malthusians and the Cornucopians.  

Such reconciliation means that we need to learn how to become "skeptical optimists"--optimists because of the potential for new, sustainable technologies to grow exponentially in the coming years (see, for example, Singularity University); skeptical because of the scale and scope of the challenges we face. Skeptical optimism gives us the perspective we need to solve the world's social and environmental problems through a new form of sustainable entrepreneurship and enterprise.  And the time is now.

The New Dust Bowl

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dustbowl1.gifThe 1930s are best known as the time of the Great Depression, brought on by the Wall Street crash of 1929.  Most point to speculation, excessive debt, and an ensuing stock market bubble as the "cause" of the depression.  The Great Depression was accompanied by the Dust Bowl--a time when much of America's agricultural "Heartland" dried up and blew away, leading to massive unemployment, homelessness, and social upheaval (remember the John Steinbeck classic, The Grapes of Wrath?).

Few remember, however, that the so-called "Roaring 20's" were the time when the agricultural economy in the US actually began its steep descent.  In fact, the period immediately following World War I, represented the first large-scale application of mechanized farming practices in the World.  This was uncharted territory:  Never before had farmers used tractors and fossil fuels to cultivate increasingly large tracts of land to grow commodity crops for a burgeoning urban population.  Not surprisingly, there were unintended consequences.   In the free-for-all that ensued, farmers plowed and over-cultivated their way to oblivion, causing widespread soil erosion, loss of fertility, and ultimately, the Dust Bowl.

Some would say that the collapse of the farm economy was what made the Great Depression the decade long debacle that it became.  Only with the advent of the Soil Conservation Service and a whole set of other institutions aimed at regulating and improving industrial agricultural practice, did the situation turn around after the Second World War.

deadbull.gifFast  forward to the 2000s.  In 2008, the financial crisis, and the Great Recession struck.  Most point to speculation, excessive debt, and an ensuing housing bubble as the "cause" of the recession.  Few remember, however, that the 1990s were the time when academic finance and the financial services industry really took off.  Driven by deregulation and the rapid develop of distributed computational power, exotic financial products such as CDOs and derivatives became possible for the first time.

Just like mechanized farming in the 1920s, these new tools got out of hand.  In the free-for-all that ensued, financiers securitized and arbitraged their way to oblivion, causing widespread misery and wealth destruction. 

The question is:  where is the financial equivalent of the Soil Conservation Service? 

When will we create the global institutions required to regulate and improve the functioning of this new force of nature?  Until this happens, expect the New Dust Bowl to continue.

How does business move beyond greening? TOP - “Create needs in existing markets” vs BOP - “Create markets from existing needs.”

On Creating Smaller Problems

malaria.gifMy colleagues Amory and Hunter Lovins tell a wonderful parable:  In the early 1950s, the Dayak people in Borneo experienced an outbreak of malaria. To combat this terrible problem, The World Health Organization sprayed large amounts of DDT to kill the mosquitoes carrying the disease.  As expected, the mosquitoes died and the malaria declined.  Problem solved.

But wait--there were unexpected side effects:  The roofs on peoples' houses began to cave in.  It seems that the DDT was killing the parasitic wasp that previously controlled the thatch-eating caterpillars.  Even worse, these DDT-poisoned insects were eaten by geckoes, which were then eaten by cats.  The cats died, allowing the rat population to explode, exposing the local people to even more vicious outbreaks of plague and typhus.  To cope with these new problems, which were the result of the original solution, the WHO was obliged to parachute 14,000 live cats into Borneo...

merton.jpgThis parable illustrates one of the most difficult challenges facing the initiators of any purposeful human action:  That any new solution or innovation will always create new problems.  Sociologist Robert K. Merton identified this phenomenon in the 1930s as the "Law of Unintended Consequences." While unintended consequences can be positive (e.g. taking aspirin for pain also appears to reduce the risk of heart attack), it is the negative ones that necessarily concern us the most--precisely because they are unforeseen!

Thus, a key criterion for determining if a given human endeavor is "sustainable" (or not) is whether or not the problems it solves are more significant than the new problems it creates.  Tragically, many of our most notable technological and industrial innovations of the past century do not appear to have passed this test.  

Take, for example, Fritz Haber's invention of synthetic nitrogen in 1909.  Until Haber figured out how to "fix" nitrogen from the atmosphere into a form useful to living things (i.e. plants), all the useable nitrogen on earth was fixed by soil bacteria living on the roots of leguminous plants.  Before Haber's invention of synthetic fertilizer, the amount of life earth could support--crops and humans, for example--was limited by the amount of nitrogen fixed by natural processes.  

omnivore.gifBut as Michael Pollan points out in his wonderful book, The Omnivore's Dilemma, having acquired the power to fix nitrogen, humankind was now liberated from biological constraints.  This enabled the creation of "modern" industrial agriculture--monoculture crops fed with massive quantities of chemical fertilizers and pesticides manufactured from fossil fuel.  Some estimate that two out of every five humans on earth today would not be alive if not for synthetic nitrogen.   This has clearly been a tremendous boon to humanity, to say the least.  But wait, there were unexpected consequences...

Today, it takes more than a calorie of fossil fuel energy to produce a calorie of food. 

In fact, industrial agriculture accounts for nearly one-quarter of all greenhouse gas emissions to the atmosphere.  In addition, most of the synthetic fertilizer applied to crops is wasted--it either evaporates into the atmosphere (acidifying the rain, and further contributing to climate change), or it runs off into streams, ultimately ending up in estuaries like the Gulf of Mexico, where it stimulates wild growth of algae that then dies and smothers marine life, creating "dead zones," and adversely impacting coral reefs and other fragile life forms critical to marine fisheries and ecosystems.

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Haber's process for manufacturing synthetic nitrogen is also what enabled less humanitarian industrialists to create the industrial munitions for modern warfare and terrorism--high explosives, defoliants, and poison gases.  Might it be that the new problems created turn out to be bigger than the problems solved?

Or take the case of nuclear power.  In the years following the Second World War (which was ended with the use of nuclear weapons), nuclear power was hailed as the solution to our future energy problems.  "Electricity too cheap to meter" was the slogan in those days.  Throughout the 1960s and 70s, the world pursued nuclear power with great vigor.  Until the accidents at Three Mile Island and Chernobyl put the brakes on.  

But these accidents only exposed part of the "new" problem--the potentially devastating consequences of a nuclear meltdown.  With the increased scrutiny these accidents brought, it also became clear that there really was no long-term, permanent, or safe way to manage the waste from spent fuel rods.  So, today we continue to store the material above ground in growing numbers of radioactive pools, which are potentially vulnerable to terrorist attack.  Even worse, the failure to secure all existing nuclear weapons presents the real danger that "loose nukes" will fall into the wrong hands, with potentially horrific consequences.

In recent years, the growing specter of climate change has brought nuclear power back to the forefront, since it produces no greenhouse gas emissions.  And then came the earthquake and tsunami in Japan and the Fukushima disaster.  In June, at the Tokyo Power Board Meeting, livid shareholders told the executives at the utility to "jump into the reactor and die."  

Might it be that the new problems created turn out to be bigger than the problems solved?

In the years ahead, we will face unprecedented challenges to design and develop "sustainable" solutions to our growing food, energy, water, and other problems. Of necessity, we will be forced to take action before we completely understand all of the unintended consequences.  The "precautionary principal" dictates that we pursue only those solutions that minimize the potential for massive negative unanticipated consequences.  

Experience over the past century teaches us that large-scale, centralized solutions typically fail the test for unanticipated consequences--most end up creating bigger problems than they solve.  Better instead to pursue the emerging wave of small-scale, distributed, point-of-use solutions such as distributed generation of renewable energy, point-of-use water treatment, and multi-crop agriculture.  Such solutions can "fail small and learn big," enabling technologists and entrepreneurs to fine-tune and perfect the model on a small scale before seeking wider application. In so doing, we can finally begin to create smaller problems...and begin the transformation to a sustainable world.
Oil painting of Franz Schubert, after an 1825 ...

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When Franz Schubert wrote the first two movements of Symphony No. 8 in B Minor in 1822 (what would come to be known as the "Unfinished Symphony"), little did he know that he was modeling the behavior and skills needed to successfully create the markets of the future at the base of the world income pyramid in the 21st century.

In fact, a full decade after C.K. Prahalad and I first wrote the Fortune at the Bottom of the Pyramid (BoP), few large corporations have yet to realize the vast business potential of the world's four billion poor and underserved:  Most have either sought simply to sell stripped-down versions of their current products to the emerging middle classes in the developing world, or have abandoned the profit motive entirely and moved their BoP initiatives to the corporate social responsibility department or corporate foundation. 

Indeed, it is telling that, as we enter the second decade of the 21st century, the only real BoP business success stories come from the developing world itself--microfinance and mobile telephony for the poor.  Billion dollar companies like Grameen Bank and Grameen Phone in Bangladesh, Compartamos in Mexico, and CelTel in Africa still stand out as the few iconic examples of business success cited by BoP analysts and advocates from around the world.  In fact, no global conference on the topic is complete without significant reference to at least one of these "home run" examples.

This raises the question:  Is there something about microfinance and mobile telephony that has enabled such stunning success?  The answer is yes!  When you examine each of these industries closely, it quickly becomes apparent that each is really a means to an end, rather than an end in itself.  Indeed, microfinance and mobile telephony are not end products, but rather are enabling platforms that facilitate people to accomplish any number of tasks and deliver a wide range of functionalities.  They are, in short, the equivalent of "unfinished symphonies."

Microfinanciers and rural wireless service providers enable poor slum dwellers and villagers to figure out for themselves how best to weave these new services into their lives.  For these customers, this may mean mobile transfer of funds, communicating in code with a loved one, acquiring a third cow, accurate information on crop prices, or expanding a current micro-enterprise.  My colleague Erik Simanis calls these types of products and services value open since they enable people to complete the value proposition for themselves.

Unfortunately, most multinational corporations have chosen BoP strategies that effectively deliver finished symphonies with defined value propositions in the mistaken (though well-intentioned) belief that they know better than the poor themselves what their real needs are.  What works in the established markets at the top of the income pyramid, however, does not work so well in the emerging BoP space.

Time-tested marketing research methods (e.g. consumer surveys, focus groups, ethnographic studies) are excellent ways to uncover new opportunities in already established markets, where low cost or differentiation strategies rule and customers are already accustomed to paying money for service.  However, when it comes to serving the BoP, the challenge is not one of uncovering latent demand, but rather one of creating entirely new markets and industries, where only informality, self-provisioning or barter previously ruled. 

To effectively realize the vast business potential at the base of the pyramid, corporations must thus show a bit of humility.  Companies must come to view the poor more as partners and colleagues rather than merely clients or consumers.  Such an approach calls for deep dialogue (two-way communication) rather than just deep listening.  To realize this mindset shift requires the development of a new "native capability" which focuses on co-creating business concepts and business models with the poor, rather than simply marketing inexpensive versions of top-of-the-pyramid products to low income consumers.

The logic of co-creation does not, however, mean simply entering underserved communities with a completely open mind and no sense of business purpose or direction.  On the contrary, companies must clearly communicate what resources they bring to the table in the form of skills, capabilities, and technological potential; they must do so, however, without prematurely imposing a final product or technological solution.  The aim then is to marry corporate global best practices and technologies from the company with the local knowledge, skills, and aspirations of the local community--to complete the "unfinished symphony" together.

Done well, such an approach to BoP business development holds the potential to create entirely new product and service categories that are embedded in the actual context (rather than simply cheaper versions of existing products from the top of the pyramid).  Embedding also means creating "community pull" for BoP innovations, since they have been co-created with community members, rather than engaging in the expensive and time-consuming process of "social marketing" to educate and promote behavior change among the poor.

Over the past seven years, my colleagues and I have been focused on developing such an approach for companies to effectively co-create new markets in the BoP.  The approach is called the BoP Protocol.  We have now experimented with this approach in a half-dozen different business contexts in Asia, Africa, and Latin America, and have learned a great deal about how to engage local partners and communities in the dance of co-creation.

Many others have also embarked on similar learning journeys to unravel the keys to successfully creating the inclusive businesses of tomorrow that embrace all of humanity and end the scourge of poverty.  My colleague Ted London and I have gathered some of the most important emerging contributions in this regard in a new book, Next Generation Business Strategies for the Base of the Pyramid.

Our conclusion:  There is no "fortune at the bottom of the pyramid" waiting to be discovered.  Instead, the challenge for companies is to learn how to create a fortune with the base of the pyramid.  Franz Schubert's Unfinished Symphony in the 19th century may thus hold the key to a more inclusive form of capitalism for the 21st century.

About Stuart. L. Hart

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I’m Stuart L. Hart, a leading authority on the implications of environment and poverty for business strategy. This blog will be a place for me to update you on some of my newest insights - based on the work I’m doing to help businesses take the Green Leap.

Join the discussion!

A few years ago, I defined the concept of sustainable value; my work includes over 70 academic papers and several books.

Capitalism at the CrossRoads

Capitalism at the Crossroads, published in 2005, was selected by Cambridge University as one of the 50 top books on sustainability of all-time; the third edition of the book was published in 2010. I present new strategies for identifying sustainable products, technologies, and business models that will drive urgently needed growth and help solve social and environmental problems at the same time. I also argue that corporations are the only entities in the world today with the technology, resources, capacity, and global reach required.

Beyond Greening: Strategies for a Sustainable World won the 1997 McKinsey Award for Best Article in Harvard Business Review and helped launch the movement for corporate sustainability. 

fortune at the bottom of the pyramid

With C.K. Prahalad, I wrote the path-breaking article: The Fortune at the Bottom of the Pyramid which provided the first articulation of how business could profitably serve the needs of the four billion poor in the developing world.

Learn more about my work at stuartlhart.com >>

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