The Green Gap

In the Cold War, we feared a Missile Gap was a strategic weakness. Nowadays, we must awaken to the fact that the Green Gap is true strategic weakness: the nations whose economies will thrive in the coming years will not be those with the biggest factories, but those with the most sustainable, efficient, and ecological markets. What we require is a Strategic "Green Reserve" of ecological design to weather the coming changes that both climate and resource scarcity will force on the international economy.

Sunday, 1 May 2011

The Problem Is the Incentive Structure

As you probably know from reading this blog, I like to think about all kinds of stuff most other people find interminably boring. After writing a couple rants about the stupid incentive structures in most corporations, I found myself pondering incentive structures in general over my morning coffee. It started by me asking myself:

Why aren't corporations aren't targeting the "Base of the Pyramid" (BoP), that 4-billion-strong cadre of low-income consumers?

I reckoned it could have been any number of things, but let me walk you though my first ideas.

1) Perhaps they just had an information gap. It's possible that with over 60,000 multinational corporations (MNCs) in the world, every single one of them has been utterly and completely kept in the dark regarding four of the six billion people on the planet. OK, maybe that's not very possible. Next idea.

2) Perhaps they had information about the BoP, but were subject to prejudice regarding their ability to be a market. I'm certain that a lot of this exists. People in business who think you can't sell something to someone who works for a dollar a day are more than likely the majority. Still, for there to be virtually zero interest in business to serve 4 billion willing customers, that prejudice had to be not only deep-rooted and persistent but pervasive. It means that even when a visionary leader has come along who thinks that serving the BoP could be good business, that prejudice has, until very recently, always won out in the end. I have a hard time believing that this is the case, not only because it requires "perfect prejudice" (and not everyone over the past 60 years has been thus) but also because that prejudice has been overcome by a select few companies. It's clear that there are people who want to sell to the BoP, it's just corporations don't allow them to do it. Next!

3) Perhaps they tried and failed to tap the market. Possible. Hart routinely stated in Capitalism at the Crossroads that companies that try to transport their business models for the 1st world to the 3rd world often find the models have no traction. Why would they try to transport extant business models to new markets? You know, like trying to sell a McDonald's hamburger in New Delhi? McDonald's had to transition to non-beef and even non-pork products and add vegetarian dishes to its menu to serve the bustling metropolis. Perhaps other companies have failed for their inability to be flexible? This is another possibility, but large companies have shown that they can adapt their services and products to local clientèle. Hart argues that the BoP are not just different by local custom and preference, but they operate on a completely different model than the one billion satisfied customers of the first world. While companies can adapt to sell to people who have money in other countries, they can't necessarily adapt to sell to people who don't have much money - especially in other countries.

4) Perhaps the corporate culture played a role. I'm going to be an armchair anthropologist and theorise that there are three things cultures do: stuff that they know is pragmatic and useful in their day-to-day lives, stuff that they know is sacred and useful to their spiritual lives, and stuff they know is taboo. Corporations are no different. Some examples: sales incentives are pragmatic (because they encourage a beneficial activity); staff retreats are spiritual (because nobody can prove they do anything useful, but people still believe in them); and presenting market data about the company in anything but the most glowingly positive terms in the quarterly report is simply taboo. Corporations try to minimise risk and maximise gain. It makes sense that the activities a company considers pragmatic, those activities that make up its culture, are things they've tried before that worked. Humans are innately conservative in this way, we tend not to like to step outside the bounds of stuff we've done before. It makes us uncomfortable. While there are people who really enjoy that kind of discomfort (me, for example), in a working environment where the culture is propagated by all your coworkers, it is hard to be innovative or step outside of your corporation's comfort zone. So far as I can determine, anything not pragmatic or spiritual is taboo when it comes to corporations. I'd go so far as to say that if the idea of serving the BoP somehow got past the first three ideas above, it would be stopped dead in its tracks at this one. Hart called this the corporate immune system, and it's a great analogy. Except in this case, the immune system is malfunctioning, like in Hashimoto's Thyroiditis or Crohn's Disease. The immune system attacks the good parts of you as opposed to keeping the baddies out.

All of these ideas get back to a central point: the incentive structure. Why? Well, perhaps there was an information gap, but why would such a thing happen? Business planning models rely to a degree on demography to pinpoint potential customers. Lamborghini doesn't think about me, because I will never have enough cash to purchase a Lamborghini. Equally so, most companies in the developed world have products that simply aren't a demographic fit for the BoP, more or less by design. This is because corporations attempt to create as big a market as possible with the highest margin possible by measuring potential demand versus total production (supply). Any and all traditional models that serve the BoP are likely considered high-volume low-cost because culturally we are accustomed to modelling the consumer as an individual rational actor who attempts to maximise value. We don't model individual phone service providers with access to microcredit, such as Grameenphone did. This cultural prejudice biases us against low-income purchasers because we misconstrue their actual purchasing power. If we modelled them any differently, we would run up against a corporate taboo: we would step outside the bounds of that which is corporately pragmatic or spiritual. There are always going to be actors in a corporation whose interests coincide with stamping out that which is neither corporately pragmatic or corporately spiritual, because the corporate system privileges the minimization of risk. The unknown is a risk. When you associate a risk with an ongoing expenditure, you will have executives - stumbling over themselves to look good to their shareholding puppeteers - to cut it.

So, all this to say that corporate culture incentivises the information gap because to use untested and unknown models to gauge projected profit margins is risky. Why gather information about a demographic it isn't profitable to sell to? Corporate culture incentivises prejudice because of this same reason - but it could equally be that a corporation has tried and failed to sell to the BoP and this engenders further prejudice. Corporations will try and fail to serve new demographics because of their inability to approach the demographic in a culturally sensitive way, instead considering the extant first world model to be sufficient, then wondering why it doesn't work. This is because, again, stepping outside standard operating procedure is considered an unnecessary risk even if it shoots the venture in the foot from the beginning. Finally, in corporate culture, the incentive is to minimise risk and maximise gain, and executives will a) always be coming in and out of the organisation, and b) always be on the lookout for ways to make their mark. One of the main ways to do so is to "trim the fat" and one day, eventually, your beloved BoP project is going to be that "fat". Your growth horizon is farther away than that executive's likely date of leaving the company. If you don't show spectacular growth in under 6 years (3 preferably), be very afraid.

If something doesn't work, and it doesn't work repeatedly, and it fails in the same way each time, there is a really good chance that the problem is systemic, and not just the victim of the whims of fate. Successes in reaching the BoP are certainly successes against the odds. As I mentioned in my previous blog post, a startup is more capable of navigating the rough waters of a BoP strategy because it comes without as much baggage.

The solution here is not to plead with corporations to do the right thing. The solution is to build a smarter corporate model from the ground up.

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