Enterprise as a Driver of Sustainable Development
Stuart L. Hart, Samuel C. Johnson Chair in Sustainable Global Enterprise, Professor of Management, Johnson Graduate School of Management, Cornell University

David Nissen: Joe's given us a stark picture of what we have to do.

Our next speaker is going to talk about the mechanisms by which development can happen in places where development has not yet happened, and begins a discussion of how in the developing world we might begin to do what we have to do. Stuart Hart is the S.C. Johnson Chair of Sustainable Global Enterprise and Professor of Management at Cornell University's Johnson School of Management. A distinguished record which you can read. I want to remark on his book “The Fortune of the Bottom of the Pyramid,” which I stumbled across last year. And it is one of those books that changes the way you look at the world. I rank it with Jared Diamond's “Guns, Germs and Steel” as a book that just changed my understanding of things, and I heartily recommend it to you. And I guess we ought to get to it. Professor Hart's discussion will be Enterprise as a Driver of Sustainable Development. Stuart Hart.

Stuart Hart: Thanks, David. Good morning, everybody.

Well we had quite a wakeup call from Joe. Thank you for that wakeup call.

I'd like to start just with a few framing comments, and then I want to get into the meat of what I want to talk about, which is exactly what David has suggested for a way for us to think about enterprise as truly becoming an engine for creating sustainable development. And I'll be a little more optimistic, I think. That's not to say or to deny the precipice that we're standing on, because we truly are. And I think Joe has laid it out in terms of climate, but there are many other dimensions in terms of the precipice that we stand at. It's truly unprecedented when you think about it, what's happened over the last fifty years. Human population has grown from two to six and a half billion, and in my lifetime I could see eight or nine billion people in the world. Truly unprecedented when you think about the level of consumption, most of that occurring at the very top of the pyramid. So to imagine a world of eight or nine billion people consuming at the level that all of us are is simply unimaginable, it can't happen. Carbon a big part of that, but there are many other dimensions as well. We all know that, that's why we're here. But I think it's important to keep that in mind.

If we think about this in terms of enterprise, I think just as us as a species we stand at the precipice. This is truly a unique time. Every human generation thinks they live at the most important time, there's a term for it, chronocentrism, right? But I think we actually have some empirical evidence to back that up, unlike previous generations. If that's true for us as a species, and I believe it is, then the institution of capitalism, private enterprise, I think similarly is poised at the precipice. The simple truth is that when you think of this, especially global capitalism, global capitalism has touched only perhaps 800 million to a billion people in the world. The rest of the world has been largely bypassed or damaged by economic globalization, big multinational companies, just has not been the focus, that's pure and simple been the case.

That needs to change. We need to be thinking very creatively about how enterprise at all levels, small local companies all the way to multinationals, can become a part of the solution rather than just a part of the problem. So I've got a little shameless self-promotion of my new book here called “Capitalism at the Crossroads,” but you'll notice that the subtitle is “The Unlimited Business Opportunities in Solving the World's Most Difficult Problems.” And I really believe that's the case. But in order for us to take on an enterprise-based approach to this, to develop an enterprise-based approach, we have to think very differently about business strategy, and Abby Joseph Cohen referred to that. We've got to think much differently, and I want to get into that a little it.

But first I want to provide a little bit of background frame, and then I'll talk a little bit about what I think it takes in order to do that. And I'll start with, and I'll apologize in advance, a gross oversimplification of what I think has happened so far. But I think it's generally on tune, but it is a gross oversimplification. If we reduce the problems that we face to two metaproblems, that being a big footprint at the top, all of us, our level of consumption of energy and materials and production of waste and toxics, and poverty at the bottom, that is, a balloon in the population over the last fifty years, most of them at the base of the bottom of the economic pyramid. Those are the two metaproblems that we face, those are the two big problems from a sustainable development point of view. And so far the policy approach and the strategy in terms of development have been certainly laudable, but maybe not as successful as we had hoped, and that's why we're all here, again, I think. And part of the reason I think is that these two problems are, I hate to use military analogies but I will, these two problems are very well defending hills. When it comes to the big footprint at the top there's a lot of inertia, there are a lot of invested assets in the ground, and a lot of large companies don't want to see those disappear anytime soon, there are incumbents that desperately want to hold onto their competitive positions, there's a lot of inertia in the system. And the same thing with poverty at the bottom. There are many people who live very well by keeping large numbers of people down. That's a continuing problem. It's been going on since our species first emerged. Corruption's an issue, keeping people isolated, keeping people in the dark, can work to a few's great benefit. So these are well defending hills, the problems of the big footprint and poverty at the bottom.

Our problem has been that our strategy for trying to address these issues has generally been frontal assault, and again, I'm sticking with the military analogy, that when it comes to the big footprint at the top our typical approach has been to try to take it head on, that is, especially for us, the Americans in the room, and I'm not saying this isn't true, you need to reduce your consumption, you need to reduce pollution, your footprint is too large, it's an approach premised upon sort of take responsibility for it, it's guilt-oriented, you need to sacrifice. Maybe there's some regulation that backs it up but generally the governments haven't stepped up to the plate on this one. It hasn't worked by and large. And I think what Joe just presented is testimony to that fact.

Similarly, when it comes to poverty at the bottom it's been a frontal assault. We need to raise the standard of living. That's been done through some combination of aid, structural adjustment, and so forth. Again, Jeff Sachs and others have written, and Joe Stiglitz, eloquently about the shortcomings of that approach. We need to fundamentally rethink that approach. It just hasn't worked as well as we had hoped, and in some cases it's actually exacerbated the problems.

So what I want to propose is the following. If we stick with these two fundamental metaproblems, the big footprint at the top and poverty at the bottom, how do we bring enterprise into this in a way that offers up a way out? Perhaps a new approach. I think we're desperately in need for a new strategy, not the only strategy, just a new strategy. I think there are a lot of ways toward this. And I believe personally that private enterprise can become a real catalyst for driving us toward a more sustainable world, but again it's going to take a very different approach to thinking about it. And here's a way schematically to imagine this.

Rather than the frontal assault, kind of the direct, this is really more of an entrepreneurial judo approach, to use Peter Drucker's term. That we have a whole range of emerging technologies that have the potential to be sustainable, inherently clean, or at the very least a dramatically reduced footprint, renewable and distributed energy being one very good example. The problem is that most of these technologies, to use my friend and colleague Clay Christensen's term, most of these technologies are disruptive technologies. That's why they don't take root in established mainstream markets very rapidly, they're disruptive to the current market. And typically what happens with disruptive innovations is they find an early incubation market elsewhere, not in the existing well established mainstream market. That's the way this has always worked throughout industrial history. Why should we expect it to be any different when it comes to sustainable innovation or sustainable technology?

So I think the way to approach this, we're gradually coming to realize this, is that when it comes to the next generation's technology, sustainable technology, the place for this to come forward first of course is not here, it's in the base of the pyramid, that's where the real opportunity lies. It's an innovation agenda on a massive scale that we need to be thinking about. Most of these technologies are small scale distributed point of use, they lend themselves to experimentation, it doesn't require massive capital investment up front, in fact it requires real innovation in business models. We've got to be thinking totally differently about how we set up shop, the kind of partners we work with. This is not big companies going it alone in rural areas in the developing world or in shantytowns, it's about developing whole new business ecosystems and creating wealth on a massive scale. That's what we need to be thinking about doing. And oh, by the way, that's how we incubate the technologies of tomorrow, because that's where the real needs lie. They're not well served today. Typically people in slums and shantytowns or rural areas pay much more than we do for bad service. That's why there's opportunity to bring these kind of technologies forward.

So if we do this and do it well then we can think about generating income, especially through a local partnering strategy with microenterprise and microentrepreneurship. If you imagine a company like BP, which I think has now realized that there's money to be made in the renewable energy business, increasing their investment substantially over the next five, six years, and most of that strategy will be in the developing world where it needs to be. Well, if we do that and do it well we're going to generate income and we're going to raise standard of living, which is after all what our intention was to begin with when it comes to poverty at the bottom, but that's accomplished as a byproduct, it's not a direct frontal assault. Again, to take Joseph Schumpeter's term “creative destruction” and turn it on its head a little bit, if we think in these terms what we're doing is creating a whole new space, we're inventing new industries, and they'll incubate in these spaces where most people are poorly, underserved or actively exploited. This is creative creation at this point, because it's all new space, it's not displacing anything in the early going.

But ultimately as these approaches become better and better, cheaper and cheaper, they will begin to move up market, they will make their way back up to our world. And eventually when they become twice as good, three times as good, maybe three times cheaper, then we will begin to see rapid migration toward this kind of approach in the up markets, in a place like the United States, and that's when we begin to see real growth obviously, this is how the industry can grow over time, but it's also when we begin to see the actual creative destruction. This is when incumbent firms will be disrupted, out-competed, if you will, and oh, by the way, as there's rapid and mass adoption of the next generation technology, consumption goes down, which is after all what our intention was from a sustainable development point of view in the first place.

So the model that I'm trying to articulate is one of entrepreneurial judo, rather than frontal assault. And to do that I think it takes imagination, it takes thinking about business in a completely new and different way, and this is what C.K. Prahalad and I had talked about going four of five years back, a little quote from our paper “The Fortune at the Bottom of the Pyramid,” “That the aspiring poor present a prodigious opportunity for the world's wealthiest companies, but,” and I think this is the big warning,” it requires a radical new approach to business strategy.” There's no way to think about doing this just building on the current approaches that we use.

So over the last five, six years we've created something called the Base of the Pyramid Learning Laboratory, which started at North Carolina where I was prior to coming to Cornell, it's now at Cornell. And this is a consortium of large corporations, smaller entrepreneurial companies, NGOs, some of the multilaterals, increasingly private equity people, all of whom are interested in figuring out how to do what I've just been describing in very broad terms. And in essence it looks something like this, the challenge, that if you think about the world as an income pyramid, and if you think about this from the standpoint of business, especially large corporations, most of them have been focused only at the very top of the pyramid until very recently, and that was largely because that was where the money was, there was still a lot of growth potential. Now the growth potential has slowed, most top of the pyramid markets are saturated or even declining in size, they've become highly competitive, so what happens? You begin to think about moving into so-called emerging markets. Emerging markets are places around the world in developing countries where there have been large numbers of people who have migrated to cities, where they've found wage, employment, and prospered, they've been able to join into the economy, it's the flat world that Friedman talks about, and clearly there is growth opportunity there, there's no question about it, and it enables companies to build on existing capability to enter these new market spaces. That's really what emerging market strategy has been, I would argue, for the last ten or fifteen years.

What I'm suggesting is something completely different, that the base of the pyramid, which is four, four and a half billion people, and obviously not homogeneous, that's not a homogenous grouping, but that's a lot of people. It's better than two-thirds of humanity who have largely not been included in this vision of global capitalism yet, but in order to get there it means developing new capacity and it's a new market. Now for those of who teach strategy in a business school, as I do, you're generally schooled that that sounds a lot like unrelated diversification, that's a bad strategy. And I would agree with that at the top of the pyramid. Unrelated diversification probably doesn't make a lot of sense at the top of the pyramid. At the base of the pyramid there's no choice. If you're going to get into that space as a Western multinational, or even Japanese, or anyone else for that matter, a top of the pyramid based multinational, it requires you to take the plunge, sort of suspend disbelief and get in, because the only way to do it is to learn. The truth is we don't have any idea how to do it, we're just beginning to learn the process.

So what it comes down to is two basic approaches when it comes to so-called low income markets. You can think of a middle of the pyramid strategy which I believe most companies have done so far, which essentially is just moving incrementally into lower income spaces in developing countries, take the cost out of the current model. And for that it's relatively easy because you can build on what you already know how to do, use existing business structures, apply current metrics. It can be done almost all internally. But when it comes to what I'm referring to as the base of the pyramid this is disruptive in character. So this is much more difficult for established incumbent firms to do. It means inventing an entirely new low cost system that's premised on sustainable innovation and sustainable technology from the start. It means creating a completely new structure. It's going to be a different business model, it's going to be more distributed in character, you're going to have a whole set of partners that you've never worked with before, you're going to have to evaluate it differently, it looks very, very different which makes it hard to pull off. A former doctoral student Ted London's done a wonderful piece of work, and we've been studying a number of initiatives inside multinationals for the last five years on how this plays out. So then the question becomes if it's so tough, then who in their right mind would do it, and how do you think about doing it? How do you break the code? Within a large company how do you begin to think about getting a license to imagine? How can a multinational truly become a driver of a more inclusive form of capitalism, which is what I'm trying to argue here.

For serving the base of the economic pyramid, not just selling stuff to poor people but truly imagining products and services that improve their lot in life, for fostering cultural diversity and social equity, for reducing the human footprint on the planet, and for restoring ecological systems, those become the core objectives. Oh, and also growing and making money.

If you think about this from a corporate capability point of view it's kind of interesting and also somewhat challenging. Because if you look at the lower left-hand part of this model where you see large companies already typically are very strong, capital efficiency, low cost production, multinationals already have those capabilities pretty well in place, so you can build off of that. Unfortunately those capabilities don't necessarily help you very much when it comes to getting out into the base of the pyramid. As you move either around the top part or around the bottom, where you think in terms of low cost distribution or new product development, those are relatively easy extensions as well. But it's when you try to get up to the northeast side of this diagram that you run into trouble. And the truth is that large companies just don't possess these skills, they just don't know how to discover basic needs for those in rural areas or in urban slums and shantytowns. It's the deep listening part, it's the co-creation, it's the identification of real solutions rather than just imposing a preexisting product, that's the hard part. And the truth is that large companies just don't know how to do that. So out of our Base of the Pyramid Learning Lab came the realization that what we really need is to figure out how we allow people in large corporations to do this, how can you build capability in deep listening? And it comes back to this issue of stakeholders, and we heard about that a little bit earlier in the morning, that I think as people in large companies have become quite adept now at dealing with their core stakeholders, the ones that surround their current business and their current business system in the current market. So you get sort of the typical diagram here with the firm in the middle. Companies have become quite good at that, but when it comes to what I'm describing in terms of getting out into the base of the pyramid these sort of stakeholder relationships don't help you, because fundamentally they're interested in the current business system, they'll help you incrementally improve the current system, they'll help in eco-efficiency, they'll help in product stewardship, but they won't help you imagine a whole new business system. To do that you need to be thinking about how you engage with what I would call fringe stakeholders, how do you consciously seek out and interact with and access the voice of those who are very different from you, that you've never had any linkage with before, the poor, the weak, the divergent, the illiterate, the adversarial, the non-human - what's that? - I mean that's Nature, right, I mean that's learning from nature, that's the whole idea of biomimicry and moving toward a biological solution, how do you actively engage that, how do you create a conscious process to actually engage those voices?

Well, what we've been trying to do is through something called the base of the pyramid protocol, is to design such a business process. So for the past two or three years we've been working on this with both a set of partner companies, as well as essentially partners from a variety of backgrounds, anthropology, rural development, techniques like participatory world appraisal, empathy-based design. And what we've done, just to give you a taste because I need to finish up in the next minute or so, it so design a process for creating mutual value creation. In other words, the only way this works is if people in local communities on the ground in the developing world have capacity building and view this as valuable from their point of view, and it has to be a growth and profit opportunity for the company at the same time. That's the only way to motivate this forward, to try to get the scale and impact that we need. At the investment levels they're going to be required to really move the world. It can't happen on an sustained basis just through aid.

So we have a set of collaborators, we've been working on this for the past two or three years, and just really quickly to give you a flavor for it, and then I'll finish, the process which we designed over a three-year period through a series of design workshops, you begin with a period of non-commercial opening up, which includes a structured approach to home stays, living in the community, and then idea generation workshops to co-identify new business and business solutions, then a period of actually building the ecosystem to get the business in place, which includes local partnerships with a bias toward creating value on the ground in the local area. A multinational can be catalytic in making this happen, but there's no way they can do by themselves. And then a structured process for enterprise creation where you begin with a pilot test, where you co-generate metrics for success, track them, try to ferret out unanticipated consequences, and then there's an organic scale out process.

So we've pilot tested this now with S.C. Johnson in Kenya over the past year, learned a lot, have engaged in a redesign process and now we're working with a couple of companies including Dupont in India to apply this full scale. If you're interested in learning more about that, there's a public web site you can go to and actually download the current version of the protocol, but I'd also be happy to discuss it with anyone who's interested.

So thanks very much, I appreciate it.