Contrarian Advice for Businesses Serving the Poor

C.K. Prahalad argued in his classic HBR article that companies trying to serve the bottom of the economic pyramid must be high volume, low price and low margin operations.  Cornell prof and HBR blogger Erik Simanis questions this widely accepted wisdom.  Noting that operating costs in low income overseas markets often run well above expectations and that getting to scale takes much longer, Simanis argues that higher profit margins are absolutely necessary to build up the capital needed to take on the challenge.

Companies and those that criticize their efforts are not doing D and E consumers any favors by clinging to the low-margin philosophy, which is unable to generate economic returns that are competitive with alternative uses of a company's capital — the true benchmark of business success. Precious few of the ventures that failed to generate such profit levels have survived, leaving low-income consumers without access to products and services that could have improved their lives and stimulated economic activity in poor areas.

Gore on sustainable capitalism

This week WSJ provided beaucoup op-ed space with Al Gore where he provides his perspective on the societal changes that will be needed to make capitalism consistent with sustainability.  Whatever you think of Al Gore (always beware when an author talks about "We are once again facing one of those rare turning points in history," whether its Newt or Al), this piece is well worth reading to see the underpinnings of his arguments. 

Gore focuses on two main issues: externalities and short termism.  He argues that we need policies to establish a fair price on externalities.  An example would be a carbon tax to account for the environmental and national defense costs generated by our use of certain forms of energy.  Gore would make sweeping changes in business practices: expand corporate recruiting to include the full triple bottom line, dump quarterly earnings reports and realign incentives for top executives so that they are focused on the long term. 

My take: I see eye-to-eye with Gore in terms of needed changes in executive pay.  I also believe in taxing goods that impose negative externalities on society, but I am not sure how one would determine a "fair" price.  Economic research has not converged to a single, simple answer.  I also was puzzled as to why Gore wants corporations to produce more information about societal and environmental impact in their annual reports but he then wants them to reveal less information by ditching quarterly reports.  Let's keep the quarterlies, but make sure they are not driving CEO pay. 

Maybe the future does not belong to electric cars

Argues Toronto Globe and Mail columnist Margaret Wente, after Ontario plowed $50m into Magna International for R&D.  A few of the more serious issues: Are customers prepared to pay a premium of $20k for a vehicle "that doesn’t go very far, isn’t very convenient, and runs out of juice as soon as you turn on the air conditioner."  (Caveat: maybe Canadians won't need a/c, but wait, there's global warming, scratch that.)  Wente interviews Manitoba professor Vaclav Smil, who points out that unless all the juice generated to run these cars comes from carbon-neutral sources, there will not be any savings on the carbon front.  Smil also points out that if Ontario were to meet the 2020 target of having 10% of all cars be electric, they better start expanding the grid ASAP.  

Where are all the "green jobs" we were supposed to see?

Lots of luck finding them, says NYT in a recent news article.  California received $186m in stimulus funds to insulate homes two years ago; so far, only half the money has been spent and 538 jobs have been created.  That comes out to almost $350k per job.  Spending has been slow because, even with the federal subsidy, consumers are unwilling to pay the cost. 

To be fair, there aren't all that many new jobs to talk about in any sector of the economy.  But politicians have clearly oversold the role that green jobs will play in the economy.  Money quote from NYT:

President Obama once pledged to create five million green jobs over 10 years. Gov. Jerry Brown promised 500,000 clean-technology jobs statewide by the end of the decade. But the results so far suggest such numbers are a pipe dream.

Sustainability update

Dean Ira Weiss has appointed a task force to make recommendations about how the Poole College of Management can create a center of excellence in the area of sustainability.  Scott Showalter will be chairing the task force; other members include Ted Baker, Mark Beasley, Rob Handfield, Roger Mayer, Paul Mugge, and Ray Palmquist.  Dean Weiss has charged them to develop "a strategy for the college that incorporates the varying strengths we have in our core areas of expertise."  The task force is expected to report back to the college before the end of the fall semester.

Also on the sustainability front, WSJ ran a short piece Monday about job opportunities.  Coca-Cola and UPS have recently appointed CSOs (chief sustainability officers).  The article also notes that renewable energy is gearing up.  

China's "green leap forward"

Will China dominate the emerging market for alternative energy sources?  It produces half of the world's solar panels and a third of the new wind turbines.  But in a recent WP op-ed, Bjorn Lomborg points out that very little of this new capacity is being installed in China.  Instead, China is manufacturing these devices and exporting them to the US and Europe where they are heavily subsidized.  China still gets 87 percent of its energy from fossil fuels, mostly coal. 

The Chinese are getting a leg up with one new energy source: solar heaters, which are apparently cheaper than fossil fuels in some applications.  Lomborg concludes:

This is the green lesson China holds: A green future will result not from subsidizing immature technology today but from developing competitive green technology that is effective and cheap. Wind and solar power are not yet competitive. Research would be a much better investment for Western countries than subsidizing imports of today’s green technology from China. Until we can make alternative energy technology effective and affordable for everybody, there will be no happy ending to the “green” success story.

New MBA course in sustainability

This semester the NC State MBA program offered its first course on sustainability issues in management as a one-credit-hour, weekend offering.  This fall we will be offering a full three-credit-hour course MBA 590 taught by Professor Ted Baker.  Professor Baker has a grant from the Center of Innovation Management Studies over the summer to do research on sustainability.  He will be covering a wide range of issues, including consumer valuation and supply chain; there will be a special focus on opportunities to create new enterprises.  There also will be a one-credit-hour lab course for those who want a hands on experience.  The new sustainability course MBA 590 will count toward the Entrepreneurship and Innovation Management concentrations.  Details will soon be available on the NC State MBA webpage.