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Large-scale economic growth is a very recent “discovery” in human society. Only in the last seconds of our history have combinations of technological and organizational innovation, entrepreneurial individuals and emerging institutional structures succeeded in creating enormous wealth not only for elites but for mass populations. This has translated into real improvements in quality of life.
But two unintended consequences of this rapid and recent change pose serious challenges for the current economic system. First, most people have been bypassed by this economic development and are relatively worse off today. Second, use of finite natural resources and the accumulation of waste byproducts threaten the quality and capacity of our environmental life support systems and thus our ability to sustain economic growth.
New Questions Needed
Einstein said that we could not solve our problems with the same type of thinking that created them. Similarly, we urgently need new solutions to extend the benefits of economic development to those left behind. But humankind and nature must form a healthy balance in doing so. Future generations should be free to make their own decisions, not hamstrung by the mess we left because we didn’t learn and adapt from the big global economic development experiment. And we can achieve all of this only if we don’t stifle entrepreneurial endeavor and the incentive systems that motivate involvement in economic activity.
The good news is that a number of case studies already point the way to new solutions. In Europe, IESE is at the forefront of “social entrepreneurship” research. Also, business education is starting to address these pressing needs. In 2004, IESE introduced a new course, “Entrepreneurial Strategies for Social Impact", which last year won the school’s “Outstanding New Course” award.
A Triple Dilema: Last-developed Countries
Research into competitive strategy has identified resources and capabilities as essential building blocks for competitive success. Most economic resources and capabilities are built up through competition over how to best serve customer needs. Research has also furthered our understanding of how to leverage existing resources and capabilities and how to access those of local companies in order to enter less developed or emerging markets. Sometimes, however, it is easier to recognize opportunities for growth and new wealth creation than it is to work out how best to exploit them.
Our research at IESE has focused on countries where the most basic needs of millions of people are not being met and there are practic-ally no markets to serve them. This provides a bizarre contrast to the mature markets in highly developed countries, where competition tends to optimize price-benefit ratios for consumers, enabling them to consume more of the things they want, not just what they need to survive. The latter is an important aspect of choice and perceived quality of life. But in the context of deep poverty, companies face a triple dilemma:
- There may be no existing market to enter. Thus, an entry decision might hinge more on how to build markets and the necessary enabling institutional structures.
- Doing it alone might not be feasible. A company’s resources and capabilities have probably evolved in a very different environment and may be only partly relevant in a poor country.
- The absence of markets translates into a scarcity of local partners and suppliers that could otherwise provide locally relevant resources and capabilities.
Creating New Market Space
Declining growth and rapid commoditization in existing markets puts great strain on management and tends to result in focus on value appropriation instead of new ways to create value. Cost-cutting measures, reorganizations and layoffs may increase efficiencies and productivity but stifle creativity and innovation.
Among the most popularized ideas on how to escape from the pressures of “hypercompetition” and lack of growth is the ”Innovator's Solution" by Christensen and Raynor (1). They argue that managers should forget their obsession with existing customers and markets, usually seen as the sacred "core" of a company's business, and instead study the low-end disruptions that can lead to new products and services at radically better quality-price ratios. This could well be an ideal framework for poor countries, where innovation and low-end disruption may indeed be the only means to serve customers.
Similarly, Kim and Mauborgne (2) suggest creating and occupying new market space through value innovation. This involves a new combination of customer benefit elements and optimal trade-offs between the value of benefits and the costs required to deliver them. In under-developed countries, the absence of markets for many goods and even of whole industries might be the ultimate opportunity for creating marketspace. Therefore, the big question is: how can companies create and occupy new market space in the context of deep poverty? Partially answering the question of how to do this may be a prerequisite to deciding whether to do it.
Business Model Innovations
Next we provide some practical “how to” advice. This includes examples where, through working with local entrepreneurs in developing countries, companies have achieved more inclusive economic development and attracted significant financial returns. We also show how to use market mechanisms to deal with neg-ative environmental impacts and how to make economic growth more sustainable through new types of highly-profitable business models.
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