AS WE HAVE explored in earlier chapters, two sets of forces—one from outside the economic system and one arising naturally from within it—have jointly created a series of large-scale challenges that threaten the foundations and future of the global market system. Threats come from many sources: the lack of education and opportunity in some areas, the rise of radical political movements in others, environmental degradation and climate change worldwide, growing disparities in the distribution of income and benefits flowing from the system in many countries, and failures of governance across critical sectors. The challenges are large and growing. And as we have also discussed, effective countervailing forces—and institutions that produce and direct those countervailing forces—have yet to arise or at least to become complete and effective. From this vantage point, the prospects for significantly ameliorating these constellations of negative forces appear bleak.
One possible source of countervailing force is business itself. To what extent can this growing array of threats to the market system be addressed through actions by individual firms and entrepreneurs? Many would say that the challenges are too great and too massive in scale for individual firms to have a significant impact. And many argue that governments and multilateral institutions are ultimately the only actors capable of managing risks of this magnitude and that the proper role for business is to get out of the way and let governments do their job.
This assessment, however, misses the mark. Companies and entrepreneurs can make a material difference. By aligning their activities with the needs of a sustainable economy and bringing their distinctive skills and capabilities to bear on these disruptive forces, companies can help strengthen the system and put it on a more secure footing. In answer to worries that such efforts might be a competitive handicap or a disincentive for investors, we see evidence that at least sometimes, these efforts can actually help drive innovation, growth, and profitability.
In this chapter, we review some examples of companies that have pursued innovative business models with the potential to help address some of the systemic challenges identified in earlier chapters. These examples illustrate four generic approaches suggested by the model of the market system introduced in chapter 4. As shown in figure 4-8, interventions to strengthen the system can take a variety of forms. One is by amplifying the system’s positive consequences—for example, extending its benefits to new and previously excluded groups. A second is by mitigating its negative consequences—for example, reducing damage to human health and the environment. A third is by seeking to counteract or interrupt exogenous threats—for example, strengthening resistance to health and security threats from without. A fourth is by reinforcing the antecedents necessary for the system’s effective functioning—for example, introducing improved methods of governance and capital allocation.
The examples that follow lend credence to the business-as-innovator view that at least some of the challenges to capitalism have within them the seeds of business opportunity. This is not to say that realizing these opportunities is easy or straightforward. As our examples show, even the most sophisticated companies and executives may need to acquire new knowledge, build new capabilities, or cultivate new ways of thinking and doing business to build successful business models around these opportunities. Nonetheless, these examples demonstrate that individual and firm-level actions can help mitigate some of the brewing threats if business leaders are willing to innovate to that end.
Consider “ecomagination,” General Electric’s signature environmental effort. Conceived in 2004, ecomagination was aimed at driving innovation and generating superior returns by tackling some of the planet’s biggest problems—energy efficiency and harmful environmental impacts. Within five years, the initiative accounted for more than ninety products and services and some $18 billion in revenues.1
As CEO Jeff Immelt tells it, GE was going through its annual strategic planning review in June 2004 when the management team realized that six of the company’s core businesses were deeply involved in environment- and energy-related projects. The appliance business was exploring energy conservation; the plastics business was working on the replacement of PCBs (polychlorinated biphenyls, once widely used industrial compounds found to be harmful to health and the environment); and the energy business was examining alternatives to fossil fuels. Other businesses were dealing with emissions reduction, resource scarcity, and energy efficiency. Far from reflecting a deliberate strategy on GE’s part, these projects had all been initiated by GE in response to demands from its customers.
When these common issues surfaced across different lines of business in the midst of its planning process, the group realized that something was going on that GE needed to better understand and possibly become part of. Immelt announced that he wanted to learn about greenhouse gas emissions, and the company set about educating itself on critical energy and environmental issues. Meetings with leading customers were arranged, and the management team launched a study of the science behind climate change. “We went through a process of really understanding and coming to our own points of view on the science,” recalled Immelt. At the same time, GE deepened its engagement with government officials and regulators on environmental issues and hired a consulting firm to help it understand the NGO landscape. This same consulting firm would eventually help GE identify promising products and services for its environmental portfolio.
As the management team gathered information and perspectives from external sources, GE also looked inward. A review of the company’s technologies and technical capabilities revealed some important gaps that needed to be filled. The culture, some managers felt, needed to become more innovative and more externally focused. At several points in the learning and self-evaluation process, Immelt shared the management group’s findings with GE’s board of directors. He wanted board members to understand both the financial and the social aspects of the “green is green” message that was emerging and to be comfortable with the strategy that was taking shape.
After nearly a year of information gathering and analysis, the management team settled on an environmentally focused strategy that would cut across five or six key businesses. Immelt had become convinced that the world was changing dramatically and that climate change was a “technical fact.” He believed that GE could prosper by helping its customers improve their environmental performance.2 Some of his deputies disagreed, but Immelt was ready to put people and resources behind these ideas. The new strategy was dubbed “ecomagination” for its links to economics and ecology and its echo of GE’s “imagination at work” tagline. As Immelt made clear, ecomagination was not a feel-good effort or just a rebranding move—it was aimed fundamentally at driving growth and innovation.
With dedicated funding in place, Immelt tapped one of the company’s promising young leaders as the program’s first manager. In characteristic GE fashion, the leadership team wrestled with finding the right metrics to guide and measure success. “If I stood up and talked about this as something we wanted to do without any output metrics, nobody would follow,” noted Immelt, referring to GE’s rigorous use of metrics as a company hallmark. He also stressed the importance of a program that could be easily understood and replicated: “It’s got to be repeatable, it’s got to be learnable, it’s got to be teachable, and it’s got to be something that investors can understand we are doing across the company.”
The management team ultimately chose four core metrics, but only after extensive discussion and analysis over six months. As originally framed, the initiative would be assessed by R&D spending, growth in revenue from eco products, increased customer activation, and reductions in GE’s own greenhouse gas emissions. Reductions in water use and heightened public engagement would be added later. GE set targets for doubling its R&D investment in clean technologies to $1.5 billion per year by 2010 and growing revenues from eco products to $20 billion by 2010. (The target was later raised to $25 billion for a time and then reset back to the original $20 billion.) In its own operations, GE set out to cut greenhouse gas intensity—a measure of emissions against output—by 30 percent by 2008 and to cut absolute emissions by 1 percent by 2012 (as compared with what would have been a 40 percent increase in a business-as-usual scenario). These corporate goals were broken into subgoals and parceled out across the relevant businesses.
To fill gaps in its technology portfolio, GE put together an investment program that included in-house R&D efforts and a sizable venture fund to invest in innovative environmental and energy solutions. By investing in early-stage ventures in core areas such as renewable energy, water use, carbon management, and smart-grid development, GE enlarged its innovation network and forged relationships with a cohort of creative entrepreneurs and scientists. The company also formed an outside advisory board of energy and environmental thought leaders. Members of the advisory board offered a valuable external perspective on the company’s efforts and shared with the heads of GE businesses insights on emerging issues and opportunities.
Immelt’s team recognized the importance of the evolving policy framework to the ultimate success of its strategy. Rather than leaving matters to chance, GE joined forces with a select group of other U.S. companies and environmental NGOs to develop a proposed framework on climate change. As discussed more fully in chapter 7, the United States Climate Action Partnership (USCAP) issued a call for action in late 2006, laying out a set of principles and proposals, including support for legislation to cap carbon dioxide emissions. Immelt’s answer to critics of this foray into the policy arena was succinct: “We are much better as a company getting ahead of [climate change policy] than we are pretending like it doesn’t exist.”3
As ecomagination got under way, Immelt found himself walking the fine line between staying ahead of the market but not so far ahead that it would alienate some of GE’s biggest customers—not all of whom were as convinced as Immelt about climate change and the need for legislation capping emissions. With those more skeptical customers, some of whom were personal friends, Immelt’s approach was one of candor and transparency. “You are going to hate this,” he told one particularly close but dubious customer who ran a major utility. “I’m going to make it so the public utility commission [says] you’ve got to do coal gasification—but I’m transparent and you’re going to know every step of the way what we’re doing.”4
When ecomagination was announced in May 2005, investor reactions were mixed. Some analysts deemed the strategy “sensible and intelligent” and pronounced the individual products well aligned with market demand.5 Others, however, questioned whether the strategy could be made to pay—and whether the environmental markets that Immelt envisioned would actually materialize. For those who had lived through earlier periods of environmental concern, the current enthusiasm was just that—a passing enthusiasm.
By 2010, GE had overcome much of the early skepticism about its new direction, though the global slowdown after the financial crisis of 2008 had hit the company hard. GE stock lost nearly half its value in the crisis. Nonetheless, the company met its original goal of doubling its annual investment in clean technologies by 2009 (a year ahead of plan) and exceeded its original targets for reducing its own greenhouse gas emission. Taking a page from its playbook for customers, GE adopted many of its own new technologies and mobilized the efforts of employees at fifty GE facilities around the world. The result was a 41 percent reduction in greenhouse gas intensity by 2008, well above the originally targeted 30 percent by 2008. A major contributor was media and entertainment company NBC Universal, where a number of television and movie production studios embraced the go-green message by adopting comprehensive programs to save energy and reduce their carbon footprint.
Even in the absence of U.S. legislation capping carbon emissions, GE was also on track to achieve its original goal of at least $20 billion in revenues from ecomagination products by 2010. And, noted Steve Fludder, ecomagination’s head until mid-2010, GE’s eco products were among its most profitable. Contrary to widespread expectations that the financial crisis would kill the company’s environmental business, the crisis actually proved to be something of a boon. Virtually all the postcrisis stimulus packages put in place by governments around the world included a significant environmental component earmarked for just the kinds of projects that GE was prepared to deliver, thanks to ecomagination. GE won contracts for a range of major infrastructure projects aimed at laying the foundations of a new energy future: clean-coal demonstration plants, renewable energy generation, electric-grid modernization, and many others.
Although the cumulative environmental impact of ecomagination innovations was difficult to assess, GE pointed to significant improvements in a number of areas—such as increased fuel efficiency for jet engines and avoided carbon dioxide emissions from using wind power. GE had grown its wind turbine business, purchased from a postbankruptcy Enron, from $200 million a year in 2002 to $6 billion for 2008. The company calculated that the nearly twelve thousand wind turbines it had installed around the world were avoiding 32 million metric tons of carbon dioxide emissions annually, compared with traditional U.S. grid sources. By its estimates, GE had also improved turbine reliability by 11 percent, creating another $2 billion in value on a net-present-value basis for the turbine owners.
From a certain perspective, the ecomagination story can be seen simply as a continuation of GE’s hundred-year-plus tradition of using manufacturing and process excellence to improve the efficiency and performance of the technologies it offers the marketplace. But Fludder sees it as much more. From his vantage point, ecomagination has allowed GE to create new solutions that individual business units, left to their own devices and following their historic focus on pushing products out the door, would not have been able to develop. “By bringing the outside in and mobilizing the company to address a major multiconstituent problem in society, ecomagination has helped transform GE’s relationship with the world,” he noted. “The initiative has shown that you can make money and make the world a better place at the same time.”
China Mobile, China’s largest telecommunications operator and the listed subsidiary of state-owned China Mobile Communications Company (CMCC), is another company that has prospered by addressing a potential threat to the system. Through the rural communications strategy that it launched in 2004, China Mobile has helped narrow the gap between China’s urban rich and rural poor and extended the benefits of participating in the market system to millions of people. At the same time, the rural communications strategy has helped fuel the company’s own growth and profitability.6
The catalyst for the company’s efforts to bring mobile phone service to China’s rural regions was the Chinese government’s Cun Cun Tong (“connect every village”) program. First launched in 1996, when China’s telecoms sector consisted of two state-owned operators and when China Mobile had not yet come into existence, the program was aimed at providing universal service to China’s then 850 million rural citizens and, more generally, at promoting rural economic development. In practical terms, this meant providing service to hundreds of thousands of unserved villages, including a large proportion of the country’s estimated 740,000 administrative villages at that time and its more than 2 million natural villages. (An administrative village is China’s smallest unit of political organization; it typically comprises from one to twenty natural villages—defined as a grouping of more than twenty households.)
Given China’s vast territory and rugged terrain—encompassing the mountains of Tibet as well as the deserts of Xinjiang and Inner Mongolia—the Cun Cun Tong program was an extraordinarily ambitious undertaking, especially for a country and industry in the throes of rapid transition on so many other fronts. Few, if any, believed that truly universal coverage could be achieved given the last-mile problem. Still, with an estimated seventy thousand administrative villages still unconnected at the end of 2003 and the wealth disparity between China’s rural and urban populations growing ever more pronounced, the government decided to step up the effort. In 2004, the Ministry of Information Industry (MII) relaunched Cun Cun Tong and set a target date of 2010 for reaching the remaining villages. In furtherance of its efforts to foster social harmony and more-balanced growth between urban and rural areas, the Chinese Communist Party also incorporated the new goals into its eleventh five-year plan for 2006 through 2010.
Each of China’s then six state-owned telecommunications companies, including CMCC, was charged with providing at least two phone lines to an assigned number of unconnected villages. The government would provide support in the form of expedited approvals, tax credits, and access to energy, but each operator was responsible for funding the necessary infrastructure—principally base stations—and providing connectivity to its assigned number of villages. As the largest of China’s telecoms companies, CMCC was tasked with the largest share.
By the time of Cun Cun Tong’s relaunch, China Mobile was traded on both the New York and the Hong Kong stock exchanges and had become the world’s eleventh-largest telecom operator by market capitalization.7 In the period following its listing in 1997, the company had focused on acquiring various provincial networks from its parent CMCC and building up its subscriber base in China’s cities and densely populated eastern seaboard regions. By 2004, China Mobile owned wireless networks in all of China’s thirty-one provinces, autonomous regions, and directly administered municipalities. Its subscriber base, mostly in the cities, numbered some 200 million, up from 45 million in 2000.
At China Mobile and other operators, the Cun Cun Tong directive was met with grudging acquiescence. For a company whose annual revenue and net income growth had averaged some 30 percent and 25 percent, respectively, between 2000 and 2004, the prospect of having to build networks in remote areas with low rates of phone traffic held little appeal. Analysis of the company’s scant rural business—then less than 3 percent of subscribers—led many at China Mobile to question whether the investment required by Cun Cun Tong could ever be made to pay. “Everyone had doubts about how the poor could afford such an expensive item and how the company could reduce the cost enough to generate a profitable expansion,” recalled a company adviser.
Moreover, by 2004, China Mobile’s management had a much bigger problem than Cun Cun Tong. With mobile phone penetration rates in China’s cities as high as 80 percent—and even approaching 100 percent in some cases—the looming question was where the company was going to find its next 200 million customers. The new chairman and CEO, Wang Jianzhou—also the new chairman and chief executive of CMCC—challenged China Mobile’s strategy group to find an answer. The group soon realized what, in retrospect, would seem obvious: that future growth would come from the countryside. Instead of viewing the government’s Cun Cun Tong program as a burden that had to be borne and something of a distraction from the company’s main business activities, key members of the strategy group began to see it as a platform for the next phase in China Mobile’s own growth and development.
With Cun Cun Tong recast as the foundation of a new rural communications strategy, the group turned to the challenges of execution. How to implement the new strategy was far from self-evident, given the vast territory to be covered and the uncertainties about the acceptance of wireless communications in the rural areas. The picture was further clouded by other risks involved in building the extensive network to a scale large enough to achieve even theoretical profitability. Using the idea of innovation competitions, Wang challenged the heads of the company’s thirty-one provincial subsidiaries to come up with new ideas for the business. The provincial heads, in turn, challenged their subordinates to do the same. In keeping with the company’s customary practice of testing new ideas with pilot projects, China Mobile launched a series of pilots to test various approaches to marketing and distribution. Some regions set up flagship stores; others tried franchisees. Some also experimented with independent sales agents like those the company was already using in the cities.
Ultimately, management went with an innovative distribution system that reached deep into the countryside. Unlike many other companies that had tried to penetrate China’s rural regions, China Mobile recognized the importance of establishing outlets at every level of the country’s administrative structure—not just the 31 provincial capitals and nearly 2,900 county seats, but all the way down to the nearly 41,000 townships (or township-level entities) and more than 735,000 administrative villages (down from the earlier number because of consolidations and recategorizations). Under the slogan of “one store per township and one agent per village”—an approach crafted by a provincial operator during the experimental phase and then replicated across the company—China Mobile set up a vast but low-cost distribution system, encompassing company-owned stores at the county-seat level, both company-owned and franchise stores at the township level, and a network of more than a million independent sales agents at the village level. To help minimize turnover and build strong ties with customers, the company tapped respected local citizens and village leaders as store managers and agents whenever possible.
By the end of 2005, the rural communications strategy was taking off and voices of doubt inside the company were receding. Even the investor community, which had been highly skeptical of the strategy when it was announced, had started to come around. While meeting its Cun Cun Tong obligations in 2005, China Mobile also added another 42 million subscribers, about half in rural areas, and grew its revenues by 26 percent. As networks were constructed in rural areas, farmers and merchants quickly saw the benefits of basic voice and texting services. For this group, the mobile phone became an essential tool of daily commerce. By keeping costs low—through its low-cost distribution system, low-cost handsets, and customized pricing—China Mobile was able to make its services affordable for the average rural resident.
Drawing from its ongoing research and innovation efforts, China Mobile soon began to add new services tailored to the needs of rural customers. One early success was a rural information network that users could access through their mobile phones or through special information terminals. The network provided farmers with critical information about topics from weather forecasts and agricultural prices to pest management and job opportunities. The network also provided access to agricultural experts knowledgeable about various regions or specific crops. Much of this information had never before been available, and farmers quickly made use of it to gain more-accurate price information and to better time the delivery of their crops to market. In some cases, they were able to cut out costly middlemen entirely by communicating directly with wholesalers and factories.
From 2006 to 2010, the rural market continued to be a significant driver of China Mobile’s growth, accounting for over half of the company’s newly added subscribers each year. Innovations such as more-convenient payment systems, complimentary life insurance with certain offerings, and solar-powered charging stations where subscribers gathered to recharge their phones and socialize with one another fueled this growth and put China Mobile ahead of its rivals.
By late 2010, China Mobile had signed up more than 220 million rural customers and held an estimated 76 percent share of the rural market for mobile phones.8 Enlisting the next segment of rural residents would no doubt require further innovation and be more difficult still. But China Mobile’s rural communications strategy had paid off for the company—revenue and income grew at an average annual rate of 17 percent and 21 percent, respectively, between 2005 and 2009—while at the same time narrowing the digital divide and helping millions of rural citizens increase their incomes and improve their standard of living. Whatever difficulties the company might face in the future, this achievement, too, explained one China Mobile manager, is “a kind of profit.”9
India’s generic-drug maker Cipla Limited has led the way—albeit not without controversy—in fashioning a business model for delivering antiretroviral drugs (ARVs) to some of the world’s poorest regions.10 Also known for its antibiotics, anticancer drugs, and anti-asthma inhalers, including the first chlorofluorocarbon-free inhaler made by an Asian company, Cipla entered the ARV business in 1998. By 2005, this business had expanded to nearly 150 countries and an estimated 25 percent of the total ARV market.11 By 2009, Cipla was the world’s largest supplier of ARVs (as measured by units produced and distributed), and its drugs were being taken by as many as 40 percent of the HIV/AIDS patients undergoing antiretroviral therapy worldwide.12
Cipla CEO Yusuf Hamied Jr. recognized the threat posed by HIV/AIDS earlier than many. Alarmed by the rapid spread of AIDS in India, Hamied announced in 1992 that Cipla would begin producing AZT, an anti-HIV/AIDS drug made and sold in the United States by Burroughs Wellcome at prices of nearly $10,000 per person for a year’s dosage. At the time, India’s intellectual-property system allowed for patents on drug-making processes but not on drug products, so Cipla was legally permitted to reverse-engineer AZT and produce generic AZT capsules using its own novel manufacturing process. The company did just that. Priced at only $2 per day, the Cipla therapy nonetheless proved too costly for India’s AIDS patients. After an unsuccessful attempt at persuading the Indian government to buy and distribute the drugs, Cipla withdrew from the AIDS market.
Meanwhile, the number of AIDS cases in India and elsewhere continued to grow. In 1998, Cipla reentered the market, this time with a different combination of drugs but again reverse-engineering products developed by multinational pharmaceutical companies. By this time, South Africa’s infection rate was skyrocketing. (In 2000, a quarter of all deaths in South Africa were attributable to AIDS, and the number of infected individuals was expected to reach nearly 5 million in 2002.) With the country’s annual per-capita income at just over $2,500, few South Africans could afford the $10,000 per year that the multinationals were asking for their ARVs. Facing this dire situation, South African president Nelson Mandela gave effect to a new law that allowed for the import or manufacture of generic anti-HIV/AIDS drugs on payment of a licensing fee to the patent holder but without the patent holder’s prior approval. Even though experts argued that the law’s provisions on compulsory licensing and parallel imports were similar to those in other jurisdictions and consistent with international patent agreements, Mandela’s actions set off a firestorm.13
Many of the global pharma companies saw Mandela’s move as a threat. With business models predicated on huge investments in the discovery and development of blockbuster drugs to be sold at premium prices in the industrialized world, the major multinationals were ill equipped to meet the challenge presented by a pandemic afflicting patients who could not pay the prices the industry had come to expect. And the companies worried that compromising on prices for the developing world would put further pressure on prices in the developed world—already a controversial issue—and ultimately erode the intellectual-property system on which their business models depended. Nearly forty companies filed suit against Mandela and the South African government, arguing that high R&D costs made it impossible to reduce the price of ARVs. The move only heightened the pressure from NGOs and world health authorities. In early 2000, the World Health Organization (WHO) called on the leading global pharmas to join forces in a collective effort to increase access to anti-HIV/AIDS drugs. The result: several companies offered discounts of up to 50 percent. Still, at $6,000 annually, the price remained out of reach for most afflicted Africans.
As Hamied watched the controversy unfold, he saw the situation in Africa as both a humanitarian disaster and an opportunity for Cipla to intervene. In early 2001, he announced that Cipla would offer to sell its triple-therapy ARV “cocktail” using a three-tiered pricing structure of $1,200 per person annually to wholesalers, $600 to governments, and $350 to the Geneva-based nonprofit Médicins Sans Frontières. The announcement made the front page of the New York Times and catapulted Cipla onto the world stage. According to Hamied, Cipla would neither make nor lose money on the proposal; the average of the three prices would allow it to break even. After seeking a license from the patent holders and getting no response, Cipla applied to the South African government for a compulsory license. The World Health Organization subsequently qualified three Cipla units to supply anti-HIV/AIDS drugs, making it the first Indian company to receive WHO certification.14
Hamied’s offer angered many global pharmas, but it demonstrated to the world that ARV drug prices were malleable. Within months, the multinationals’ lawsuit against South Africa’s government was dropped, and several European and U.S. companies announced price cuts of their own. As prices came down, generic-drug makers, NGOs, and some leading brand names entered into negotiations with volume purchasers. But Cipla’s prices were typically lower, and many purchasers preferred its once-daily cocktail for reasons of patient compliance. Between 2003 and 2006, Cipla’s ARV business grew to an estimated 35 percent of its exports.15 The largest portion of the company’s ARV exports went to countries in Africa under high-volume, low-margin contracts with governments and foundations. (A decision taken during trade talks in late 2001 gave less developed countries in Africa and elsewhere until 2016 to comply with the World Trade Organization’s intellectual property rules, and as noted, opposition to South Africa’s new law permitting parallel imports and compulsory licensing had been dropped.) In India, Cipla continued to be the leading supplier of ARVs, with an estimated 51 percent of the market in 2009, according to analysts.16
Cipla’s ability to sell ARVs at affordable prices depended on its distinctive low-cost business model.17 In sharp contrast to multinationals that concentrated their efforts on developing new blockbuster drugs and selling them in rich countries at premium prices, Cipla focused on bringing down the cost of existing drugs and making them more widely available to the less well-off. Through its innovative approach to pricing—an issue that multinationals had long declined to consider—Cipla allowed purchasers to segment themselves into tiers while the company saved on its own financing and inventory costs.18 The lowest prices were available to those willing to prepay and preorder in bulk, assume shipping and customs responsibilities, protect against raw-materials price inflation, and indemnify Cipla from patent suits. By working with governments, foundations, and aid organizations, Cipla kept its marketing and administrative costs to only 9 percent of total expenses, compared with 33 percent for the multinationals.19
Without question, Cipla and other generic companies benefited greatly from the multinational firms’ investments in discovering and developing these drugs, bringing them to market, and creating demand in the medical community. But Cipla and its generic brethren also created markets for these drugs where they had not previously existed. In so doing, the companies extended treatment to several million people with HIV/AIDS in low- and middle-income countries—an estimated 5.2 million were receiving treatment in 2009, compared with 300,000 in 2002—and helped moderate the broader health and economic effects of one of the world’s most lethal epidemics.20 Economists have estimated that losses in gross domestic product for a typical sub-Saharan country with an HIV rate of 15 percent could be as high as 4 percent per year.21
Cipla’s role in expanding access to ARVs is all the more remarkable considering that during this same period, the company grew overall sales and income at an average annual rate of more than 20 percent, making it a favorite among investors. Between 2002 and 2009, the company’s average annual return on equity was more than 25 percent. With changes in the protections afforded to intellectual property in the least developed countries (LDCs) scheduled to take effect in 2016, Cipla will no doubt face significant challenges. Indeed, the company’s sales growth slowed considerably in 2010, partly because of fewer ARV exports.22 Still, Cipla’s role at the forefront of the HIV/AIDS crisis has made the company a worldwide name and an attractive partner for many of the multinational drug companies now looking to expand into emerging and less developed markets.
Meanwhile, Cipla’s bold actions also helped catalyze reforms in World Trade Organization rules for trade in lifesaving drugs for the world’s poorest regions, and many global pharma companies have joined the effort to combat HIV/AIDS. With only 18 percent of the estimated 33.4 million people with HIV/AIDS worldwide receiving ARV therapy as of 2009, the opportunities to become involved would appear to be plentiful.23
Generation Investment Management illustrates a fourth type of intervention suggested by the model in chapter 4: strengthening the antecedents of the market system. Founded in 2004, London-based Generation is a boutique asset-management firm that invests in companies whose business models are aligned with the needs of a sustainable global economy. The firm’s flagship product is a $6 billion global equities fund that takes long positions in publicly traded companies. At any given time, its holdings include thirty to sixty companies that have been selected using the firm’s innovative investment process. The fund’s goal is to outperform the MSCI World Index by 9 to 12 percent (on a three-year rolling-average basis).24
The idea for Generation grew out of a meeting in 2003 between David Blood, then CEO of the Goldman Sachs asset management division, and former U.S. vice president Al Gore. At the time, Blood was preparing to leave Goldman Sachs to pursue his interests in sustainable development, and Gore was seeking advice on an investment. In the course of the meeting, Blood and Gore discovered that they had much in common. Both were deeply concerned about challenges facing the global economy. Blood was most focused on poverty, and Gore on climate change, but the two men were convinced that these and other global trends were closely linked and would present major challenges for business and society in the years ahead. They also found common cause in their concern over “short-termism” in the capital markets. Both believed that short-term investing only aggravated the larger societal problems that worried them and was a poor investment strategy in any case.
Shortly after their initial meeting, Blood and Gore decided to join forces to launch an investment firm that would put their ideas to the test and potentially offer a better way to manage money. Their basic premise was that companies able to manage the challenges presented by the changing global context would outperform for investors over the long term. In addition to Blood and Gore, the seven founding partners included Gore’s former chief of staff, two of Blood’s former colleagues from Goldman Sachs, a leading expert on sustainability research, and an experienced investment manager with expertise in the health-care sector.
The founding partners spent the first half of 2004 forming the new firm’s leadership team and hiring a staff of investment professionals. As a foundation for building the capabilities needed to execute on their novel investment premise, they sought to attract professionals with a mix of skills and perspectives. About two-thirds of the firm’s sixteen original investment professionals came from traditional asset management backgrounds, and one-third from the newer field of sustainability research.
With the team in place, the group turned to the next challenge—translating their investment premise into an actual day-to-day investing process. It was clear from the start that the models and analytics used by traditional investment professionals could not readily accommodate the social, environmental, and other factors the Generation team thought important. But the founding partners were also wary of creating an organization in which the traditional analysts and the sustainability researchers operated as two separate camps—a common situation in asset management firms that added sustainability researchers to their staffs without rethinking their overall investment process.
As a first step toward creating an integrated investment framework, the managing group set up working partnerships between those with traditional investment backgrounds and those schooled in sustainability research, government, or the nonprofit sector. For more than a year, before beginning to manage any money from third parties, these groups worked side by side to learn each other’s concepts and methods for analyzing companies and industries. To the founding partners, one of the firm’s most significant early accomplishments was the integration of these different skill sets into a structured investment process that would be used by all analysts, whatever their original discipline.
By the time Generation began accepting third-party money in late 2005, it had developed an innovative approach to investing that integrated sustainability factors and fundamental equity analysis at each stage. By necessity, the process required that all of the firm’s investment professionals learn the fundamentals of traditional equity analysis as well as the fundamentals of sustainability research. In practical terms, this meant that a sustainability researcher had to earn a financial analyst degree, and a financial analyst had to master the techniques of sustainability research.
Generation’s investment process starts with identifying what the firm calls sustainability themes—major trends and developments affecting the global context of business. To help identify and stay abreast of these themes, the leadership team created an outside advisory board of global thought leaders and experts in a range of domains—from capital markets and information technology to human rights and environmental science. Twice a year, the advisory board meets with Generation partners and analysts to share insights and review the investment implications of large-scale changes in the global business context. Key themes explored by this group have included climate change, water scarcity, poverty, pandemics, demographic flows, corruption, and corporate governance.
These themes then form the basis of Generation’s sustainability research agenda. Using many sources that investors have not traditionally tapped, analysts develop thematic white papers that examine the likely impacts of a given theme for different businesses and industries. For example, a white paper on anticipated water shortages would identify intensive water users, like beverage makers, for which a shortage would represent a major risk. The paper would also identify sectors such as developers of desalination or wastewater treatment technologies, for which water shortages would represent a significant opportunity. Building on the white papers, Generation analysts then create industry roadmaps that focus in greater detail on long-term trends and specific sustainability issues for particular industries. These roadmaps, which also incorporate more traditional forms of industry analysis, seek to chart how industries are likely to evolve and to identify the companies that are best positioned to thrive in the projected context over the long term.
For individual companies, Generation then develops a sustainability profile to assess how well the company is positioned in relation to the risks and opportunities arising from the relevant themes. This assessment focuses on the company’s core products and strategies and on the themes most material to that company’s specific business and industry. In evaluating a bank, for instance, Generation looks at the bank’s culture, leadership, and risk and incentive systems, as well as whether it considers environmental and social risks in its lending practices—but not whether it recycles paper. The aim is not to catalog all possible sustainability impacts for a given company, but to evaluate how well the company is addressing risks and opportunities—including second-order risks and opportunities arising from changes in regulations and social attitudes, for example—that are material to its business and strategy over the long term.
In deciding whether to put a company on its focus list—a list of companies it would like to own, subject to price—Generation looks more closely at each prospect’s business quality and management quality. In each category, analysts again consider a mix of sustainability and traditional factors. For instance, in evaluating business quality, Generation analysts consider traditional factors such as a company’s competitive position, pricing power, and technological strength, as well as sustainability factors such as the company’s use of energy, handling of waste, and impacts on the quality of life, especially for poorer segments of the population. Similarly, when assessing management quality, the team looks at traditional factors such as the management team’s record on execution and talent retention as well as sustainability factors such as its record on corruption and its leadership on environmental issues. In each instance, a company is evaluated on the factors that the Generation team deems most relevant and most material.
For companies that make it to Generation’s focus list, the decision to buy—or sell—involves a careful evaluation of the company’s price and value. Even though Generation focuses on long-term trends and how well companies are positioned relative to those trends, its portfolio managers are highly disciplined when it comes to buying and selling. A significant change in management quality or business quality, or stock price movements that exceed predetermined value ranges, may trigger a decision to sell. At the same time, Generation engages with management, votes proxies, and generally seeks to act as a responsible long-term owner.
Consistent with its investment philosophy, Generation has adopted sustainability practices in its own operations. Partners invest in the global equities fund on the same terms and conditions as clients, paying the same fees and adhering to the same policies, including the one-year lock-in period for investments. The firm actively manages its carbon emissions and purchases offsets on an annual basis. In general, Generation seeks to govern itself by the leadership and management principles that it applies to companies on its focus list. Compensation is based on both annual performance and rolling three-year averages. As a holiday gift one year, the firm gave employees home energy checkups.
About 90 percent of Generation’s $6 billion in assets under management comes from institutional investors in the United States, Europe, and Australia. The rest is from wealthy individuals. Clients pay a base fee related to asset values to cover costs and a performance fee if the fund outperforms its benchmark. Although Generation does not publicly disclose its holdings or its performance (it discloses these only to clients), the company is rumored to have weathered the financial crisis exceptionally well and met or exceeded its performance goals in recent years.25 But only time will tell whether the fund’s underlying investment premise is robust and whether the targets can be met consistently.
Perhaps the firm’s most important contribution to date, however, has been its innovative investment model. Blood, for one, is convinced that integrating sustainability factors into fundamental equities analysis allows Generation to make better investment decisions. For the founding partners’ ambitions to be fully realized, however, the model will have to influence investing methods more broadly so that capital flows and corporate resources are more consistently directed toward uses aligned with the needs of a sustainable global economy.
These are just a few examples of companies that are finding business opportunities in the challenges and potential disruptors identified by our business leaders. Many other cases could be cited. Indeed, numerous books have been written about the opportunities presented by the world’s environmental challenges or those presented by poverty—especially by populations at the “bottom of the pyramid” living on less than $2 per day.26 The successes of organizations like Enterprise Solutions to Poverty (ESP),27 an adviser to India’s ITC on the e-Choupal initiative described in chapter 1, and the increasing flow of venture capital into green tech, smart consumption, and other environmentally promising fields provide further illustrations.28
Such examples are important for at least two reasons. As noted earlier, they lend credence to our claim that at least some of market capitalism’s weaknesses and vulnerabilities contain the seeds of opportunity. They provide evidence that slogans like “green is green” cannot be dismissed as wishful thinking and that business can play a role in strengthening the market system while still delivering profitability in the short term. But perhaps more important, these examples point to some of the skills and capabilities that may be needed to realize these opportunities. As the case studies in this chapter make clear, the path from systemic problem to corporate opportunity is not always clear and the journey may call for new ways of seeing the world and doing business.
The business potential inherent in many of the problems we have been discussing may be difficult to discern, in part, for structural reasons. Market solutions are relatively easy to envision when demand is evident and supply is nonexistent. In the paradigmatic situation, an entrepreneur emerges to develop a new product or service to satisfy this unmet demand. The entrepreneur typically does not need to worry about creating the infrastructure needed for markets to function—since this is presumed to exist—and instead can focus more narrowly on securing funds, developing the technology, and mobilizing people to carry out the business plan. However, in the examples discussed in this chapter—and more generally when the issue is finding market solutions to systemic threats and problems—some features of the standard situation may be absent. As a result, the opportunity may not be readily apparent and the entrepreneur may face obstacles that seldom appear in the more conventional scenario.
A recurrent theme, as illustrated by the case examples, is the absence of a clear and visible market demand. In some cases, demand is inchoate because the underlying problem is not yet well understood. When problems are complex and manifest themselves slowly over time, the felt need for solutions emerges slowly as well. It takes time for evidence to accumulate and understanding to spread. Climate change is a good example, but long lead times are a characteristic of many other threats and disruptors identified by our business leaders. Even after a problem is widely recognized, market signals may still remain weak. As marketers have long known, action almost always lags awareness. And this natural lag is exacerbated by well-documented human tendencies to shun complexity, postpone difficult choices, discount the future, and deny weakness. Success in combating these tendencies requires extra efforts to educate the prospective market and careful attention to timing. Like Jeff Immelt at GE, entrepreneurs seeking to build a business around solutions to problems with long lead times must walk a fine line between being ahead of the market but not so far ahead as to alienate their customers and potential customers.
In other situations, the need for solutions may be acute, but market signals are weak for other reasons. Would-be customers may lack the ability to pay, for example, and therefore not appear as prospects through the lenses typically applied by marketers. As seen in the Cipla case, people with HIV/AIDS in Africa are a prime example. Their need, while evident, did not express itself in the form of market demand, and global pharma companies did not naturally view Africa as a potential market, given the continent’s low income levels. Indeed, few companies in any industry would view the indigent as potential customers, and fewer still would see poverty reduction as an element of their corporate strategy. Recall that many questioned how poor Chinese farmers could pay for China Mobile’s cell phone service. Yet, as the Cipla and China Mobile cases illustrate, addressing poverty and would-be customers’ inability to pay are crucial for transforming many systemic problems into business opportunities. To bring indigent citizens into the system as paying customers, a company needs somehow to overcome the affordability obstacle—by increasing prospective customers’ purchasing power, reducing prices to levels they can afford, or finding a proxy such as a government or another third party to pay on the ultimate users’ behalf.
In still other situations, the business opportunity may be difficult to discern because would-be customers are physically remote or otherwise disconnected from the infrastructure necessary to support their participation in the market. The villagers of rural China, without access to land lines and mobile phone networks, are one example. But many other potential participants in the market system are excluded by their lack of access to transportation, communication, energy, banking, governance, or other essential support structures. To realize opportunities involving potential customers like these, entrepreneurs must find ways to overcome such access barriers—often by working with governments or other third parties to fill the gaps in needed infrastructure. China Mobile was fortunate to have its state-owned parent’s assistance in funding and building the base stations necessary to operate its mobile network across rural China.
Perhaps the most challenging obstacles, however, are the conceptual barriers—habits of mind and mental models—that leaders must overcome to gain support for their ideas. The executives profiled in this chapter had to contend not just with the standard resistance to change that accompanies virtually all innovation. They also faced deep-seated resistance based on fundamental beliefs about the role of business and how it should be conducted. Recall the reactions to Immelt’s idea of building a business around mitigating environmental externalities. To many, it was unclear whether this was a space that GE could—or should—claim. Like Cipla’s challenge to the intellectual property system, China Mobile’s focus on reaching the rural poor and Generation Investment Management’s integration of sustainability factors into investment analytics, GE’s proposed new business model ran up against widely held assumptions about what business could or should be doing.
Success in overcoming these obstacles and building viable businesses calls for leaders with an uncommon set of skills and attributes. They must be able to challenge orthodoxy without alienating the orthodox. They must see markets and opportunities where others see nothing or see only problems. Even while pursuing innovative business models that throw basic assumptions into question and upset familiar arrangements, they must at the same time maintain their organization’s competitiveness and perform their usual functions as business leaders—allocating resources, motivating and developing people, answering to investors and boards of directors, and so on.
In many respects, these leaders are quintessential entrepreneurs. They are imaginative, energetic risk-takers who put themselves and their companies on the line for an envisioned future. In each instance, they successfully mobilized the human and financial resources needed to pursue an innovative strategy. In “pursuing opportunity without regard to resources currently controlled”—to cite our colleague Howard Stevenson’s widely quoted definition—they exemplified the essence of entrepreneurial activity.29 But these individuals are a very different breed from the garage-shop entrepreneur focused on developing a new product or technology or the startup entrepreneur who launches a new business with the intention of exiting at the first opportunity for a public offering.
These leaders are also skilled in the subtle arts of general management. They are masters at directing and coordinating the activities of their organizations—to cite another classic definition.30 But unlike the archetypal general manager described in Chester Barnard’s seminal text, The Functions of the Executive, these leaders see their companies as actors on a world stage with the potential to influence the lives of people and communities around the globe. They are attentive not just to their organizations but also to the larger system within which their organizations operate. They understand that the health of their organization depends on the health of this larger system. And they possess the skills needed to interact with other participants in this system.
In other words, these leaders are also diplomats. They are comfortable engaging with constituencies beyond the organization and its investors and even beyond the private sector. Successful execution of the strategic plan in each of the cases discussed required an understanding of public policy and government affairs. Leaders in each company were called on to engage with a range of public-sector actors, including governments, multilateral institutions, NGOs, and civic leaders at various levels.31
The leaders in our case examples each pursued a very different type of innovation: a new environmental business at GE, a new distribution system at China Mobile, a new marketing model at Cipla, and a new investment process at Generation Investment Management. But in each case, the motivating insight came in significant measure from an awareness of larger systemic needs, trends, challenges—and consequent opportunities. To translate these insights into workable businesses, these leaders capitalized on well-honed business skills and capabilities—their own and those of their organizations. None were novices in their field; in fact, all were highly accomplished. At the same time, they and their organizations had to acquire new knowledge and learn about issues well beyond their customary domains. Immelt and his team at GE, for example, immersed themselves in the science of climate change. China Mobile experimented with different distribution models through pilot projects across China. The investment team at Generation dedicated a year to learning new analytic techniques and developing a new investment process. To ensure ongoing engagement with the wider world, both GE and Generation established standing advisory boards of outside experts as part of their organizational models.
These examples suggest that success in building a business that addresses these larger issues calls for an expansive outlook and an enlarged skill set. The ability to learn quickly about new domains, think creatively about systemic problems, and work across different sectors of society—these are essential skills for functioning in this arena. But to be useful, these skills must be anchored in fundamental business and management know-how. As ecomagination head Steve Fludder put it, “If you’re going to go after a big multiconstituent societal problem and make a business out of it … [you have] to really think about how to take that big problem … and treat it like a market opportunity and use your traditional instincts of profit and profitability and making money for yourself and your shareholders and bring that same thinking to these new problems.”
Our view that companies should take a broader view and seek to align their activities with the needs of a robust and sustainable market system may strike some as a brief for corporate social responsibility (CSR). But we prefer to describe it as a call for enlightened self-interest—or what the nineteenth-century French political thinker Alexis de Tocqueville termed “self-interest properly understood” and what others have called “self-interest rightly conceived.”
When Tocqueville toured the United States in the 1830s to explore the then developing country’s progress and assess the effects of democracy on society, he was struck by what he described as a “near universal” tendency among Americans to explain their acts of apparent generosity or civic responsibility not as expressions of morality but as pragmatic actions that would ultimately redound to their own benefit: “It gives [Americans] pleasure to point out how an enlightened self-love continually leads them to help one another and disposes them freely to give part of their time and wealth for the good of the state.”32 Calling the doctrine of self-interest properly understood “the best suited of all philosophical theories to the wants of men,” Tocqueville also saw it as ultimately “their strongest remaining guarantee against themselves.”33
The accuracy of Tocqueville’s description of these tendencies as “near universal” is certainly open to question. By other accounts, the marketplace of that era was awash in commercial fraud and similarly pernicious practices.34 Still, the outlook he highlights is similar to that of forward-looking companies today. Like the Americans encountered by Tocqueville, these companies recognize that their own health and prosperity are deeply intertwined with the health and prosperity of the market system as a whole and, conversely, that a fragile system presents threats and risks to their companies and to enterprises across the industrial spectrum. In seeking to moderate forces that threaten to disrupt the system—or in adopting strategies and behaviors that help reinforce and strengthen the system—these businesses realize that they are looking after their own long-term interests as much as they are performing a civic responsibility.
By putting the accent on enlightened self-interest, we hope to counteract the tendency to regard efforts to improve the system as optional—nice, perhaps, but by no means necessary. If the prognoses presented in earlier chapters are anywhere near correct, continuing to disregard the health of the market system will be seen by future historians as the height of folly—a term defined by historian Barbara Tuchman in her masterful book The March of Folly as a ruinous and costly policy that is mistakenly believed to advance the interests of those pursuing it.35 Her findings seem all too relevant: “Primacy of self-aggrandizement, illusion of invulnerable status, and obliviousness to the growing disaffection of their constituents are persistent aspects of folly.”36 Unless action is taken to contain the negative forces identified by our business leaders, future generations looking back on today will not ask why proponents of the market system were so uncharitable; rather future generations will wonder why the system’s supporters did so little to protect their own interests despite mounting evidence of serious problems.
Moreover, the activities typically undertaken under the CSR banner, worthy as they may be, are not likely to be sufficient—individually or collectively—to address the problems at issue. In most companies that we know, CSR activities are entirely peripheral to the main lines of decision making and management. They are treated as discretionary, and their impact on the targeted problem is typically modest. Although altruism and corporate charity have their place, a sustainable economic system cannot be built purely on self-sacrifice any more than it can be built purely on greed.
Whatever terminology is used, however, the quest for growth and profitability must go hand in hand with respect for the health and sustainability of the market system. As we have tried to show in this chapter, companies and entrepreneurs have a crucial role to play in strengthening this system and improving its performance for society. But innovative and enlightened companies cannot do it all unilaterally. In the next chapter, we will take a closer look at the role of companies as activists for good government and more-effective institutions.