Social Entrepreneurship: The Secret to Starting a Business Worth Living For

By Marcel N. Kwedi

Can hunger be a good business? Yes, and in fact, it is the only business that has ever been. Whatever the business you are in, you are in the hunger business: hunger for food, hunger for clothing, hunger for transportation, etc.
This book extends the notion of Social Entrepreneurship and places it into a bigger picture: the entrepreneurship for the masses. The book revisits every aspect of business administration (microeconomics, marketing, operations and innovation) and turns them into powerful tools to help normal people make the World around them a better place.

The book brings with it three key innovations:
- A presentation of Marketing in a way that can be understood even by children;
- A step by step innovation process that can turn anyone into a new Steve Jobs;
- A pure excel-based operation simulation model.

All the revenues generated from the book sale will be used exclusively in the financing of social enterprises around the World through the crowd funding portal WOHAOO dot com.

• Language: English
• Publisher: Lulu.com
• Release date: Oct 1, 2014
• ISBN: 9781312565388

Book preview

JOBS

Preface

After successfully getting my Computer Engineering degree, I was very enthusiast in starting up my own company. The idea for the business was straightforward: a software company that would deliver (essentially web-based) software applications to help the local government in better managing its finances and physical assets.

The prospect of spending my days doing what I loved most (at the time), computer programming, looked exciting to me. I didn’t want to end up doing some anonymous job in some well-known multinational company. Moreover, being my own boss, as I thought at the time, would give me more freedom to indulge in my other personal innovative projects (somehow I always manage to have many of them in the pipeline).

Without much effort, I was able to recruit a number of local private investors and associates. With a couple of thousand dollars, the business was started. The business went well: it made money, not enough to turn into a billion-dollar business, but enough to cover its operating expenses. However, three years after starting up, in agreement with my associates, I decided to shut the company down.

I closed the doors of my first business for a simple reason: I just wasn’t feeling it anymore. In the process, I had lost my enthusiasm. I promised myself never to make this happen again.

How did I lose my enthusiasm? By then I did not have any answer to this question. However, the feeling that kept creeping me down was that of fear. I was determined to start another business soon. Yet, how could I make sure that I wouldn’t run out of energy again?

The idea that came to me was to get business training. I applied to the best business schools in the World. I got a positive response, along with a full scholarship, from the Colorado State University. They had just launched a new innovative Master’s of Science program in Social Entrepreneurship, and were attracted by my experience.

Unfortunately, I was refused the VISA to the United States. That was a frustrating moment. I had just found a way to answer all my questions, and the door leading thereto was shut before me. I didn’t give up on my goal. I applied to other schools, especially in Europe, and was finally admitted to follow a classical MBA program in The Netherlands. At first, the program was not so attractive to me. Given my experience, I just did not believe anymore in business as usual. Little did I know at that moment that I was about to make a life-changing encounter.

In the middle of my study there at the Nyenrode Business Universiteit in Breukelen (pronounced like Brooklyn), I was invited to participate in a Sustainability Think Tank session. The session was also attended by renowned people such as Stephen Fry, of the BBC. The subject of the meeting was about sustainable mobility. During the meeting, a Professor coming from the University of Michigan (USA) made an interesting presentation on sustainable business processes. His name was C.K. Prahalad.

This first meeting with C.K. Prahalad later led me to buy and read his bestseller book: The Fortune at the Bottom of the Pyramid. In this book, Prahalad explains in a very scientific way how the very poor in most developing countries are a huge market yet to be harnessed by companies, local or international. After reading the book it became clear to me what I wanted to do in the future, something I would never run out of energy doing: making products and services for the masses.

This book, Social Entrepreneurship, the Secret to Starting a Business Worth Living for, is designed for people just like me who want their lives to be meaningful — yes a life full of meaning, not just money and superficial experiences. Such people have long been tagged as dreamers, or idealists. Today, partly because of this book and many other similar books, people striving to make the World a better place to live in, have in their hands a practical guide on how to shape their dreams and turn them into successful and sustainable businesses.

Marcel N. Kwedi

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Introduction

Prahalad’s Pyramid

Late C.K. Prahalad did a tremendous amount of work in advancing Business Science through his many books and articles such as Competing for the Future.¹ However he will certainly forever be remembered as one of the first key business scientists to take interest in the subject doing business with the very poor.

Before C.K. Prahalad’s The Fortune at the Bottom of the Pyramid book, the very poor segments in developing countries were considered by most multinational companies as economically unattractive.²

Here is Prahalad’s theory: when businesses design and market products that are of key utility, and that are financially accessible to the people at the bottom of the income distribution pyramid, the new products will generate returns on investment far superior to that which can be generated from customer groups belonging to any other segments of the pyramid.³

In his book, Prahalad and his co-author, Stuart L. Hart, have studied the financial performances of two multinational companies (MNC) in India specializing in detergents, Nirma Ltd. and Hindustan Lever Ltd. Their discoveries were mind-blowing: the ROCEs (Returns On Capital Employed, the MNC’s version of the Return On Investment) of both companies in the lower segment of the market (bottom of the pyramid) were four to five times higher than the ROCEs of the same companies in the High-end segment (see table 0.1 below).

Therefore according to Prahalad’s theory the key success factors, with the bottom of the pyramid customers, are utility and pricing strategy. More than any other group of the income pyramid, the willingness to buy of the people at the bottom of the pyramid are more price-elastic (more sensitive to variation in prices). ⁴

Following Prahalad’s discovery, many multinational companies (Uniliver, Vodacom, MTN) have started to approach markets in developing countries (especially in India and Sub-Saharan Africa) with a different strategy: miniaturization. Detergent companies in India, for example, would subdivide the normal quantity of detergent per SKU (Storage Keeping Unit), they use to sell in Europe, into smaller quantities to make it accessible to the bottom of the pyramid customers.

Car manufacturing companies have started making smaller, more energy-efficient, versions of their popular car models specifically targeting the very poor.⁵ Micro-financing institutions have sprout out around the world, especially in the emerging countries, with the objective of providing micro-credit (loan whose amount is less than US$ 50) programs for the very poor.⁶ Examples are numerous.⁷

Classical View

Making products and services targeting the very poor has long been tagged as Social Entrepreneurship.⁸ In fact, according to the book, The World is Flat, we learn that a social entrepreneur is an entrepreneur whose ultimate goal is to make a positive impact on the World by providing poor people, not with food aid, but with tools that will enable them to improve their living standards.⁹

Furthermore, The Schwab Foundation for Social Entrepreneurship, one of the leading authorities in the field, defines Social Entrepreneurship as any activity applying practical, innovative and sustainable approaches to benefit society in general, with an emphasis on those who are marginalized and poor.¹⁰

In other words, the classical view of a Social Enterprise is that of a business focusing on the people at the bottom of the pyramid. According to late C.K. Prahalad, sustainable Social Enterprises are the most profitable businesses.

However, C.K. Prahalad’s study of the bottom of the pyramid was biased, in the sense that it only focused on Social Enterprises in developing or emerging countries (Africa and India). The question that now pops out is this: can we talk of Social Entrepreneurship in developed, Rich economies (Western Europe and USA)? The answer to this question is definitely yes! My personal experience in The Netherlands and Chicago (USA) have taught me that indeed there are poor, and very poor, people even in Western established economies.¹¹

Income Distribution

If it is true that we can talk about a bottom of the (income) pyramid even in developed economies, will the Prahalad’s theory still apply, namely that Social Enterprises have superior returns? Certainly not, Why? Simply because in most Northwestern countries, especially in Western Europe, poverty is almost eradicated.

The part of the population that is poor (with an annual income less than US$ 720, or US$ 2 a day) often represents less than 5% of the total population¹², thus making it a less attractive market, when compared to developing countries where the bottom of the pyramid usually represents more than 50% of the population. For example, in both Nigeria and Mali, 9 out of 10 people live below the extreme poverty level¹³. For example, in the following diagram, we present the (half) pyramid of household income in the United States for the year 2012.¹⁴

What we observe from the United States 2012 household income pyramid is that the lowest segment (people earning less than $5,000) represents less than 4% of the total population. At the same time we discover that more than 50% of the population has an income between $0 and $55,000. The segment of income $0 - $55,000 thus represents the masses as far as the United States income pyramid is concerned.

After observing the income pyramid of the United States, we can conclude that the Prahalad’s theory cannot be applied as is to a developed economy. This fact creates what Scientists in Physics Theory call a point of singularity i.e. a place where a theory cannot apply.

To make the Prahalad’s theory applicable also to Modern Western countries we have to relinquish the idea of the absolute bottom of the (income) pyramid as the target of Social Enterprises, and replace it with the segment of the (income) pyramid representing the highest percentage, in other words the masses.

Focusing on the masses instead of just the absolute bottom of the pyramid looks more logic since in most countries the income distribution pyramid is often not a strict triangle, but instead has other forms such that of a mushroom.

The General Theory of Social Entrepreneurship

If we want Social Enterprises to be sustainable and generate superior returns, whether in developing or developed economies, we have to adopt a definition more general than what is currently accepted. Thus Social Entrepreneurship could be defined as any business activity applying innovative and sustainable strategies to design and develop new products fulfilling unsatisfied needs in the society while targeting the masses. Let’s called this new view, the General Theory of Social Entrepreneurship.

Depending on whether we are in a developing economy (India, Nigeria, Cameroon) or in a developed country (United States) the masses would mean the very poor (the bottom of the pyramid) or simply the middle-class, respectively. We can define as the masses any continuous part of an income pyramid, starting from the bottom, representing more than 50% of the total population.

If we apply the C.K. Prahalad’s theory to the masses, whether it be in developing or in developed countries, it would yield the same result: superior rates of return. How can that be? Yielding superior rates of return is in fact a consequence of the Economies of Scale: the more you produce a good, the less costly it becomes to you.¹⁵

Targeting the masses also enables companies to benefit from the Network Effect: the more a product is consumed, the more customers it attracts.¹⁶ The Network Effect can be mostly observed in today’s Social Networks such as Facebook or Twitter. The more followers someone has, the more people will be attracted to become new followers.

The Network Effect combined with the Economies of Scale produces what C.K. Prahalad has observed as above-average returns. As a side benefit, when a product targets the masses, this can block imitation by new entrants in the market.

Because the products has already been tested and approved by the majority of the market population, new entrants in the market have to beat the product in both price and quality to attract customers to their offerings; in other words, new entrants are forced to radically innovate to survive.¹⁷

Approaching Social Entrepreneurship in its more general definition brings it farther than just a philanthropic activity, as many currently perceived it. In its new definition, a Social Enterprise is just like any other enterprise, with the specificity that the Social Enterprise focuses on satisfying the majority of the market population (rich or poor), while the common enterprise focuses only the gross margins.

More practically, the Social Enterprise will prefer to sell to a million customers and make $1 of gross margin, while the classic enterprise would prefer to sell to a single customer and make $1 million of gross margin. In this case, because of the economies of scale, the Social Enterprise will be able to reduce its costs, thus increase its gross margin to $2 or even to $5 with greater operational innovation. At the same time, the classic enterprise will see its costs increase and thus its gross margin decrease due to the dominant position of its single customer.

The General Theory of Social Entrepreneurship also changes the way Social Enterprises are evaluated. Just like classic businesses, a Social Enterprise needs only be judged on its Return On Investment (or ROCE if it relates to a multinational company). That might look strange to conservatives who currently prefer to make a distinction between the financial performance and the social impact of Social Enterprises.

If we see through the lenses of the General Theory, there is simply no such difference: because of its low-end pricing strategy, the Social Enterprise will only yield superior rates of return if and only if it succeeds in reaching the masses, a broader customer base. The masses will only welcome a product or service only if it provides them with a superior utility, in other words, a greater social impact.

Measuring a social impact of a product is difficult, even sometimes impossible, as it relates mostly to emotions, while it is easy to measure financial performances.¹⁸ Being able to easily evaluate Social Enterprises would make them attractive to common financial markets.

I will personally not be surprised if soon we witness the creation of stock markets targeting Social Enterprises. Going even further, I don’t see why in the long term Social Enterprises would not become the standard in the business landscape, since we know from the C.K. Prahalad’s theory that Social Enterprises generates superior rates of return.

The two key measures of performance for Social Enterprises are: the size of the customer base as a percentage of the total market population, and the Return On Investment. This book will therefore only deal with those two measures and will not dwell on impact evaluation, since this performance measurement is only a consequence of the two key business success factors mentioned above.

Final Thoughts

C.K. Prahalad in his milestone book, The Fortune at the Bottom of the Pyramid, has demonstrated that products targeting the very poor in emerging countries have the highest rates of return on invested capital. However, this theory can be extended to developed economies by changing the target of the product; instead of targeting the very poor, The C.K. Prahalad’s theory holds true for products targeting the masses, in other words, the middle-class in a customer population.

This new perspective, gives a different perspective of Social Entrepreneurship. Social Entrepreneurship cannot just be seen as an activity focusing on the poor, but a business operation targeting the masses. Because, Social Entrepreneurship key success factor is the sales volume (number of customers), Social Enterprises need only be evaluated on their profitability just like any other business.

Chapter 1

Microeconomics

"Teachers and criminals and real-estate agents may lie, and politicians, and even CIA analysts. But numbers don’t." THE NEW YORK TIMES MAGAZINE, AUGUST 3, 2003

History of Economics

Adam Smith (1723-1790) laid down the basis of what we know today as Economics through his book An Inquiry into the Nature and Causes of the Wealth of Nations. Smith is popular thanks to his principle of the the invisible hand. He was the first to state that nations are richer or not depending solely on their productivity.¹

David Ricardo (1772-1823) introduced the law of comparative advantage through his bestseller book On the Principle of Political Economy and Taxation. He is also regarded as the father of the Rent Theory.

The Ricardian Rent Theory states this: economic rent (net profit) is generated due to competitive factors that are limited in supply (uniqueness) and cannot easily be transferred from one company to another.²

William Stanley Jevons (1835-1882) developed the theory according to which the value of goods, from the buyer point of view, is mostly emotional and not based on the supplier-side costs of production.³

Alfred Marshall (1842-1924), in his foundation book, The Principles of Economics, introduced the concepts of demand, supply and the relationships between the two.⁴

Joseph Schumpeter (1883-1950), is best known for his views on the role of entrepreneurship in the economy. He became famous with his idea of creative destruction: entrepreneurship is cyclical in the sense that new products make old products obsolete (destroy them) while creating a new value for the customer.⁵

John Forbes Nash (1923-) best known because of the movie based on his life, The Beautiful Mind, developed the theory of the non-rationality of actors evolving in a competitive landscape.⁶

His theory was proved in trend analysis and the network effect: people follow the trend based on non-rational factors. This non-rationality also explains why intense competition becomes destructive to all the suppliers of the market.

For example, suppose two companies, A and B, are competing for customers in a market; let’s also assume that they are the only suppliers of that particular market. Depending on the price each company sets, it will get less or more customers than the other company. We get the following choice-profits table below (table 1.1):

If both companies, A and B, set low prices for their products, the total profits both companies would make is $200. If only one company sets low prices and the other keeps its prices high, the total profits would be $300. However, if both companies are reasonable and agree simultaneously setting high prices, the total profit would be at its optimal value, $400.

Seeing such table, one would easily conclude that both companies would end up at the optimal state, getting the $400 total profit. However, Nash proved mathematically that at the equilibrium (in the long term), and without a cartel (i.e. an exchange of price information between the two companies), both companies will tend to converge towards the least optimal state, with both companies setting up low prices.⁷

Why would the two companies choose the less profitable state? According to John Nash, the answer is simple: human beings aren’t rational. This sad (sad for companies, good for customers) fact explains why major supply cartels have generated so much wealth to their participants.⁸ One of such cartels is the OPEC (Organization of Petroleum Exporting Countries) or the global oil cartel. In more than 40 years of existence the OPEC has generated trillions of dollars for the oil producing countries.

Each country that is member of the OPEC gets a monthly quota of oil that it can export.⁹ Those quota’s acts like price information exchange: when oil prices are low, scarcity is created by lowering the quota’s. However in most competitive environments cartels are prohibited by governments.¹⁰ How then can an individual company avoid the John Nash’s trap? Companies can make optimal profits in competitive environments simply by making the right choices.

Economics

One definition of economics is that of the study of the choices individuals make.¹¹ You will notice that we mentioned the term individuals in this definition, not animals or plants, as, generally, economics focuses on human beings. Yet economics can easily be extended to any other beings equipped with a freewill (the ability to make choices).

Why do we need to study choices? One answer could be simply this: people are not gods. In the commonly accepted view, the idea of a god is that of an entity that is omnipresent (everywhere at the same time), omniscient (possessing all information past present, and future), and omnipotent (having all resources).

Human beings have to deal with limited information availability (despite the proliferation of the Internet). Human beings can only be present in one place at a time. On this fact is the judicial alibi based. For everyone, resources are scarce (even if one is a multibillionaire). From this it follows that the key elements of any economic decision are: information cost, location cost and resource scarcity.

Business owners need the right information to make good decisions.¹² A farmer needs to know the evolution of the price of corn to decide to increase or not his or her production for the next season; the baker needs to know the prices of raw materials to know what quantity of different products to produce or not. However information acquisition is costly.

The farmer needs an Internet connection to get corn prices from the market; the baker needs to survey his or her suppliers to know who has the best prices. Information costs also include uncertainty about the future; that is the limited knowledge of the outcome of a specific decision. The corn farmer might be able to know the current prices of corn on the market, whereas he or she knows little about the prices of corn in three or six months after the current season ends.

Just like information about the future is costly (uncertainty), so it is with information about the past. Information about the past performance of a resource is called the risk of the resource. If I want to book a plane ticket with a particular airline company, I would most likely want to know the accident history, in other words the flying risk of that particular company. As just emphasized, risk is about the past, while uncertainty is about the future.¹³ Most people would confuse risk and uncertainty for a simple reason: past failures tend to repeat themselves.

Beside information scarcity, businesses have to deal with the uniqueness of resources.¹⁴ For example, despite the advent of the airplane and the Internet, it is still today difficult for anyone to be present at two places at the same time.

Although with the use of videoconference someone might be in Africa while discussing with people in Europe, there is no dual-presence. Only the person’s body is present in Africa, but his or her mind (what is most important) is in Europe. The uni-presence or location applies also to other resources such as machines.