Thursday
May 12
2016

Chris Wolff

The Secret Sauce in Shared Value, Lean Startup, Behavioral Economics and Social Enterprise

As an enthusiast for new solutions to old problems I wonder: Are you as excited as I am by relatively recent developments of social enterprises, shared value, behavioral economics and/or lean startups for social change? Or do you skeptically forecast which of these business approaches might just be fads?

Even for skeptics, there’s a fundamental denominator under-girding all of these trends that we’re just starting to tap. The secret sauce is how dynamics within the marketplace act much like a crowdsourcing process, revealing insights on needs as well as value.

At the heart of these new possibilities is how all four disciplines centrally rely on monetary exchanges, which hold benefits broadly applicable beyond just profits driving capital deployment. I remember an economics professor describing how money equals information, making pricing the most efficient global system for learning. Our biases can obscure others’ perceived needs, but mass purchases create cycles that generate millions of price feedback loops to learn each item’s true value to people. Before there was Wikipedia, money was the original crowd sourcing tool for how much worth users anywhere attribute to different benefits, especially compared with all available trade offs.

 

Market dynamics in Various disciplines

Social Enterprises: Encompassing a range of definitions, social enterprises benefit from multiple aspects of business approaches. However, the most promising ventures deliver explicit social or environmental benefit inherent to what they sell. In this way, customers’ purchases reflect their demand for the value as it competes with all alternative uses of money. Product pricing reveals true value-add and evolves over time as customers’ options do. And with currency as a common denominator for all products and services, everyone can compare value across sectors. While its “cousin” impact investing focuses more on deploying capital and diversified portfolio approaches, social enterprise is related to the similar promise that over time capital markets will “learn” to allocate efficiently to the most effective and valuable interventions (at least those that are financially sustainable).

Shared Value: In this practice, defined in the Harvard Business Review article “Creating Shared Value” by Professor Michael E. Porter and Mark R. Kramer, the first two out of three socially-beneficial ways companies deliver economic value rely on someone paying for new solutions. To a large extent, this is only possible when a company re-envisions its products to satisfy customers enough to pay up, or improves productivity for partners to better deliver that value. More people deciding to pay more en masse (or fewer paying less) leads to cycles of increasing the level of benefit delivered, as companies learn more of the degree of relative value they’re creating to inform improved solutions. Pursuit of shared value can point businesses back to market opportunities by  addressing people’s basic needs, and using  corporate profit engines as a way to experiment, iterate and refine how to balance efficiencies with what can be learned.

Behavioral Economics: Transcending the economics assumption that the masses  will settle over time on economically rational choices, behavioral economics draws from psychology to understand other factors that influence human decisions. But beyond just adding psychology studies, an advantage that this nascent discipline offers is its concentration on people’s real actions with their money. For any aspect of an ephemeral “why” into which they might dig deeply, the aim remains firmly on lessons derived from tangible exchanges in the marketplace.

Lean Startups:  Eric Ries’ The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses advocated disciplined methods of systematically testing hypotheses to challenge assumptions in unknown, changing markets. What distinguishes Lean Startup from other disciplines like market research, learning organizations or human-centered design is that the process follows execution based on actually realizing customer demand. Lean innovation for faster learning stems from quickly reaching a stage where customers make or decline purchases so that real market dynamics become the crucible for salient insights. It’s these monetary exchanges whose varying trends from iterations over time reveal how valuable something really is to customers in the face of numerous alternatives.

In the new book Lean Startups for Social Change: The Revolutionary Path to Big Impact, Michael Gelobter expertly details the process of hypothesis testing for any mission-driven organization’s innovation. I especially appreciate how he considers the central differentiation of NGOs’ multi-sided markets where “the disconnect between who pays for and who receives the innovation means that each of these targets may require… a slightly different MVP (minimum viable product).” However, alluding to eventually “unifying these MVPs into a single operating model that optimizes these relationships” (p. 97) loses the benefit of testing those solutions simultaneously. The key question is: “Have you solved enough of a problem that someone is willing to pay you for your solution?” (p.109) and what’s that worth?

Having taught courses in the implications of multi-sided markets and a model for that ongoing unification, my primary addition would be to emphasize when the business model and lessons are inherently derived from the financial transactions by those directly targeted for the social support (as with shared value or social enterprises).  Then lean startups have more processes and pressures to drive them to better understand what’s most important to that population. So while government or NGOs inevitably translate concepts in different ways, let’s not be too quick to define “business models growing to meet customer needs by watching revenue” as interchangeable with “operating models serving multi-sided stakeholders for self-determined mission achievements.” (This was proposed in the initial adaptation of the Mission Model Canvas by Steve Blank, the father of Customer Development, with Alex Osterwalder).

It’s true each of the four approaches also promotes a number of benefits stressed in business: innovation, learning, rapid iteration, metrics, incentives, competition, technology and rigorous methodology. While it’s worth applauding every time the social sector works to adapt these, it’s without precedent.

 

Insight highlights

The field of combating poverty presents my favorite paradigm busters. What is more recently proving revolutionary is how markets are yielding new insights into the priorities of people in poverty and increasingly effective ways to help their complex lives.

Just as Portfolios of the Poor‘s research on all market exchanges of each household revealed cash flow management pitfalls beyond an average income of $2/day, the recent US Financial Diaries dug beyond the common perception of over-consumption by maxing out credit cards, a stereotype not unlike an SNL parody. The researchers shed light on even middle-class difficulties with cash flow volatility, with income spiking or dipping 25 percent from one’s average five months per year, and unexpected expense spikes simultaneously coming from multiple categories (like food, health care and transportation). They also cit a Pew study that 41 percent of American households lack $2,000 liquid savings for these shocks.

Based on his research of base of the pyramid (BoP) customers’ purchasing of goods from social enterprises, poverty is more about managing the unknown as articulated by Olivier Kayser, co-author of Scaling up Business Solutions to Social Problems: A Practical Guide for Social and Corporate Entrepreneurs. As he says in this NextBillion interview (minute 10:30): “You could describe the poor as being surrounded by incredibly attractive investment opportunities but that they cannot exercise… The problem of the poor is not high price; it’s high risk.” Buying some tools generates lucrative returns that make the BoP willing to pay higher margins still costing only a fraction of their gains, but their main worry remains, “Will it work so I really get the benefit?”

Harvard’s Sendhil Mullainathan and Princeton’s Eldar Shafir, in their behavioral economics book Scarcity: Why Having Too Little Means So Much, explain how juggling busy schedules, dieting or poverty create a “tunneling tax” on mental bandwidth that skews decisions. With “slack” from abundance, choices can be made without tradeoffs, but lacking room for error, mistakes create real sacrifices, making choices more daunting and people more inclined to “stick to the plan” rather than risk making things worse than the status quo. Adopting any recommended practices depends on their perceived value outweighing those risks. How people with scarce resources spend their money equals information on the degree they value different things; so paying attention to transactions creates insight into their view of tradeoffs and yields deeper understanding of demand.

As outside practitioners watch BoP demand through market exchanges to escape different paradigm traps (i.e. poverty = binary amount of money), more innovative solutions will emerge. For example, fintech is discovering, beyond mere efficiencies, how to blend product silos or focus more on habit nudges instead of total financial balances. The Center for Financial Inclusion’s roundtables found customization according to personalized finances to be the most important of the Seven Behaviorally-Informed Practices for Effective Financial Capability Interventions behind their Catalogue of Innovations. Similarly, ICT for development efforts shouldn’t stop at merely spreading information or productivity derived from Moore’s Law. It must pursue how connectivity’s leverage of network effects for transactions can inform more helpful supports.

If poverty has more to do with cash flow + risk management + weighing of tradeoffs, then only integrated multi-sector solutions could address inseparably complex needs, instead of the myopia of a single-sector’s expertise. Engaging in financial exchanges competing across sectors for disposable income provides intelligence on what impoverished families value most, so that insights on their tradeoffs can inform iterations that deliver better value for their top goals.

We’re just starting to tap the benefits from these disciplines, using market dynamics to crowdsource insights on both needs and value.

 

Chris Wolff is the founder of Shared Value Agents.

Categories
Entrepreneurship
Tags
crowdfunding, entrepreneurship, financial capability, financial inclusion, social business, social enterprise, social entrepreneur, social impact