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Capitalism and the Net Generation

February 2, 2009


For security reasons, President Obama was told he would have to relinquish his Blackberry — a challenge he has apparently overcome. But along with his new encrypted Blackberry came a new email address — one that is apparently a closely guarded secret [“Symbol of Elite Access: E-Mail to the Chief,” by Peter Baker, New York Times, 31 January 2009].

“Mr. Obama was spotted last week trying out his new BlackBerry — or actually a more sophisticated, encrypted variation — and aides say that he uses a computer in the study next to the Oval Office but that he has agreed to limit the number of people he would exchange e-mail with. In the process, he created a new measure for Washington to judge who really has the ear, or the thumb, of the president.”

The President’s comfort level with networked technologies highlights the fact that big changes are just over the horizon as the boomer and X generations makes way for those in the Net Generation. In a review about Don Tapscott’s book Grown Up Digital: How the Net Generation Is Changing Your World, Olga Kharif warns that “companies had better learn what makes the influential Net Generation tick” [“Raised on the Web and Ready for Business,” BusinessWeek, 8 December 2008 print edition]. She begins her review with an incident in Tapscott’s life that inspired him to write the book.

“On Christmas morning 2006, author Don Tapscott gave his 20-year-old son, Alex, an advance copy of his book Wikinomics. Within hours, Alex had created a community for the volume on social network Facebook. ‘By the time we were eating turkey on the same evening, he had 130 members in seven countries; seven regional coordinators; a president (Alex); a secretary, and a chief information officer,’ Tapscott reports.”

The incident also raises another characteristic of the Net Generation that I’ll discuss later — a growing social consciousness. As Tapscott tells it:

“One user had submitted a correction. ‘”Exactly how will Mr. Tapscott be contributing to our community?” said another—appearing to be placing demands on me!’ Tapscott writes in Grown Up Digital: How the Net Generation Is Changing Your World. As you may be starting to guess, a main theme of the book is that youth have a natural affinity for the Web: ‘When I was 20, I could have never created a community with 130 people in seven countries,’ Tapscott says. What’s more, he makes a strong case that the Net Generation is using the Internet to become very influential. But Grown Up Digital exists not only to praise the kids but also to offer insights into their habits, which the author says everyone from employers to politicians must study to tap their potential. Two caveats: Reader skepticism is in order as Net Geners have a ways to go to prove themselves. And at times the account gets weighed down by a load of statistical evidence.”

Tapscott, of course, is trying to sell books as well as ideas. He has made the “Net Generation” his branding tool.

“Tapscott coined the term Net Generation a decade ago in his best-selling Growing Up Digital: The Rise of the Net Generation (1998). Even then he was inspired by his kids: In 1993, seven-year-old Alex was already e-mailing Santa Claus. At that time the Web was ‘a place for outsiders, geeks, radicals or visionaries,’ Tapscott writes. Net Geners—those born between 1977 and 1997—had little say, as baby boomers and Gen Xers ruled. But fast-forward to now, and Net Geners—81.1 million strong, or 27% of the U.S. population—are starting to put a stamp on education, work, family life, and politics. Armed with nearly 10,000 Net Gener interviews and feedback from the likes of Google CEO Eric Schmidt, Tapscott says young people think, work, and play differently than their parents and older siblings, who often suffer from what Tapscott terms ‘nGenophobia.’ In fact, older folks may see many reasons to worry: Tapscott interviewed a Rhodes scholar studying at Oxford who gets all his information from Google rather than from books. Another Net Gener intertwines spurts of work time with video chats with family via online service Skype. A young Yahoo! manager, drawing on his experience with interactive video games, expects his people to regard work projects as opportunities for spontaneity and fun. Are you anxious yet?”

I’m not sure that anxiety is the emotion that first strikes me. Boomers and Gen-Xers are not unfamiliar with surfing the Web or using Skype (I know one Enterra Solutions employee of the boomer generation who routinely communicates with his son in India using Skype). My first reaction to the Net Generation is caution not anxiety. Take, for example, the Oxford scholar “who gets all his information from Google.” In an earlier post [Is Google Rewiring our Brains?], I discussed an article that examines whether online scholarship is altering how people read and think. In another post [When does Connectivity Narrow Thinking?], I discussed research that concluded “that as more journals become available online, fewer articles are being cited in the reference lists of the research papers published within them. Moreover, those articles that do get a mention tend to have been recently published themselves. Far from growing longer, the long tail is being docked.” Tapscott’s point, however, is not that “Net Geners” are better or worse, just different, than previous generations. It is those differences, he insists, that will transform the workplace.

“As baby boomers retire, businesses will have to embrace this generation’s quirks or face worker shortages. But such workers can be picky: In Tapscott’s research, Net Geners say they want to be loyal employees, but they usually last only two years at a job. ‘So why do they keep moving?’ asks Tapscott. He finds Net Geners reluctant to accept many workplace failings, from a perceived absence of collaboration to office bans on Facebook participation. But tap their creativity, and this highly educated group will deliver. Take Best Buy, most of whose retail employees are 16- to 24-year-olds. The retailer recently teamed six young, tech-savvy staffers with three professional developers to build online collaboration into Best Buy’s operations on the cheap. In weeks, the team created a wiki that lets the company’s 150,000 employees contribute insights on competition and popular trends. Net Geners have already become key players in politics. One of them, Chris Hughes, then a 23-year-old former Harvard roommate of Facebook co-founder Mark Zuckerberg, served as Barack Obama’s director of online organizing. His tools helped build a 1 million-strong social network for Obama.”

Kharif concluded her review this way:

“With expectations running high, the President-elect had better not disappoint his young constituents, Tapscott cautions, or Net Geners will take to the streets—er, the Web. They are a mighty force out to change the world. As comedian and baby boomer Jon Stewart pointed out in a commencement speech several years ago: ‘We broke [the world]….But here’s the good news. You fix this thing: You are the next greatest generation, people.'”

That is a great segue. Net Geners not only do work and do business differently but more of them are, in fact, “out to change the world.” According to another BusinessWeek article, they really would like to “fix this thing” [“Capitalism with a Human Face,” by Steve Hamm, 8 December 2008 print edition]. Hamm discusses how social entrepreneurism has recently grown and how social entrepreneurs mix capitalism and altruism.

“As chief executive of Mercy Corps since 1994, Neal Keny-Guyer helped turn the Portland (Ore.) relief organization into a global powerhouse with 3,500 employees and a budget of nearly $300 million. But he was taken aback last year when one of his lieutenants proposed the radical step of buying a bank in Indonesia. Why would a not-for-profit disaster relief agency go the capitalist route and buy a bank? Gradually, though, he warmed to the idea. He saw that, if Mercy Corps operated a wholesale bank that could offer capital to some 2,000 local microcredit organizations and had an ATM network, it could help turn microfinance into a powerful force in Indonesia. Keny-Guyer was in uncharted territory, however. In the last days before the acquisition closed in May [2008], he feared the risky gambit would end in disaster. ‘I imagined a newspaper headline saying, “Mercy Corps’ Bank in Bali Fails,”‘ he recalls. ‘I thought of the reaction of our donors to that bit of news.’ Now, as the renamed Bank Andara cranks up operations, Keny-Guyer is hopeful. If the strategy works in Indonesia, he says, Mercy Corps may try it in the Philippines next.”

Hamm reports that the new mix of capitalism and altruism is different from the past when the normal pattern was for wealthy capitalists to turn into philanthropists.

“This departure from business as usual in the nonprofit realm is part of a major shift in the way people are taking on the world’s social problems. In developing nations and parts of the U.S., governments have failed to make substantial progress against poverty, disease, and illiteracy. Traditional charities and social service agencies often provide Band-Aids for problems instead of long-term solutions. Now a new breed of do-gooder—the social entrepreneur—is trying fresh approaches. While the term is used in many different ways, there’s a narrow definition that gets to the heart of what makes these people stand out: Rather than depending solely on handouts from philanthropists, social entrepreneurs generate some of their own revenues and use business techniques to address social goals. ‘Traditional ways of doing things haven’t produced the kind of progress we all hoped for, so we’re trying to come up with new approaches that are truly transformational,’ says Keny-Guyer.”

Like Tapscott, Hamm believes that the world sits on the cusp of a new way of doing business.

“The idea of the social entrepreneur has been percolating for decades, but it has become a mass movement in the past couple of years. Thousands of people are launching ventures and trying out new business models, both for-profit and nonprofit. Now that the global financial crisis is squeezing charitable giving, socially oriented organizations are pushing even harder to reduce their dependence on donors and generate their own funds. Lehman Brothers, for instance, was a generous backer of both nonprofits and social entrepreneurs. No more. In this climate, only the most efficient and effective organizations will thrive.”

I believe this new movement is going in the right direction. The Enterra Solutions® Development-in-a-Box™ approach fits generally within the framework being described. Enterra Solutions is a for-profit company, but Development-in-a-Box was the result of discussions about how we could help make the world a better place for those living in it. It’s an offshoot of the old strategy of helping those who help themselves.

“Social entrepreneurs are being backed in part by a new generation of super-aggressive philanthropists and social investors, including Microsoft co-founder Bill Gates and former eBay executives Pierre M. Omidyar and Jeffrey Skoll. These guys expect results from their social investments and grants. Says Gates in an interview with BusinessWeek: ‘Nonprofits are applying what we’ve typically thought of as business strategies for better outcomes, and businesses are beginning to apply what I call creative capitalism strategies to increase the positive social impact of their work. That’s a powerful combination.’ He believes the most effective way to make social progress is through partnerships among nonprofits, businesses, government, and philanthropists.”

Anyone who has read my posts about Development-in-a-Box knows that I am a strong supporter of strategies that involve partnerships. I agree with Bill Gates that market strategies aimed at creating social impact can be powerful. Hamm reports that growing enthusiasm for “capitalism with a human face” could create a humanitarian bubble that could easily burst. Good intentions must be backed by common sense and good business skills.

“In this emerging social sphere, there’s a danger of confusing enthusiasm with effectiveness. Many social enterprises, from microfinance organizations to those aimed at purifying water or improving agriculture, aren’t being built to grow large or to last. They’re poorly managed, undercapitalized, or overly dependent on philanthropic handouts. In India, for example, there are an estimated 1.2 million organizations aimed at addressing social problems. ‘Many are just too small to be effective,’ says Manoj Kumar, chief executive of Naandi Foundation, a large Indian social service organization. In a sense, the social enterprise phenomenon is like an industry just starting to take shape. Think of the early days of autos or computers, when startups tried a variety of approaches to see what worked best. For this movement to have a major impact, it needs the same kind of dynamic business climate as Detroit in the 1920s or Silicon Valley a decade ago. What’s necessary—once the global financial crisis eases—is free-flowing capital, a willingness by entrepreneurs to aim high and take risks, and a level of transparency that quickly makes obvious what’s working and what isn’t. ‘You have to get beyond the gee-whiz factor of social entrepreneurship,’ says Michael E. Porter, a professor at Harvard Business School. ‘Which of these models really works? How do you create a high social value per dollar invested?’ It’s difficult to prove success in such an immature field. Nobody has come up with numbers quantifying the overall impact of social entrepreneurship. Some organizations make impressive claims. Grameen Bank, the pioneer of microfinance, says it has brought 65% of its 7.5 million clients out of ‘extreme poverty.’ Yet while Grameen’s home base of Bangladesh is crawling with microfinance outfits, it remains one of the poorest countries in the world, with 40% of its people under the poverty line.”

When Enterra Solutions applies its Development-in-a-Box model, it begins with a sound business plan. Hamm is absolutely correct that successful enterprises can’t be established if they are “poorly managed, undercapitalized, or overly dependent on philanthropic [or government] handouts.” The key to helping people out of poverty is creating jobs for them. It does no good to create a job in a business destined to fail. Hamm discusses the philosophical debate that embroils the development community.

“Grameen founder Muhammad Yunus, who won the 2006 Nobel Peace Prize for his work, argues that social businesses should not make a profit off of poor people. … To others, the profit motive is crucial for addressing the needs of poor people. C.K. Prahalad, a University of Michigan Ross School of Business professor and author of the influential book The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, argues that the poor should be seen as consumers, not charity cases. Their basic needs can best be addressed by businesses that are attuned to dealing with them. ‘If we get entrepreneurship right, social entrepreneurship won’t matter as much,’ he says.”

Philosophically I consider myself in the same school as Prahalad. Although dole is important to relieve immediate needs, it is not a path out of poverty. Jobs are required and jobs require successful businesses and successful businesses must make a profit. I’m not certain that Yunus would disagree with that notion. What Yunus is opposed to is people taking advantage of the poor through gouging or usury.

“Vikram Akula, a social entrepreneur based in Hyderabad, wants it both ways. He’s out to prove you can make a healthy profit while serving—and not gouging—the poor. Akula grew up in Schenectady, N.Y., but returned to his native India in the mid-1990s after he got a PhD in economics from the University of Chicago and worked as a consultant at McKinsey & Co. He first worked for a government-run microfinance organization. But with limited funds, it couldn’t expand fast. He says his conversion to the for-profit, faster-growth model came after an encounter with a poor woman he had to turn down for a loan because he couldn’t operate in her village. ‘She said: “Don’t I deserve to get out of poverty, too?”‘ he recalls. ‘I decided to come up with a model that works so you don’t have to say no to anybody.’ Today, Akula is chief executive of SKS Microfinance, which has 9,500 employees and 3.3 million customers throughout India and is adding 300,000 new clients per month. SKS charges an average of 26% annualized interest. Given the cost of granting and servicing microloans, that’s considered a reasonable rate by many industry observers. SKS had revenues of $48 million in the half-year ended in September, up 153%, and net income of $6.16 million.”

If 26% interest sounds high, read more about microfinance in three previous posts (Financing the Poor, Small Loans Attract Big Players, and Microfinancing Turns Greedy in Mexico). As one microfinance group explains, “At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can’t be cut below certain minimums.” In other words, it takes the same number of people and the same amount of paperwork to make a 50-cent loan as it does a 1000-dollar loan. To cover that cost, the resulting interest rate is comparatively much higher on the smaller loan. Microfinancing — done right — works.

“A journey with Akula into the villages of India’s state of Andhra Pradesh shows just how aggressive he is about applying business methods to economic development. In a schoolyard in Narayanraopet, a village of 3,500, three dozen women dressed in brightly colored saris sit in a circle in the shade of a spreading rain tree. K. Sandhya Rani, a self-assured 18-year-old SKS field assistant, takes attendance, collects weekly loan payments, and hands out new loans with all of the efficiency of an employee at McDonald’s, which, in fact, Akula uses as a model of business-process excellence. … Afterward the women hustle back to their shops and farms. There, money from SKS pays for more goods and for the purchase of chickens and buffalo. A woman named Sarojamma carries in her hands a six-inch pile of currency with which she plans to buy rice, lentils, and other food to replenish the shelves in her four-year-old kirana, or mini general store. … Sarojamma and people like her represent a new market opportunity for companies that hope to reach India’s vast population of villagers. SKS’s Akula is using his network of field agents and customers as a distribution channel for moving a wide variety of products and services on behalf of business partners such as Nokia. SKS helps sell mobile phones, insurance, and foodstuffs for shopkeepers. ‘The potential here is huge,’ says Devinder Kishore, Nokia’s marketing director in India.”

Selling to the bottom billion is not an easy task as a new venture in India is proving.

“While Grameen Bank’s Yunus doesn’t believe in profiting off the poor, he, too, sees his microlending network as a strategic jumping-off point for all sorts of economic activity. The bank’s parent company, Grameen Family of Enterprises, is forming joint ventures with large multinationals in an effort to develop vast new markets and improve the health and livelihoods of poor people. The first of the ventures, Grameen Danone Foods, sells nutrition-enhanced yogurt to poor people in affordable, single-serving packages, with a portion of the deliveries handled by Grameen Bank customers. But the strains between social goals and business imperatives are showing. Wahidun Nabi, the executive director of the venture, who came from Danone in mid-2007, says he’s being forced by economics to sell larger packages and market to those with more money, which means he’s doing less than he might have for poorer people. ‘For the success of the project, we must improve the bottom line,’ he says. “This is a social business, but business is business.”

The most interesting social enterprise discussed by Hamm uses African giant rats as “sniffer” animals, in much the same way that those in the developed world uses dogs.

“Belgian Bart Weetjens was focused purely on altruism when he started an organization called Apopo a decade ago. It trains African giant pouch rats to sniff out land mines on former battlefields. The mines, if they remain undetected, occasionally blow up and hurt people and animals. The program was a modest success, with mine-clearing operations in Mozambique and a contract to expand into Africa’s Great Lakes Region. But Apopo ran into problems when Weetjens tried to secure a more dependable source of funding. An adopt-a-rat program launched on the Internet, HeroRATS.org, failed to attract many supporters. … So Weetjens and [Apopo Chief Executive Christophe] Cox decided to run Apopo more like a business and generate their own money from operations. Earlier this year they hired Virtue Ventures, a consulting group specializing in social enterprises, to help them write a business plan. And in the summer they brought four interns from the MBA program at Oxford University to their headquarters in Tanzania to help size up their money-earning potential. Options include expanding mine-clearing operations to the Middle East, getting into the cargo-inspection business, and forging aggressively into disease detection. It turns out the rats can sniff out the presence of tuberculosis, and perhaps other diseases, at costs dramatically cheaper than traditional laboratory tests. … Their tests with Tanzanian health-care clinics are producing strong results in cost and quality.”

Although helping the bottom billion (or even those just above the poverty line) to improve the quality of their lives while turning a profit can prove challenging, Hamm reports that “there is anecdotal evidence that social enterprises can grow large and balance their social and economic imperatives. But it requires a lot of time and effort.” He turns to the deserts of Egypt for proof.

“Sekem Group, an Egyptian [family-controlled] conglomerate with businesses in organic farming, garment manufacturing, herbal medicines, and food processing and distribution … got off to a fragile start in 1977 in the desert 50 kilometers northeast of Cairo. Egyptian-born founder Ibrahim Abouleish had been managing a pharmaceutical-research facility in Austria but returned to his homeland after he realized that two decades of socialism had ruined the economy. His goal was to convert the country to organic farming and enrich Egyptian culture with a renaissance of art and education. Abouleish chose a place in the desert far from urban influences so he could create a self-defining community. It all started in a mud hut built for him by Bedouin. The original hut remains as part of a guest house on a campus that now includes 20 sparkling-white buildings for offices, farm operations, and factory work. Sekem has 2,500 employees, 500 acres of nearby farmland, and a vast composting operation. The company, which has been growing at 25% per year, brought in $40 million in revenues and $3 million in net income in 2007—after spending much of its operating profits on schooling and health care for employees’ families. Sekem just bought 4,000 acres of arid land on the Sinai Peninsula and in the Western Desert that it plans on converting to farming. For Abouleish and his son, Helmy, who now runs day-to-day operations, more important than the financial accomplishments is the impact of Sekem on Egyptian agriculture. When done right, organic farming uses a lot less water, and farmers don’t spend money on expensive and polluting herbicides and pesticides. When Sekem started operations, there was no organic farming in Egypt. Today there are several other major organic growers, and Sekem has developed a network of 800 independent farmers on 50,000 acres whose produce it exports to major grocery chains in Europe. The company’s nonprofit Sekem Development Foundation runs a school, a medical center, and economic development programs in the seven villages around the campus. But Ibrahim Abouleish is not satisfied. ‘What we have achieved is a great model. Now we have to change the whole country,’ he says. He figures it could take more than 100 years to reform Egypt from the bottom up.”

That’s a remarkable story of transformation, but it is also a tale of managing expectations. Transformations take time — something that President Obama tried to tell his inaugural audience. Transformations also take money, which is why profit-making ventures hold so much promise.

“While Sekem shows that such enterprises can grow up and make progress, there are many economic and social hurdles that need to be cleared for this phenomenon to become powerful. Money is a major issue. While philanthropies and investors are plowing hundreds of millions of dollars into social enterprises, that’s still minuscule compared with the $35 billion in venture capital invested worldwide last year. To attract more capital, social enterprises have started trying to better quantify their results. A group spearheaded by Acumen Fund, a nonprofit supporter of social enterprises, has begun gathering an ocean of information into one massive, easily accessible database. That way, results can be monitored by the funders and investors, and social entrepreneurs can see how they stack up with their peers. Still, it’s hard to justify most social enterprises on strictly financial grounds. In many cases, investors have to accept lower returns than they would expect from traditional investments. That trade-off has tormented investors in Freeplay Energy, a social business that sells hand-crank radios and lights for people in developing countries and Western nations. The company went public in Britain in 2005, but its revenues have been disappointing, and its stock price plummeted until it was taken private again this year.”

One of the reasons that Enterra Solutions’ Development-in-a-Box approach focuses on proven business models is that new social enterprise business models are still sorting themselves out. We think that success is essential to keep the work moving forward. Hamm concludes:

“Until today’s entrepreneurs discover which business models really work, there will be uncertainty and wasted effort. The movement is growing and taking on more ambitious projects. But from Mercy Corps’ Keny-Guyer to Satyam’s Raju, these entrepreneurs know most of their work still lies ahead of them.”

I’m sanguine that new, successful business models will emerge as new technologies and techniques are developed. I’ve been preaching for some time that the business world is in transition and that organizations need to position themselves to take advantage of opportunities that will emerge in the coming years. Social entrepreneurs are likely to be the source of much of the change that creates those opportunities.

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