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Capitalism at the Crossroads: An Interview with Stuart Hart

The Huffington Post The Huffington Post 10/03/2016 FIXCapitalism

© Provided by The Huffington Post by Christian SarkarStuart Hart is one of the world's top authorities on the implications of sustainable development and environment for business strategy. He is currently the Grossman Chair of Sustainable Business at the University of Vermont. Previously, Hart founded sustainable MBA programs at Cornell, UNC, and the University of Michigan. He wrote the seminal article "Beyond Greening: Strategies for a Sustainable World," which won the McKinsey Award for Best Article in Harvard Business Review in 1997, and helped launch the movement for corporate sustainability.
With C.K. Prahalad, Hart also wrote the path-breaking 2002 article "The Fortune at the Bottom of the Pyramid," which provided the first articulation of how business could profitable serve the needs of four billion poor in the developing world. He is the author of the business bestseller "Capitalism at the Crossroads: Next Generation Business Strategies for a Post-Crisis World" now in its third edition.
Stuart Hart © Provided by The Huffington Post Stuart Hart As someone who helped launch the sustainability movement in the business world, what do you see happening today? Is Capitalism still at the crossroads?
Businesses are learning that they do not need to accept trade-offs when it comes to societal and economic performance. You must meet both criteria. The future demand it, your customers demand it, and your conscience demands it.
In my book, Capitalism at the Crossroads, I presented new strategies for identifying sustainable products, technologies, and business models that will drive urgently needed growth and help solve social and environmental problems at the same time. I also argue that corporations are the only entities in the world today with the technology, resources, capacity, and global reach required.
What we're now experiencing is a transformation to a more sustainable form of capitalism--and ultimately, a more sustainable world. This transformation began in the 1990's with the "eco-efficiency" revolution when, for the first time, it became clear that reducing waste, emissions, and pollution can actually save money and lower risk.
In the past decade, two exciting new commercial developments have burst onto the global scene. One revolves around the commercialization of new green technology; the other around better serving and including the poor at the base of the income pyramid. Both are exciting, but the problem is that they have evolved as separate communities. The green techies say, "Just give us the venture capital, and we'll invent the clean tech of tomorrow," as if it will then spring magically into reality.
Proponents of the base of the pyramid approach seek to address poverty and inequity in developing countries through a new form of enterprise. They say, "How do we innovate business models, extend distribution, and become embedded in the community to build viable businesses from the ground up?" But such "pro-poor" business advocates often lose sight of the environment, as if all this new economic activity will automatically create a sustainable form of development at the base of the pyramid. Tragically, that way of thinking could take us all over the cliff, if we end up with 6.7 billion people consuming like Americans.
The challenge of our time, therefore, is to figure out how to bring these two worlds together to enable a global "Green Leap." Indeed, emerging clean technologies, including distributed generation of renewable energy, biofuels, point-of-use water purification, biomaterials, wireless information technology, and sustainable agriculture hold the keys to solving many of the world's global environmental and social challenges.
Because these small-scale green technologies are often "disruptive" in character, the base of the pyramid is an ideal place to focus initial commercialization attention. China's towns and small cities, Brazil's favelas, and India's rural villages present such opportunities. Once established, such technologies can then "trickle up" to the established markets at the top of the pyramid--but not until they have become proven, reliable, affordable, and competitive against the incumbent infrastructure.
In my view, the Green Leap is a key point of leverage in transforming the global economy toward sustainability. If I am right, this holds important implications for policy-making. Rather than circling the wagons and seeking to build a Green Fortress America (or Europe, or Japan), the best thing we could do is get our most promising technologists and entrepreneurs out of the US (and the rest of the developed world markets) and into the rural villages, urban slums, and shantytowns of the world where 4 billion plus people currently reside. It is here that the Green Leap will take place. And, it is here that the corporations of the 21st century will be born.
How does the Green Leap compare to "reverse innovation"? What are the dangers?
One area of important learning has been the potential for incubating disruptive innovations and business models starting in the underserved space at the base of the pyramid and later having some of these innovations move up-market.
Clay Christensen and I wrote about this over a decade ago (2002) in an article entitled "The Great Leap: Driving Innovation from the Base of the Pyramid." The idea has caught on. Over the past decade, a whole slew of new terms and buzzwords have arisen to describe this phenomenon, including trickle-up innovation, frugal innovation, and the latest incarnation--reverse innovation. Vijay Govindarajan and his colleagues have led the way in developing the strategic logic for reverse innovation and documented a growing number of cases illustrating this approach from the corporate sector, beginning with GEs development of a low-cost, hand-held ultrasound device in rural India and China.
A key difference between reverse innovation and the earlier work on base of the pyramid strategy is the promise--even expectation--of large and profitable up-market migration for the innovations incubated in the underserved space: GE's hand-held ultrasound device, for example, has "trickled up" to the US and other developed markets and now constitutes one of the fastest growing and profitable businesses for GE's Healthcare business.
There is some good news and some bad news regarding this trend. First the good news: Reverse innovation provides an attractive internal logic for undertaking such innovation initiatives within large corporations: Rather than simply focusing on the possibility of opening up new markets among the world's poor and underserved, reverse innovation offers the potential for having your cake and eating it too--by incubating innovations in the underserved space that can migrate up-market bringing new, disruptive, affordable, and (potentially) more environmentally sustainable products and services. Witness the growing "trickle-up" success in point-of-care medical devices, mobile telephony, and distributed energy technologies, for example. Exciting stuff, to say the least.
But now for the bad news--there is a potential dark side as well: The risk that corporations gradually come to view the world's slums and rural villages primarily as laboratories for incubating innovations for the rich. The poor, in other words, come to be seen more as guinea pigs than as underserved people and communities with special needs and requirements--a place for corporations to force cost constraints on their innovation process enabling even higher returns in the eventual (ultimate) market at the top of the pyramid.
Should this scenario come to pass, it would represent a double tragedy. Not only would this damage corporations' reputation and continuing right to operate, but the evidence is also mounting that few innovations incubated in the base of the pyramid space can easily travel up-market without significant modification, threat of imitation, or competitive reaction: Frugal designs must be upgraded to appeal to the wealthy; low-cost innovations can often be easily imitated, and competitors with lower cost structures can enter as fast seconds after the pioneers have incurred all the development costs.
Allow this to serve as a cautionary tale to all those large, incumbent corporations thinking reverse innovation is the magic bullet: Focus on first things first--better serving and lifting those underserved at the base of the income pyramid. Should some of these disruptive, lower cost, or environmentally sustainable innovations eventually lend themselves to application in the up-market, that is great news for the Corporations and the World. But let us not look back in ten years and view reverse innovation as yet another classic example of the Law of Unintended Consequences.
What can business do to embrace this transformation? Do you find a sense of urgency?
For the most part, the Corporate Sustainability Advisory Council (SAC) is now part of the standard apparatus for most major corporations.
The first SACs were launched in the 1990s; and with a few notable exceptions, they were used primarily as PR tools to curry favor with increasingly vocal environmentalists and other troublesome social stakeholders. Back in the day, members of SACs (myself included), were typically engaged to review (what were then new) Corporate Responsibility/Sustainability Reports, serve as judges for staff sustainability awards, and provide advice on specific CSR or environmental initiatives by the company.
SACs typically met once or twice a year and members were almost always prominently featured on the corporate website, but seldom compensated, other than covering travel expenses and accommodations. This was presumably done to avoid the appearance that members were being "bought" but in reality, it was a statement about the perceived value of these councils: Meetings were usually run by CSR or environmental management staff. The CEO might make a symbolic appearance at the beginning or end of the meeting, but generally no senior executives or business leaders were engaged in the work of the SAC. It was a largely symbolic initiative convened for external appearances and social legitimacy. That was then.
This is now: The days of the Symbolic SAC are rapidly coming to an end: As social and environmental challenges become increasingly material, gaining serious advice on these matters is no longer a luxury. Increasingly corporations are seeking to elevate the SAC--to make it an integral part of the strategic process of the company. What are the best ways to do that?
In my experience, there are five keys to taking the Sustainability Advisory Council to the next level:
1. Encourage Free Speech. Include only the highest quality people from diverse backgrounds with stellar reputations and strong views. And then encourage them to speak their minds. The last thing you need is a polite group of advisors willing to rubber stamp CSR initiatives. SAC members should be encouraged to ask hard questions and introduce variety, not provide cover for existing practices and strategies.
2. Make it Real. Don't waste valuable time on peripheral activities like Sustainability Reports, Websites, and Staff Awards. Instead, engage the SAC in the real stuff--the strategic and operating challenges that are most significant to the company's future. If SAC members have not signed NDAs there is something wrong.
3. Engage the C-Suite. Cameo appearances by the Chief Executive no longer cut it. If the SAC is tackling serious strategic issues, then the CEO and other key C-Suite Executives need to be active participants in the deliberations. Deep dialogue and mutual learning can only happen when people spend time together and get to know each other.
4. Interact with the Board. The past separation between the SAC and the Board of Directors must come to an end. In tomorrow's world where sustainability and strategy are joined at the hip, the Board cannot govern effectively without access to the SAC's expertise, and the SAC cannot gain the necessary perspective without knowledge of the Board's concerns and priorities. Hold at least one joint meeting (or overlap the two meetings) each year.
5. Compensate Appropriately. Members of the Board of Directors are paid serious money for their year-round engagement in the company's governance. Nothing less should be expected from SAC members. This means that pro-bono appointments and token honoraria must give way to compensation commensurate with the new expectations. Bottom line: Don't skimp on SAC member compensation if you expect them to prioritize SAC work over the myriad of other opportunities and obligations on their plates.
How do you help corporations begin the journey? It starts with the mindset. After working with scores of corporations and executive leaders over the past twenty years on matters relating to business and sustainability, I have come to the conclusion that there are fundamentally four distinctive mindsets of executives when it comes to this challenge: Deniers, Avoiders, Camouflagers, and Transformers. Not surprisingly, the sustainability strategy (or lack of one) in any given company is driven by the prevailing mindsets. Allow me to describe them for each type:
Deniers are executives who either refuse to face facts or willfully deny the existence of a problem despite the existence of overwhelming evidence to the contrary. Whether the issue is climate change, poverty, inequity, or loss of biodiversity, deniers consistently discount scientific evidence as "biased" or align themselves with a fringe minority of "experts" who expound the opposing view. For deniers, climate change is a hoax and poverty is due to laziness or lack of aptitude. Context and circumstance matter little to deniers. Belief is absolute, not unlike religious dogma. For those working in companies led by Deniers, it is virtually impossible to be an effective sustainability change agent since these concerns are literally dismissed out of hand by senior leadership.
Avoiders are executives who may actually understand the social and environmental challenges we face, but either postpone serious consideration or seek to avoid engagement of the issues in the company altogether. The classic Avoider is in his or her early 60s or only 2-3 years away from retirement or being packaged out with a large financial windfall. Their primary motivation is selfish--to "kick the can down the road" so that they don't have to invest the time and emotional energy in the few years they have remaining. For the Avoider, the serious challenges of global sustainability can wait, so they become someone else's problem. Patience is required if one seeks to be a change agent or sustainability champion in a company led largely by Avoiders.
Camouflagers are executives who wrap themselves and their companies in the jargon of sustainability but fail to take decisive action or launch initiatives that would fundamentally alter their strategic path.They take on the "protective coloration" of sustainability by investing in incremental initiatives that continuously improve existing operations and strategies. Camouflagers want their cake and eat it to: external validation for their progressive stance but little in the way of strategic risk or change. Companies led by Camouflagers typically publish elaborate Sustainability Reports with lots of charts and graphs showing how eco-efficiency and corporate responsibility have reduced emissions, lowered costs, or built brand image. Those seeking to become engaged in sustainability in companies led by Camouflagers had best get their Six Sigma Black Belt or demonstrate a passion for corporate volunteerism.
Finally, Transformers are executives who are willing and able to stake out a new direction for their companies--one which will disrupt current industry structure and "leapfrog" toward a more sustainable world. Transformers are not afraid to take unpopular positions within the current industry; they often withdraw from industry associations, defund lobbying designed to preserve the status quo, and make preemptive investments that threaten to unseat industry incumbents. Not satisfied with incremental improvement, Transformers seek creative destruction. For those really interested in using the power of business to drive us toward a more environmentally sustainable and socially inclusive world, companies led by Transformers are the place to be.
But where does the learning come from? How can business accelerate the shift?
It has been 30 years since I completed my Ph.D. degree. Over that time, I've served on the faculties at three different "top 20" business schools--Michigan (Ross), University of North Carolina (Kenan-Flagler) and Cornell (Johnson) and started Centers focused on sustainable enterprise and inclusive business at all three. I've watched the "American" business school model--with its emphasis on scholarly publishing and functional core courses in the MBA program--spread across the world. And as I start on my fourth decade of professional life, I have come to a conclusion: The dominant model of business education and entrepreneurial development is broken.
We desperately need new models of business education and entrepreneurial development appropriate to the challenges we face in the 21st century, which include epidemic inequality, ecosystem degradation, and a looming climate crisis. We need transformative change and revolutionary new business models, not just adjustment around the edges. We need a focus on the skills required to imagine, co-create, launch and scale game-changing new ventures that simultaneously lift the poor and leapfrog to new environmentally sustainable ways of living.
I've joined forces with the University of Vermont to create a new Sustainable Entrepreneurship MBA program (SEMBA). In essence, we're doing something about the "saddlebag" approach to sustainability that has permeated academic world for so long. Together with my colleague and friend Dean Sanjay Sharma, who I first met more than 15 years ago, we're taking action on our article, "Beyond 'Saddle Bag' Sustainability for Business Education" (Organization & Environment). It chronicles the history of how business schools have incrementally added courses in sustainability, corporate social responsibility and ethics in response to evolving societal demands. What we're doing represents a bold new venture where a major university has sought to fundamentally reinvent business education and the MBA degree by addressing the environment, ethics, entrepreneurship, poverty and inequality.
Our aim is to build and nurture a global, action-learning ecosystem, enabling us to develop the next generation of leaders who will build, disrupt, innovate and reinvent sustainable businesses and enterprises in a world that demands it.
What advice do you have for the CEO who is trying to get the ball rolling?
I'd ask them a few questions:
Where Will the company's disruptive and leapfrog technologies come from? Significant attention has been paid to the challenges of business model innovation, co-creation, and organizational innovation in facilitating BoP business venturing. Less attention has been paid to where the technologies and innovations that drive such ventures come from and how they might be best developed. Businesses are beginning to focus on the three primary sources of new technology for driving inclusive and sustainable business development and how they are best driven from the bottom up: Exponential technology, shelf technology, and grassroots/indigenous technology.
Is there a way for BoP business logic be applied to the developed world? For the past decade the primary focus has been on the challenges of building successful BoP businesses in the impoverished rural areas and megacity slums of the developing world. Comparatively little attention, however, has been paid to how innovation from the bottom up might create opportunity and better serve the growing underclass in the US, Europe and other parts of the Rich World.
How do we move beyond silos? How do we apply systems thinking to improve BoP Sustainability? Most BoP ventures to date have been focused on the sectors and industries that define business at the top of the pyramid: water, energy, transportation, telecommunications, food, housing, health, and education, to name just a few. Yet increasingly we see that the world's challenges, particularly those at the base of the pyramid, do not fit neatly into traditional sectoral or industry compartments. Instead, they cross boundaries and require broader ecosystems of partners to succeed. How do businesses understand and take on the challenges and opportunities of systems thinking, boundary spanning, ecosystems and interconnections in creating and scaling BoP innovations.
So yes, we are still stuck at the crossroads. Given our short tenure on this planet, we humans are a bit like the crash test dummies from the Auto industry, moving in slow motion: The changes that we see around us seem gradual enough that they do not seem particularly out of the ordinary--we've always had hurricanes, tornadoes, floods, droughts, and wildfires. So, maybe we are just in a bad stretch. Or even if this is the new normal, perhaps it won't be that bad: warmer temperatures means longer growing seasons...etc.
But when we view this video in "real time"--that is in geologic time--then the changes that are happening are occurring in the blink of an eye, like the actual crash of the crash test dummies. As far as we can tell, the atmosphere and the climate of the earth have never changed this quickly before, in the history of the planet. Not even close. Sure, the climate has fluctuated wildly over the billions of years that life has thrived on our planet. But the changes took place over millennia, not decades. There was time for life to adapt. We, unfortunately, are driving ourselves into the proverbial wall, but we can only see it happening in slow motion. Time to clean out the head gear, humanity, or the next generation of dummies will not like how this crash video turns out.
Thanks Stu!What do you think? Please tell us in the comments section below.Christian Sarkar is an artist, activist, and entrepreneur. He is the founder of the $300 House Project and manages a marketing consultancy in his spare time. He is the co-author ofInclusivity: Will America Find Its Soul Again? is dedicated to saving Capitalism from itself. Visit us at to join the debate. Follow us on Twitter and Facebook.

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