Monday, August 11, 2008

Creative Capitalism

Bill Gates spoke about 'Creative Capitalism' in Davos and recently wrote about this, at length, in TIME. [see How to fix Capitalism].


The idea is essentially to pick up opportunities of business among the poor, in poorer countries. Gates is influenced deeply by Prahalad's work on Fortune at the Bottom of the Pyramid, the key premises of which is that businesses tend to overlook the huge economic potential of the low-income countries and low-income consumers. This is because the existing business thinking - the framework of risks and returns, for example - can not estimate the potential of such consumers. Prahalad cites a number of examples from Business Strategies of multinationals - of Cemex, ITC, Hindustan Lever and the like - to show how companies can turn this unexplored 'bottom of the pyramid' market to an enormous opportunity. Obviously, Prahalad's vision of this opportunity is its sheer size - that is why the 'bottom of the pyramid' imagery - and he asserts that this is going to be capitalism's next growth frontier.

Bill Gates' assertion is based on Prahalad's, and he advocates the need for a creative thinking in expanding capitalism to solve the world's problems. Interestingly, this is different from Prahalad's idea in terms of intent - Prahalad's ideas were purely about business strategy and growth opportunity. Gates' ideas are somewhat similar to what others will call 'Social Enterprise' - indeed he cites examples like Grameen Bank in Bangladesh, which built a micro-credit empire and helped millions out of abject poverty. Gates' idea is that such creative thinking is going to make the world a better place.

Bill Gates, one must note, is uniquely qualified to talk about business and solving world's problems. He created one of the most valuable business empires in history, and also sits atop the Bill and Melinda Gates Foundation, which has the largest sum of money available for charitable work. Therefore, he can put his ideas in action, and, hence, businesses must listen to what he is saying.

Currently, it seems that we are heading towards a worldwide recession, full on. Unlike other times, this recession is coming with unusually high prices of food and fuel globally. And, therefore, this is going to hit like no other times, and it is going to hit the poor first and the most. No one so far knows how long this will last, but if this lasts too long, political stability of many countries, even many regions, will be in doubt. This will strengthen the extreme ideologies in some parts of the world, reverse the global economic integration on the back of protectionist tendencies in the United States and Europe and lead the world to a face-off, economic or military, or both.

However, while Gates' advocacy is indeed timely, how much of an effect this is going to have on business strategies? The financing structure of large corporations today - determined by the short term planning horizon of Wall Street fund managers and critically dependent on meeting the quarterly forecasts - is biased against such high risk opportunities. The existing business thinking weighs heavily towards the top of the pyramid, and the developed world companies have developed, in most parts, a systemic arrogance which keep them blind about the opportunities in the low-income markets.

As far as the need to solve the problems of the world are concerned, the corporations are in no great hurry. So far, even environmental concerns, which can have a disastrous consequences on long-term sustainability of businesses, were only superficial and treated along with AOB in most boardrooms. Poverty is even further from the core agenda. In fact, the 20th century invention, the professionally managed company, has proved as bad in handling longer term issues as the democratic system of governance. The professional managers, whose tenures are getting shorter, invariably bring to their job a reliance on proven formula and a focus on Urgent issues. That's what the capitalist system is all about, and it is hard to see how the business strategies can actually become 'creative' without a fundamental shift in business structure first.

Of course, Gates, on his part, is only too aware of the roadblocks, and in his vision, it is a journey that must start. Admittedly, there are companies which are already doing it, and based on Prahalad's work, a systematic framework for strategic thinking already exists. Interestingly, Marx' prophesied this future for capitalism about 150 years back - the Capital is all about capitalism reaching a limit of growth, and expanding ever further on the imperative to bring societies in far flung territories into its remit. It isn't impossible to see today that Capitalism can indeed reach its limit - its cycles getting more and more severe every time, and the new markets often represent the route to growth.

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