At the recently concluded world leaders’ climate summit, there was a lot of talk about the financing needed to move away from fossil fuels and embrace renewable energy. Clearly, clean energy projects require very large capital investments, and it seems the world is falling behind. Interestingly, around the same time, the market value of Tesla, a pioneering electric vehicle maker, exceeded $1 trillion. Although the markets may be in a bad mood, this is a huge valuation, especially for a new company founded with the aim of reducing harmful emissions. So how can this dual reality be explained: while the world is permanently short of funds to solve humanity’s major problems, there does not seem to be a shortage of investment in a commercial enterprise whose objectives at least partially overlap ?
The main difference is that the latter is a business project that promises positive returns, and the former is presented as a do-good project with no return on investment. In other words, it will be financed by “donors”, including governments or private bodies, but in any case it is a philanthropic mission that does not provide an adequate financial return. Such projects are underfunded. Charity always fails. No amount of preaching is enough. Some stakeholders, be they investors, customers or employees, may be willing to make sacrifices for the greater good, but often that is not enough.
Recent events illustrate a larger principle: if you want to solve a big problem, you have to find a way to generate adequate returns, and then there will be no shortage of resources. In other words, an unsolved human or social problem is simply the recognition of insufficient innovation to create positive synergies between financial and social goals.
Take the example of cell phones. Today, there are probably as many cell phones as there are people in India. People from different social strata are happy to buy telecom service plans, and telecom providers are happy to sell them a plan that suits them. In recent years, telecommunications companies have made significant investments. Therefore, the Indian society is well connected not only between family and friends but also potentially with sources of valuable information, which makes life more efficient. Yet we have many major unresolved problems in health or education that seem intractable because of their magnitude. Take, for example, the case of uncorrected refractive errors of sight: hundreds of millions of people live with vision problems that can be easily solved by wearing glasses, and hundreds of billions of dollars in lost productivity Consequently. Why is the company no longer facing the problem of lack of connectivity but suffering from vision problems?
The answer lies in the differences between the technologies underlying the two solutions. The telecommunications industry is a fixed cost business, and there is virtually no additional cost to serve an additional subscriber once the infrastructure is in place. Telecommunications companies are therefore encouraged to sign up as many subscribers as possible, with premium or basic packages. Even if the latter do not generate much income, they make it possible to compensate for the fixed costs. Basically, the business model is scalable and it is in investors’ interest to find more customers even if they are poor and only buy cheap packages. The more subscribers a telecommunications company has, the lower its costs per subscriber and the greater its potential profits. There are positive synergies between pursuing financial and social goals. A company that pursues both outperforms companies that have only one.
This contrasts with commercial vision correction models, which are typically labor intensive given the need for customization. Difficulties in accessing rural markets increase costs but do not promise high margins. Therefore, most opticians and equipment suppliers are happy to provide solutions to the urban upper stratum of urban society, rather than trying to reach the less accessible and poorer sections. This problem can be solved if there is a business model that creates positive synergies between financial and social benefits.
But the synergies between financial and social goals can also be negative, just as we don’t often see companies pursuing two distinct businesses within one organization. As a commercial enterprise, Microsoft has always engaged in ruthless market competition and created great wealth for its investors. But its major shareholders have donated their fortune to charity through the Bill & Melinda Gates Foundation. So you have one organization dedicated to making money and another to giving it away. This may be because these two distinct purposes are best served by different organizations and managers. In other words, the synergies can be negative. In such a case, the pursuit of one goal is a cost or an obstacle for the other. It is better to separate them.
The lessons for business are clear: if you have a business model with positive synergies between financial and social goals, pursuing one helps to succeed in the other. However, if there is a negative synergy, it is better to separate the two activities.
For many unsolvable problems, we would still need the support of government resources or regulations. Tesla wouldn’t be as successful without them. Such targeted support can stimulate innovative models and positive synergies. It might be more productive than a uniform mandate for companies to spend money on corporate social responsibility.
Jai Anand is a Global Visiting Professor for Competitive and Business Strategy at BITS School of Management. He is the William H. Davis Professor of Free Enterprise and Dean’s Distinguished Professor at the Fisher College of Business, Columbus, Ohio.
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