Some 16 countries have already made sustainability reporting mandatory. Serafeim and his co-author used these countries, and 42 that don’t mandate the reporting, as an experiment to see whether sustainability reporting makes a difference to socially responsible management practices. “Reporting can have a real impact on how organizations behave, and mandatory reporting can have an effect at the country level, because collectively all organizations change their practices and their behavior,” he says.

The IMD World Competitiveness Yearbook annually ranks countries on criteria that include environmental, social, and governance issues. Looking at the changes in these ratings after each country’s reporting laws went into effect, and comparing countries to each other, Serafeim found that when sustainability reporting is mandated, corporations introduce more ethical practices, increase their investments in human capital, and have more credibility as well as less bribery and corruption. This is more true in countries where enforcement is stronger.

With sustainability reporting increasingly on the public agenda—several groups worldwide are working to establish standards, and the G20 is due to discuss integrated reporting at its November meeting—it’s good to know that it is effective. “Becoming transparent on how you’re performing along these dimensions creates awareness, and as a result it is a driving force for improvements and real change,” says Serafeim. “It’s a process by which you are disciplined to think in a rigorous way about what is going on inside the organization, and for people outside the organization to question what you are doing.”

Robert Eccles, a professor of management practice at Harvard Business School, has been encouraging this revolution for decades. “Before the US Securities and Exchange Commission, before the Great Depression, there were no accounting or auditing standards. It took regulation to make that happen. And today we sort of take it for granted, but we wouldn’t have the capital markets that we have today without mandated financial reporting, to a set of standards, with some kind of verification,” Eccles says. “I think we’re at that next stage.

“If you’re going to have not just sustainable economies but a sustainable society, you need to have this information. Otherwise people end up just focusing on short-term financial earnings, and there are all kinds of problems that come out of that.”

Ioannis Ioannou and George Serafeim, “The Consequences of Mandatory Corporate Sustainability Reporting,” Harvard Business School Research Working Paper No. 11-100, 2011.

That personal experience arrived for me (Kevin Kramer) while driving through Cleveland’s dilapidated inner-city neighborhoods for a meeting with the Boys & Girls Club. We talked about recruiting more kids to the club, and I asked the director whether the children in a building just across the street would be interested in joining. “Oh no!” said the director. “The kids in that building belong to a rival gang. If they walk across the street, there will be severe repercussions.” I asked myself: How can such a fractured community create a sustainable environment? And, correspondingly, how do we in the corporate world create mindsets that promote a sustainable relationship among our business, society, and the environment?

Another “aha” moment about sustainability came when I was president of Alcoa’s wheel business. A customer said, “Kevin, Alcoa has a great story—you just need to tell it.” I realized that the story was about sustainable growth, since we had been emphasizing the environmental benefits of using Alcoa’s aluminum for making automotive and commercial truck wheels. Soon after I took on my new role, I began reading widely about the connection between sustainability and innovation. The research gave me the framework for working with other senior executives to develop a steering committee, create a product focus, and develop a communications strategy to widen the sustainability effort across the company.

In my case (Jochen Zeitz), I was focused for years on restructuring and reengineering a business that was close to bankruptcy. After I managed to turn around PUMA’s brand and financials, I realized that I had to shift my thinking and consider business and its impacts on society and the environment in a more comprehensive and holistic way. I realized that the traditional paradigm of business delivering employment and growth was no longer enough, nor was it enough for me as a personal aspiration. I came to understand that the world cannot be compartmentalized and that the status quo—business creating profit and jobs, government setting the rules and infrastructure, civil society defining ethics, and religion presiding over spiritual matters—was not leading to the positive change we need in today’s world.

After having spent nearly 20 years traveling and living in Africa, in 2008 I established the Zeitz Foundation with headquarters in Kenya to support innovative sustainable projects and to promote the holistic balance of conservation, community, culture, and commerce. My private life and business life were merging. I realized that although business is part of the problem, it is potentially the best suited to solve it. I also was inspired to do something because I was in a position of influence to help change the old paradigm, where business works against nature, to one where it works with nature. This mission took further root when I met Anselm Grün, a prominent Benedictine monk and author on spirituality. We spent long hours over the course of many months exchanging ideas and belief systems, which we documented in the book Prayer, Profit and Principles: The Monk and the Manager. I also spent time in Grün’s monastery, which was the last step in my own transformation. These conversations were a turning point for me: I realized that I, too, had a responsibility. Jean-Paul Sartre once said: “Once we know and are aware, we are responsible for our action and our inaction. We can do something about it or ignore it. Either way, we are still responsible.” This quote resonated profoundly with me, and I have never looked back.

Although executives we know recognize that sustainable growthis important, it is not clear to many of them how to implement a new approach effectively. We define sustainable growth as the use of sustainability-driven innovation to generate new business revenues from sustainable products and services, new business models, and business platforms. We believe sustainable growth is critical as growth from traditional sources becomes constrained in developed countries and economic growth accelerates in emerging countries, along with concerns about its impact on the environment and society.

This article describes a strategic framework that ties together the principles for implementing sustainable growth—principles that involve both the emotions of the heart and the reasoning powers of the head. It is based on our experience over the past decade as senior executives at Alcoa and PUMA. Together, our two companies have funded hundreds of sustainability-based business initiatives, engaged thousands of employees in delivering sustainable products and services to millions of customers, and faced many successes and failures in implementing sustainable growth. We hope this experience in implementing sustainable growth across diverse industries, markets, and regions will be of use to leaders and employees of companies pursuing a similar quest.

A SUSTAINABLE GROWTH FRAMEWORK

What are the preconditions for initiating sustainable growth efforts in a company? First, external market conditions need to be conducive to initiating sustainable growth. They include growing customer expectations, increasing resource constraints for energy, water, raw materials, and other inputs needed by the company, heightening stakeholder expectations (especially among shareholders), and increasing environmental regulations.

In addition, market conditions need to be such that sustainability presents business opportunities for growth. This issue has been explored in greater detail in recent business literature; for example, Ram Nidumolu, C. K. Prahalad, and M. R. Rangaswami’s article “Why Sustainability Is Now the Key Driver of Innovation” in the September 2009 issue of the Harvard Business Review. At both Alcoa and PUMA, many of these external drivers were sufficiently in place by 2007 to create an environment for initiating sustainable growth efforts.

Although favorable external conditions are necessary for initiating sustainable growth, they are not sufficient. Internal organizational conditions are important, and there must be senior management involvement. Moreover, the organization’s culture needs to be amenable to adopting the difficult changes associated with sustainable growth. Even when these conditions are in place, success may not occur. The key to success is a strategic approach, a framework, that we describe below.

Executives need to grasp three overarching lessons to achieve sustainable growth. First, they need to understand that a new paradigm for doing business will require fundamental changes to mindsets, behaviors, and business models. In our experience, many senior executives, and even sustainability consortia and indexes, fail to recognize the scale and scope of the shifts needed. Second, sustainable growth takes place when core business units that generate most of the revenue adopt and make it central to their business. Third, middle management represents both the central challenge and the core opportunity for enabling sustainable growth.

In this article, we identify five phases that organizations will need to go through to implement sustainable growth.

PHASE I: FORM A COHERENT VIEWPOINT ON SUSTAINABLE GROWTH

Sustainable growth means different things to different companies. Companies need to begin their implementation by forming viewpoints on sustainable growth that are a good fit with their values and strengths. Some of these viewpoints emphasize reducing damage or making a positive contribution to the environment or resource sustainability. Others emphasize first targeting the societal and relational conditions underlying environmental and resource impacts. Each company must take an industry-specific approach.

Alcoa’s starting viewpoint in 2009 was eco-friendly growth. It directly sought to mitigate the environmental impacts of producing its products while emphasizing the fuel efficiency and recycling benefits of using aluminum and other products to pursue business growth. The aluminum industry is one of the most energy intensive operations in the world. It produces about 500 million tons of CO2 emissions annually (nearly 1 percent of global emissions). Energy costs are the primary drivers of production costs, which determine the energy source and location of operations. This is especially true of aluminum smelters, which consume the most energy and generate 80 percent of the carbon emissions from all value chain activities. As energy costs from fossil-based sources increase and the effects of CO2 emissions on climate change become clear, growth that explicitly incorporates environmental impacts has become a strategic imperative for Alcoa.

The organizational challenge Alcoa faced was to get senior management to recognize that although previous sustainability efforts continued to be necessary, they were no longer sufficient to address the needs of Alcoa’s customers. For example, Alcoa had long been recognized as a leader in environmental, health, and safety matters. Along with other leading aluminum companies globally, it had supported long-term goals for greenhouse gas reductions, safety improvements, water treatment and reuse, and mine reclamation. The main challenge now was to convince executive management and business unit leaders to go beyond these traditional goals and recognize that further sustainability was imperative and could lead to greater revenues.

For PUMA, the starting point and resulting PUMAVision initiative was ethical growth, which emphasizes a moral foundation for stakeholder relationships to create mutual trust and high performance in the organization. PUMA believes that sustainable growth takes place when employees and other partners embed ethical thinking and integrity into their interactions with one another and with the natural world. PUMA arrived at this point in 2008 after setting up intense planning sessions among the CEO, senior executives, and an outside team with expertise in the environment, biodiversity, human relationships, peace, the arts, ethics, and philosophy. PUMA defined ethical growth as being fundamentally fair, honest, positive, and creative, a combination of traits it calls the 4Keys. It then established three major programs—PUMA.Safe, PUMA.Peace, and PUMA. Creative—to oversee behavioral change within the company and enable measurable contributions for stakeholders, the environment, and society. PUMA.Safe’s aim is to reduce the company’s carbon footprint, facilitate the development of sustainable products, and raise work and production standards worldwide. The goal of PUMA. Peace is to create programs that foster a more peaceful world. The PUMA.Creative program aims to bring together individual artists and organizations and to provide them with a platform for creative exchange and international exposure.

The organizational challenge for PUMA in this phase was that understanding and implementing an ethical framework required a great deal of effort from PUMA employees. The company faced huge educational, behavior, and management challenges and set out on a path to commit the time and resources to create deep and long-lasting organizational change.

PHASE II: INITIATE CHANGE THROUGH EMOTIVE MEANS

The second phase of the process focuses on targeted changes to mindsets through affective means that address emotions and feelings, providing a crucial link to initiating behavior changes. Below are a few approaches that Alcoa and PUMA used.

Provide peer inspiration. Credible organizations or peers can be pivotal in changing mindsets and inspiring new norms of behavior. Alcoa organized several meetings on sustainability and innovation based on the best corporate practices of eco-friendly growth. During these workshops, Alcoa compared its efforts and identified new business opportunities that core businesses could explore. These conversations enabled the business units within Alcoa that were further along the path to sustainable growth to serve as reference points for units just getting started. This peer inspiration resulted in new thinking and action, specifically around opportunities that Alcoa was overlooking. The meetings were enhanced by the mix of people involved: group presidents of the midstream and downstream divisions, the chief financial officer of the primary products group, the chief technology officer, and several core business unit presidents and directors.

The main challenge for Alcoa was to convince the broader management team that behavior changes would provide competitive advantages—not just against aluminum manufacturing competitors, but also against companies that produced competing materials such as steel, glass, copper, and plastics. To strengthen these arguments, Alcoa’s growth initiatives group used recent consumer research and personal anecdotes about the changing priorities of key customers.

PUMA also used peer inspiration to unleash the emotive drivers of behavioral change. All employees, including the CEO, are expected to embody the 4Keys in their daily interactions. Employees are urged to guide each other through lapses in behavior or judgment, especially at meetings. Such peer inspiration and pressure have shaped norms of behavior among employees. For example, PUMA created a partnership with Yves Béhar, a leading industrial designer, to design a new packaging system for PUMA footwear, called the Clever Little Bag, that would substantially reduce consumption of fuel, water, and materials because of improved transport logistics and package content. This partnership proved catalytic, as the designs developed in collaboration with the in-house team led to critical recognition and awards. PUMA’s designers aspired to emulate Béhar’s contributions, recognizing that designs could be cool and sustainable at the same time. The experience tapped into the designers’ desire to create a better world and to emulate admirable peers.

Choose credible change agents. Role models are also an important means for enabling the new behaviors needed to implement sustainable growth. At Alcoa, the chief sustainability officer is the former chief financial officer for the primary products group, and he has strong credibility with the core business groups. PUMA hired a museum curator with expertise in cultural change to drive the implementation of PUMAVision, who has become central to the initiative.

Because reputation is a driver of emotive behaviors, it needs to be explicitly considered during the implementation phase. Choosing the specific reputation to influence is important. Many companies aim to achieve a high rank in sustainability indexes as an end in itself. But core business managers are more likely to be influenced by the business unit’s reputation among prospective employees, key customers, and the managers’ professional community. These reputations will drive sustainable growth behaviors more than scores on sustainability indexes. This focus also prevents greenwashing and can enable stronger partnerships with NGOs developing sustainable capacity.

For example, product designers at PUMA care deeply about their reputation among design publications. As part of PUMAVision, PUMA developed the Creative Africa Network, the world’s largest online network of African artists across different disciplines, and turned the network over to the artist community to own, operate, and expand. The sustainable designs and discussions generated in the community’s forum were then picked up and publicized by leading design magazines. The value of this publicity far exceeded what PUMA could have purchased through advertisements. Most important, it validated the appeal of sustainable and local designs for PUMA designers.

Although successes have been achieved through the Clever Little Bag and the Creative Africa Network, PUMA designers continued to view sustainable growth as a significant challenge because progress is complex and takes time. PUMA has needed to nurture and encourage the efforts of product designers continually to keep them on track.

PHASE III: EMBED SUSTAINABLE GROWTH INTO ORGANIZATIONAL IDENTITY

Once changes in mindsets and behaviors begin to jell, enterprises need to identify the most effective way to embed sustainable growth initiatives within core business activities. Fundamental questions such as “Who do we want to become as a company?” and the related question “Who are we now?” become a natural preoccupation for managers and employees.

Recent research, such as Mary Jo Hatch and Majken Schultz’s collection Organizational Identity, suggests an important difference between organizational identity and culture. Organizational identity focuses on the central, distinctive, and enduring aspects that describe what the organization stands for. It is more focused, explicit, instrumental, and textual than organizational culture, which is more unfocused, tacit, emergent, and contextual. Organizational identity is the tangible “we” that arises from the intangible processes of culture. An important aspect of organizational identity is organizational mission or purpose, but organizational identity is much more than mission or purpose. It is what the organization represents to its employees.

Because organizational identity informs the enterprise’s core business activities, efforts to embed sustainable growth within it must be supported and led by the CEO and senior executives. Sustainable growth becomes an effective part of organizational identity if it provides a clear justification for the future existence of the company and guides the experience of its customers.

Justification for future existence. At Alcoa, organizational identity was redefined through two related questions customers would ask in the future: “Why aluminum?” and “Why Alcoa?” Aluminum’s chief competitors are steel in the automotive industry, carbon fiberreinforced polymers (CFRP) in the aircraft industry, and polyethylene terephthalate (PET) in the packaging industry. Although primary aluminum is highly energy intensive in its production, it has advantages in reusability when compared to CFRP and PET and in fuel efficiency when compared to steel. Moreover, Alcoa has positioned itself as the market leader in developing new technologies for producing and using aluminum and other metals. By incorporating the viewpoint of eco-friendly growth, Alcoa’s organizational identity is slowly shifting from being a producer of primary aluminum to one that produces sustainable products and positions aluminum as the preferred environmental choice.

A challenge that Alcoa’s change agents faced was to prove why aluminum and Alcoa’s sustainable innovations made financial sense to customers. To do this, Alcoa developed a quantitative tool that showed a financial return on investment for the change. Another challenge was ensuring that a consistent message was sent to all stakeholders around sustainable growth. Alcoa leveraged the broader coalition of global aluminum associations in the United States, Canada, Europe, Australia, and elsewhere as well as the International Aluminium Institute in London. Getting all stakeholders, internal and external to Alcoa, to move toward sustainable growth was an important and difficult element, but it has justified the company's future existence.

Guide desired customer experience. Once managers at PUMA became fluent in the 4Keys, the focus shifted to making sustainable growth a core part of PUMA’s organizational identity. PUMA changed its corporate mission to reflect the viewpoint of the customer. Before PUMAVision, the company’s mission was “to be the most desirable Sportlifestyle brand in the world.” Now PUMA sought “to be the most desirable and sustainable Sportlifestyle company in the world.” In addition, PUMA’s brand identity was changed to “We are the DJ: the brand that joyfully mixes the influences from sport and lifestyle with the desire to contribute to a better world.” This emphasis on sustainability, contribution to a better world, and a joyful experience in using PUMA’s products has been the driver of PUMA’s business strategy and products since 2008.

The main challenge for PUMA at this stage was the complexity of sustainability as it applied to a sports lifestyle company. The change agents at PUMA had to develop clear definitions of sustainable design, sourcing, and production, so that employees could better implement PUMA’s mission and brand identity.

PHASE IV: INSTITUTIONALIZE SUSTAINABLE GROWTH

Sustainable growth gathers momentum and is institutionalized in core businesses through formal mechanisms, such as business models, business systems and processes, and performance targets. These mechanisms need to go beyond the traditional sustainability steering committees; they need to focus on how sustainable growth opportunities will be systematically identified, justified, implemented, and evaluated in furthering strategy. In their absence, decisions on sustainable growth get made ad hoc and are informed primarily by enthusiasm and high ideals rather than by strategic thinking that focuses on business value, scale, and institutionalization.

Informal mechanisms, such as emotive means and organizational identity, and formal mechanisms, such as models, systems, processes, and performance targets, have an iterative and escalating relationship. Although informal mechanisms seed the ground through supportive mindsets and identities that initiate change to behaviors, formal mechanisms capture and communicate these changes in the familiar language of business. In turn, these changes build motivation and help change behaviors even more, leading to transformative changes.

At Alcoa, formal mechanisms for evaluating conventional market opportunities were modified to include sustainable growth. Several new opportunities have been identified in building and construction, transportation, and reuse of production waste, which could be worth billions of dollars, while significantly improving the environment. Alcoa also instituted an employee compensation system that incorporates performance incentives related to sustainability. Moreover, each business is required to report on sustainable growth progress at its quarterly business review with the company’s executive council.

An important implementation challenge for Alcoa has been clear corporate communication regarding how each employee can promote sustainability. This is especially important because 20 percent of an employee’s incentive compensation is tied to reaching internal targets. As more employees inquire about how they can help hit the sustainable growth targets, the incentives system appears to be gaining traction.

Environment-related product performance targets are also important of waste by 2015, much of which will take place through changes to its product distribution and packaging system. Last, PUMA has developed one of the world’s first formal environmental profit and loss (EP&L) systems, which will include targets for environment-related costs and benefits to measure business performance.

Currently, the principal challenge at PUMA is to create and implement a staged approach to introducing EP&L. PUMA is an early innovator; virtually no other company in the world has attempted to implement such a system. PUMA has to proceed carefully with EP&L to ensure it does not overwhelm the other considerable changes within the company.

PHASE V: EVOLVE BUSINESS FOUNDATION FOR SUSTAINABLE GROWTH

The first four phases create a basic foundation for sustainable growth. Yet the business foundation will continue to evolve because sustainable growth is an ongoing transformation whose long-term features are unclear. New and radically different business opportunities may arise that require implementation. Given the unfamiliarity of this growth paradigm, it is important to create a culture of learning, experimentation, evaluation, and persistence.

In our experience, it often takes four to five years of sustained commitment before core units begin to recognize sustainable growth as a new paradigm for business. Setbacks are bound to happen and should be viewed as occasions for learning. The best approach is to view resources spent on sustainable growth as an investment in building a business foundation that is critical for future success. Even when the basic elements of the business foundation are in place, profound questions about the nature of sustainable growth will continue to arise.

At Alcoa, sustainable growth is becoming especially important in the midstream and downstream businesses. The company is witnessing increasing demand for sustainable products in the automotive industry as US automakers recover and higher mileage standards are implemented. Emerging markets in China, India, and other countries are providing new and large markets for fuel-efficient transportation and green construction. Moreover, as the clean energy industry grows, new markets in renewable energy equipment are emerging. Globally, demand for aluminum in midstream and downstream markets is expected to grow from 53 million metric tons to 93 million metric tons between 2010 and 2020 for the industry as a whole. At Alcoa, sustainable growth initiatives are expected to add several billion dollars in incremental revenue by 2013. At the same time, Alcoa has also made significant progress in reducing its carbon emissions. For example, the upstream primary products group had set a goal of 20 percent reduction in carbon emissions by 2020 over 2005 levels; by 2010, it had already achieved a 22 percent reduction. In recognition of its sustainability efforts, Bloomberg-Maplecroft ranked Alcoa third among 350 US companies in climate-related innovation and carbon management.

Despite these opportunities, Alcoa continues to face profound questions that challenge the company and the industry. Aluminum is reusable and almost three-fourths of the aluminum that has been produced is still in use. Because of that, Alcoa is trying to ensure that CO2 emissions from the production of new aluminum are reduced, either through new operations technologies or by finding cleaner sources of energy. For the aluminum industry, upstream activities such as bauxite mining, alumina refining, and aluminum smelting are highly energy intensive and have high profit margins (ranging from 30 to 40 percent), whereas midstream and downstream activities such as extrusion, rolling, and finished products are less energy intensive but have lower profit margins (ranging from 10 to 25 percent). How can Alcoa continue to expand into more mid- and downstream products and increase its profit margins through new technologies and other innovations, while meeting the performance and cost expectations of its customers? How can Alcoa improve the business model for recycled aluminum to successfully enter markets beyond packaging? Moreover, how can Alcoa use the lessons learned in aluminum and apply them to the other materials it works with?

At PUMA, the success of PUMAVision is leading to new opportunities. By 2015, 50 percent of PUMA’s product portfolio is expected to be from sustainable products, representing €2 billion. PUMA has received numerous awards as a sustainability leader, including the German Sustainability Award for Most Sustainable Strategy 2010. Initial results of PUMA’s EP&L analysis show that the direct annual ecological impact of PUMA’s own operations is €7.2 million, and an additional €87.2 million is from the supply chain.

Sustainable growth is being implemented throughout the French multinational holding company PPR, which in addition to PUMA includes fashion, luxury, and high-end retail brands such as Gucci, Stella McCartney, Yves Saint Laurent, the Redcats Group, and Fnac. Ethical growth through fairness, honesty, creativity, and a positive outlook to work and relationships will be a key component of the group’s approach to sustainable growth. Although this expansion holds great possibilities, it also poses profound challenges. Highend fashion and luxury items are often perceived to be indifferent to, or even at cross-purposes with, sustainable growth. How can PPR implement a credible way to produce sustainable products for high-end items and still maintain its identity? How can PPR maintain a coherent approach across the disparate brands in its portfolio? And can PPR develop and implement an approach that leverages its global infrastructure to achieve a tipping point for sustainable growth within the holding company and industrywide?

Thomas Kuhn observed toward the end of his book The Structure of Scientific Revolutions, “If a paradigm is ever to triumph it must gain some first supporters, men who will develop it to the point where hardheaded arguments can be produced and multiplied.” The core message in implementing a sustainable growth paradigm is that it is a persistent, iterative, and constantly evolving effort, linking “soft” means to formal mechanisms that provide “hard” arguments. And, as Kuhn argued, it requires activist leadership.

We believe a sustainable growth framework is like a DNA double helix, comprising two interconnected strands that run in opposite directions but are mutually dependent. The strands in this case are not two polymers of nucleotides, but the heart and the head, with the heart governing the moral and ethical imperatives of sustainable growth and the head figuring out how to make them a practical reality. In the end, regardless of how the process of sustainable growth unfolds, one thing remains clear to us: Its successful implementation will make or break the credibility of business as a worldwide institution for meeting society’s economic needs.

Ram Nidumolu is CEO of InnovaStrat, an advisory and consulting company for sustainability strategy and innovation at global corporations.

Kevin Kramer is president of growth initiatives at Alcoa, and was previously president of the Alcoa wheels and structures business.

Jochen Zeitz is CEO of Sport & Lifestyle Group and chief sustainability officer of PPR, and chairman of the board of directors of PUMA.

In a fresh twist on corporate citizenship, Toyota is bringing the automaker’s vaunted process improvement methods to at least 20 nonprofit organizations that are struggling to do more with limited resources. “We’re really talking about sharing a core piece of the Toyota business culture: our problem-solving method,” says Jim Wiseman, chief communications officer for Toyota Motor North America.

A nonprofit that is rebuilding houses in post-Katrina New Orleans has managed to cut rework orders by more than 50 percent since opening its operations for a look-see by Toyota engineers. Zack Rosenburg, co-founder of the St. Bernard Project, says reducing errors on plumbing, carpentry, and electrical work “allows us to optimally serve our clients. We have a limited amount of time and money. If we’re not using both efficiently, our clients are suffering.”

Although Toyota’s commitment to this initiative was announced by corporate executives at the Clinton Global Initiative in June 2011, it began in a grassroots way. Stories started circulating about individual employees who, in their off-hours, were sharing workplace expertise with good causes. For instance, a food bank cut wait time for hungry families from one hour to 15 minutes after a Toyota engineer helped improve the process for assembling food baskets. Similar stories led Toyota to realize that its culture of continuous improvement—called kaizen in Japanese—could have value for the nonprofit sector.

At the St. Bernard Project, introducing kaizen has meant analyzing inefficiencies “at a granular level,” explains Rosenburg. With Toyota’s help, he and his staff tracked rework orders during two-week periods. Categorizing mistakes helped them identify and then eliminate the most common sources of time-consuming errors. This has led to a cultural change in an organization that’s heavily dependent on volunteers, AmeriCorps staff, and goodwill. “Fear of not being efficient can lead to hiding problems,” he says. “Now we recognize these are good problems because we can fix them.” With new efficiencies in place, the time to build a house has been cut to six weeks, a 30 percent reduction.

Similar results are emerging in diverse projects. At a hospital in Pittsburgh, engineers helped design a better system to deliver pharmaceuticals to patients, freeing nurses to devote more of their time to patient care. In Kentucky, a cash-strapped county asked Toyota to suggest energy-saving measures for a 150-year-old government building. “Our folks were able to identify where heat was escaping from this beautiful historic building. By finding ways to conserve energy and use less water, they’re saving $50,000 a year. That’s a big deal in a small town,” Wiseman says.

“Every situation is unique,” he adds, “but it’s never us saying, do this or do that.” The 10 Toyota engineers assigned to this initiative are careful about taking a collaborative approach. “We don’t come in with a silver bullet,” Wiseman says. Nor is the sharing of expertise intended to replace more traditional philanthropic efforts. “We’ve always tried to do our part financially,” he adds, “and that will continue. But we think that lending our expertise is going to be a bigger and bigger piece of our collective efforts. Our employees—especially the younger generation—are community minded. If we can give them a way to add value, that’s a win-win.”

Toyota is also working with nonprofits to help them share what they are learning. “We want to come up with a model for affordably built housing that’s scalable in New Orleans and replicable in other parts of the country,” Rosenburg explains. Sharing good ideas is part of Toyota culture. “It’s called yokoten,” says Wiseman. “We’re eager to help nonprofits do more of that, too.”

But Mackintosh knew that the demand for a cheaper beer existed. Low-income consumers in Uganda weren’t forgoing beer consumption; instead, they were drinking home brews, with potentially severe health consequences. Home brews are widely used in many African nations, despite the fact that they can cause serious ailments and even death.

Mackintosh realized that Nile Breweries had to reduce the price of its beer if it were to reach these consumers and offer them a better, safer product. The brewery faced major constraints, however, because many of its costs were determined exogenously, including the price of its imported inputs, chiefly barley, and because of the high excise taxes that the Ugandan government imposed on beer, which the Ministry of Finance, Planning, and Economic Development considered a luxury good. But if Nile Breweries could Sourcing Locally for Impact substitute for imported barley with a local crop, it could dramatically lower its costs and then, because of its choice to source locally, be in a position to make a reasonable case to government officials for a reduction in the excise tax.

Working with Ugandan farmers, Mackintosh—a South African by birth with extensive experience in the beer industry— discovered that domestic sorghum could serve as a reliable substitute for imported barley. At first, Uganda’s family farmers were skeptical about his promise to buy their crop. But once Nile Breweries bought their sorghum harvest, Mackintosh recalled, skepticism turned to enthusiasm, because the arrangement offered good prices and stable demand. And once Nile Breweries was buying produce from thousands of local farmers, Mackintosh found himself in a position to make a compelling case to the government—with the farmers’ support—for a lower excise tax on the new beer.

As a consequence, Eagle Lager was born. Today it is Nile Breweries’ largest selling brand. But Eagle Lager’s success does not rest solely on its low-income customers. To the surprise of Nile Breweries’ managers, it has also become a hit among high-income consumers, who have discovered that its taste marries well with the local barbecue.

The case of Eagle Lager exemplifies how a company can leverage its relationships with local suppliers and, in turn, with the government, to build the foundation for a successful product. In this case, Ugandan farmers provided not just inputs to the brewery, but also political support for Nile Breweries’ quest for lower excise taxes. Indeed, the farmers were the hinge on which the corporate strategy of introducing a lower-priced brand turned, and they ended up benefiting greatly from a steady market for their sorghum.

Hope Ruhindi Mwesigye, Uganda’s former minister of agriculture, said of the arrangement: “We have all gained from Nile Breweries’ commitment to working with us to develop value-added agriculture through local sourcing from thousands of Ugandan farmers. I encourage other leading global companies to see this as a model for how to partner locally to advance economic growth.”

Still, Eagle Lager has not become a well-known business model. Most managers have a long way to go when it comes to leveraging their local relationships and using them to support corporate strategy. Currently managers—especially those at corporate headquarters—tout the benefits of global sourcing because they believe it’s a cheaper method of acquiring needed inputs; and they don’t think deeply about the long-term benefits of establishing relationships with local stakeholders. In fact, in our experience, managers view their interactions with domestic stakeholders primarily through the lens of corporate social responsibility or public affairs rather than as a core element of their company’s strategy.

In this article we argue that a careful, quantitative analysis of stakeholder relationships can provide a useful complement to the strategy-building exercise happening at most multinational corporations. Drawing from the experience of different companies in banking, mining, and fast-moving consumer goods, and operating in countries across the industrial and developing worlds, we show how a deep knowledge of local markets has opened up new business opportunities.

Leveraging corporate relationships, however, requires that managers reconsider how they acquire the goods and services that their firms need. In particular, they must ask themselves whether cost alone is the appropriate metric for making their sourcing decisions. We argue that rather than focus narrowly on cost, managers would do better from a competitive standpoint if they considered the social and economic impacts of their decisions. In short, they should contemplate the following hypothesis: The greater the impact of a firm’s sourcing decisions on local economies, the more constituents the firm will develop in support of its strategic goals.

Why Source Locally?

Since at least the 1980s, multinational corporations have turned increasingly to global sourcing as an approach to supply chain management. Business analysts often see this trend as the result of two forces: an internal force that is coming from shareholders and the board for companies to focus on core competencies or be penalized by the stock market; and an external force that stems from the widespread belief that globalization of any and all parts of the production process will lead to higher profits. Taken together, these trends have driven managers to seek suppliers globally who have a cost advantage in providing goods, services, and labor. Because external suppliers of goods and services can account for a large fraction of a company’s expenditures—significantly more, for example, than direct employment—reducing that outlay can be crucial to a company’s competitive advantage and cash flow.

This tendency toward global sourcing is premised on the assumption that needed inputs can be provided at lower cost and with greater reliability, because firms with multiple suppliers won’t face holdups from their dependence on a single local supplier or capricious government regulation. In many cases, global sourcing also can lead to higher quality products. Global sourcing allows companies to adopt just-in-time production more readily as supplier relationships become transactional rather than based on long-term commitments. This, in turn, reduces the need to maintain inventories and tie up costly capital. Stephen Rogers and Lisa Cooley, two executives from Procter & Gamble Co., argued in a 2004 International Supply Chain Management Conference paper that global sourcing “sounds like a no-brainer.”¹

But the Procter & Gamble executives quickly note that it’s “not that simple.” Problems can include rapid changes in exchange rates, which make foreign suppliers less competitive than they were yesterday; higher monitoring costs, especially when suppliers speak a language different from employees at corporate headquarters; different legal systems; and political risk. Simply put, although the benefits of global sourcing may be easy to quantify, the costs and risks are often harder to calculate and, as a result, they may be overlooked or understated by corporate decision makers.

Some scholars have sought to devise simulation models of global vs. local sourcing as a proxy for such measurements. In one particularly innovative study, Woo-Tsong Lin of the Department of Management Information Systems at National Chengchi University in Taipei, Taiwan, and his colleagues conducted simulations of several different approaches to corporate supply chains, based on different types of enterprises, goods, and services. They found that global sourcing is hardly a no-brainer, and that the reliability of global supply chains varies greatly across the goods and services provided.²

Our objective, however, is not to rehash these now familiar debates about global vs. local supply chains. Instead, we wish to dig deeper into sourcing decisions by examining the strategic role of local stakeholders, including not just suppliers but also consumers, governments, and representatives of civil society. These stakeholders should not simply be conceptualized as generators of goodwill or public relations for a firm in the places where it operates, but as key players in determining the success or failure of the company’s market entry and market development decisions—and even of its continuing ability to secure a license to operate.

We have observed through our consulting work for leading multinational corporations that very few headquarters managers pay sufficient attention to the externalities, both positive and negative, associated with local sourcing decisions. To give just one example, we were working at the African subsidiary of a multinational corporation that, due to a decision made in its distant headquarters, stopped using a very competent local training company. Headquarters wanted consistency in all its training programs and signed a global contract with a large international consultancy. What the managers at headquarters failed to recognize was that the local firm had deep ties to its community and to the government, and that it was helpful to the firm in ways that went far beyond the provision of staff training. By outsourcing the training, the company reduced the number of locals it was employing and turned to expatriate expertise. The possible consequences of this type of decision in bad publicity are rarely computed at headquarters. Conversely, the possible benefits or externalities of going local are seldom analyzed.

The problem is not just one of measurement—although that’s crucial and we will discuss it in greater detail below—but also one of incentives. Managers usually are rewarded for short-term improvements to a company’s competitive position, as reflected, say, in its stock price. This makes transactions based on directly observable costs a tempting proposition; if a widget from a global supplier costs less to buy than a widget from a local supplier, then why not acquire it overseas? Managers have little incentive to map out all the positive externalities that local purchases may create.

But what if managers had a method for assessing the social, political, and economic impact of their business decisions? What if they could chart or map all the ripple effects of how they produce and sell goods and services? If they had such a tool, they might see the broader consequences of their sourcing decisions. That, in turn, might lead them to re-examine the costs and benefits of global vs. local sourcing, and to see these calculations in a different light. Let’s consider a few cases where managers have done just that.

Mapping Relationships

We believe there are several reasons managers should map out their local relationships, including discovering market development opportunities and fostering political and civil society support for corporate strategy, as Nile Breweries found when it developed Eagle Lager. By examining relationships with workers, suppliers, nongovernmental organizations, and public agencies, managers become anthropologists, developing local knowledge that can provide insights into consumer behavior and a network of constituents who can support a company’s objectives. After all, domestic actors are likely to have more influence within their communities than any multinational enterprise can muster on its own. Without broad community support, firms may even struggle to sustain their licenses to operate.

Mining companies often find themselves in that category, with local stakeholders opposing licenses to operate on the grounds that mining leaves communities worse off environmentally and economically. Indeed, mining creates so much strife that some governments choose to nationalize the industry, as happened recently in Bolivia and Ecuador. In May 2010, the Australian Parliament passed a “super tax” on all mining operations, which was transformed into a lower “resources rent tax” on only iron ore and coal after considerable industry opposition.

Most mining companies do little to improve their local relationships, often turning their backs on local communities and operating as enclaves removed from public scrutiny. By thinking strategically about their real or potential relationships with the communities and countries in which they operate, however, they can avoid these pitfalls and be viewed as valued partners in economic growth and development goals.

To provide one example of strategic thinking about local relationships, Newmont Mining Corp., the world’s largest gold producer, in cooperation with the International Finance Corp., developed a comprehensive “linkages” program with suppliers based in the Ahafo region of Ghana beginning in 2006. This program focuses on developing local entrepreneurs who can provide goods and services not just to the mine but to the district that surrounds it as well. Within the last five years, the company has supported the development of local construction and catering companies, which are engaged in a variety of governmental and nongovernmental projects. Newmont Mining also has created a foundation with revenues from the mine that serves as a funding agency for local projects; the board of directors is drawn from the Ahafo region, which reviews proposals submitted by community organizations. As a result, Newmont Mining has won public support in the community for its operations. That support is vital as Newmont Mining counters perceptions that it is taking Ghanaian gold without providing much benefit to the nation and its people. (See “Newmont’s Impact on Jobs in Ghana, 2009,” below.)

Another example of local stakeholder building, also from Ghana, is the Standard Chartered Bank, which has operated in that country for more than 100 years. Despite this long-standing relationship, many in Ghana view Standard Chartered as a foreign enclave that finances only global corporations and big projects, such as the country’s new offshore oil fields. It has come under attack from the business press and representatives of civil society for not being more active in promoting the local economy.

A detailed mapping of the bank’s lending practices, however, reveals that it provides substantial support to Ghana’s booming small and medium enterprise (SME) sector, which in turn generates thousands of jobs and millions of dollars in local household income and tax revenue. This evidence of impact on the Ghanaian economy, which Standard Chartered reported to the press in 2010, has come as a welcome surprise to government officials and citizens, and even to the bank’s senior management. As a result, the bank’s managers plan to increase lending to the SME and agricultural sectors.

For a final example, consider Heineken International. Dutch in name and origin, few people realize that the company mostly operates as a brewer that produces for local markets, often using local inputs. Heineken’s “domestic flavor” has given it a competitive edge in many places, because the beer is often viewed as homegrown. By mapping out its local impact on employment, incomes, and tax revenues in countries such as Sierra Leone, Rwanda, and Nigeria, Heineken can argue to communities and governments that they are the biggest beneficiaries of the company’s presence and thereby promote brand loyalty. And because of Heineken’s guaranteed demand for crops, farmers have improved access to capital, which enables them to buy better seeds and fertilizer to produce higher and more reliable yields. That, in turn, means higher incomes. The benefits of going local are shared by local farmers, the local Heineken brewery, and governments that rely heavily on beer sales for tax revenue generation. In the words of Door Plantenga, former managing director of Bralirwa (Heineken Rwanda): “The economic impact assessment showed that there was much more to say about our company than what you would get from its profit and loss statement and balance sheet. An important part of the value chain, Bralirwa generates an income for thousands of Rwandans.”

True, the strategy of local sourcing can easily fall victim to any number of exogenous shocks, whether in the form of tax hikes and other government policy changes, activism from nongovernmental organizations and unions, or the mobilization of the local business community against the multinational’s proposed operations. But many of these shocks can be headed off in advance if managers have mapped out and are in a position to leverage local relationships. By doing so, managers and their firms might discover that they have many supporters who can help them reach their objectives.

Input-Output Tables

For managers to gain a deeper understanding of how consequential local relationships really are, they must find a way to measure them. One method for doing this is fairly well established, although few firms make active and strategic use of it. It consists of driving the company’s financial statements through the national accounts of the countries where they do business. Let’s call this an exercise in economic mapping, or mapping the economy from the firm’s perspective. The national accounts—and, in particular, the accompanying input-output tables that almost every country produces—basically reconcile what goes into an economy with what goes out from it.

The purpose of input-output tables, created by Nobel Prizewinning economist Wassily Leontief in the first part of the 20th century, is to depict the relationship between production and consumption, or between inputs and final demand, within an economy. Input-output tables show how the output of industry A is an input to industry B. For example, glass, rubber, computer chips, and skilled labor are all inputs to automobiles, which represent a final output. Input-output tables take a matrix form, with inputs shown in the columns and outputs in the rows. The relationship between the industries is usually shown in terms of monetary values. Thus the automobile industry will consume X millions of dollars of glass, Y millions of dollars of rubber, and Z millions of dollars of computer chips. Again, managers can use input-output tables to gain a deeper understanding of how their operations relate to the economies in which they operate.

Beyond this, and no less important, input-output tables also can give managers a good idea of the multiplier effects associated with production. When the procurement managers of auto manufacturers buy goods and services, they also generate employment in these supporting industries. The firm and its suppliers pay workers who go out and spend money in the economy. All of these economic agents also pay taxes to the government. By putting the company’s financial data in the input-output tables, these myriad economic relationships can be mapped and their overall impacts on employment, household incomes, and tax revenues estimated. You can be sure that the administration of President Barack Obama took these multipliers into account when it decided to save the Big Three automakers from going under. Indeed, firms most often make use of input-output tables to illustrate their effects on the economy—their so-called multiplier effects—when they are seeking government subsidies or policy changes, for example, in the context of major investment decisions.

When we ask senior managers to guess what their company’s overall impact is on the economy in which it operates, they usually don’t have the slightest idea. It’s just not a number that’s relevant to their daily concerns or to the firm’s market share or stock price. And they generally don’t have the foggiest notion of how much employment and household income their operations support among their suppliers and their suppliers’ suppliers. They are quite literally flying blind in the countries where they operate. As a consequence, they are depriving themselves of a potentially valuable management tool for advancing their objectives.

Managers can take the economic road map provided by input-output tables and overlay it on top of their corporate strategy, discovering in the process which domestic actors are most likely to support and promote their firm’s goals based on their interdependencies—as SABMiller did when it started to work with Ugandan farmers.

This approach may seem like nothing more than common sense until one considers how most companies engage with local communities. All too often, local relationships are handled by staff in a company’s public affairs division and fall into the bucket of corporate social responsibility (CSR). These public affairs executives often develop a multitude of philanthropic programs—for example, support for the local symphony and youth sports teams—designed to shape public attitude toward the firm. But these programs are rarely judged on their effectiveness, whether they rely on the firm’s core competencies, or whether they are scalable and sustainable.

Further, although CSR spending typically constitutes considerably less than 1 percent of a firm’s revenues and has relatively localized impacts at most, a substantially higher percentage—up to 90 percent—may be spent up and down a firm’s supply chain, with influences that are felt throughout an entire economy. These suppliers provide all the necessary inputs to an industry, often including distribution and retail services and, in doing so, they create income, jobs, and, not to be overlooked, political influence.

Companies in the fast-moving consumer goods sector find that most of their multiplier effects will be felt in their distribution network. A multinational corporation like Coca-Cola Co., whose direct employment within local plants might be small, nonetheless can provide many thousands of jobs because so much of its business relies on distribution and retail sales. It is those distributors and retailers that can provide critical support to Coca-Cola when it comes time to negotiate with governments about tax and labor policies, because they will feel the pinch of any policy change that results—particularly if it reduces consumption. One way to think of local suppliers is as a political constituency.

Interestingly, some companies have used national input-output tables as a way to estimate their economic impact. But they usually have done so in the context of winning concessions from governments over, for example, tax breaks. Corporate investors like Honda Motor Co. will prepare economic impact studies when seeking incentives from American states that they are considering as a destination for a new car factory. Rarely, however, are economic impact studies used as a way to assess the multiplier effects of the company up and down the supply chain.

Why don’t more firms use the input-output tables and map their domestic relationships in the way we suggest? There are several reasons. First, managers view the creation of input-output tables as data-intensive and time-consuming. The process requires the collection of information—about suppliers, for example—not generally required by investors or regulators. Second, it is difficult for managers to spin the data that comes out of this analysis. Stakeholders who see the results may always demand that the firm do more for employment and income generation. As many senior executives have told us, “Why should I put my head above the parapet?” And these studies don’t tug at the heartstrings the way CSR reports tend to.

But taking the CSR approach to a firm’s domestic stakeholders—including its suppliers—misses the strategic boat in three ways. First, it overlooks the obvious fact that the most important thing companies do for the communities where they operate is contribute to prosperity, employment, and economic growth. Second, it fails to map and quantify the economic links between companies and their communities. And third, the CSR approach is incapable of unifying corporate strategy with supply chain management. The result is that the firm’s local relationships are left underutilized— really, they remain a wasted asset—and corporate strategy is made unnecessarily bereft of potentially crucial constituent support. In other words, all too often CSR is viewed as a means to reduce tensions between businesses and local communities. We believe this approach should be turned on its head. Companies should stress their interdependence with the places they operate and do business.

Going the (Local) Distance

In our discussions with senior managers of multinational corporations, we have been surprised that relatively few of them have analyzed their local relationships, despite the fact that the supply chain might be where they make their biggest financial outlays. By running corporate financials through input-output tables, managers can estimate how much employment they are creating and in which supporting industries, how much income they are helping to generate economy-wide, and how much tax revenue their operations are providing to government.

That type of quantitative information, it must be stressed, can be invaluable in discussions with governments and other stakeholders. Indeed, even government officials themselves can learn from this analysis. Mwesigye said of our economic impact study of the Nile Breweries operation: “The report shows the unmistakable benefits that SABMiller’s investment in Uganda has brought both to the company and to our country, with 44,000 jobs supported and $92 million added to Uganda’s economy.”³

Furthermore, this method permits firms to work with stakeholders on various scenarios and on what the effects of government policy changes would be not just to the company’s operations but also to the economy generally. Using this method, one could trace a government’s proposed tax hike through the input-output tables to gain a better understanding of, say, the trade-offs between incremental revenue generation and employment. This is often the starting point for much more meaningful interaction with government and a focus on achieving mutually beneficial outcomes.

In short, by mapping the company’s relationship to the economy in which it operates, and by leveraging the relationships it discovers in that process, businesses can do much to advance their strategic objectives in particular markets. Looking back at the experience of creating Eagle Lager, Graham Mackay, SABMiller’s CEO, said, “A better understanding of your company’s socioeconomic impact can help maximize its ability to make a difference through stimulating economic development.”

Notes

1 Stephen Rogers and Lisa Cooley, “Deciding Where to Source: Local, National, Regional, or Global,” International Supply Chain Management Conference, 2004.

2 Woo-Tsong Lin and Guang-Feng Deng, “Global Versus Local Sourcing for Different Supply Chain Networks: An Analysis of Order Unfulfillment Rates,” International Journal of Services Technology and Management 7(5/6), 2006: 420-438.

3 Ethan B. Kapstein and René Kim, The Socio-Economic Impact of Nile Breweries in Uganda, London: SABMiller, 2009.

Ethan B. Kapstein is visiting professor of management at the Wharton School of the University of Pennsylvania, and a consultant to many multinational firms and public agencies.

René Kim worked at MIT and for the Boston Consulting Group and is currently a partner with Steward Redqueen in Haarlem, the Netherlands.

A growing number of multinational corporations—including Unilever, Intel, and Wal-Mart Stores—are embracing a new way of doing business, one that puts societal issues at the core of the company’s strategy and operations. This approach differs from traditional “corporate social responsibility,” which is often built around compliance with environmental and social regulations, improving the corporation’s reputation, and unfocused charitable giving to a variety of causes frequently unrelated to the business.

The new approach to doing business, dubbed “creating shared value” by FSG co-founders Mark Kramer and Michael Porter, extends well beyond those practices. (See their cover story, “Creating Shared Value,” in the January-February 2011 issue of the Harvard Business Review.) Shared value is created when companies generate economic value for themselves in a way that simultaneously produces value for society by addressing social and environmental challenges. Companies can create shared value in three distinct ways: by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company’s locations.

Shared value taps the capacity of global businesses to solve social problems, just as social entrepreneurs do through smaller-scale enterprises. Porter and Kramer believe that widespread adoption of a shared value approach could reshape capitalism and its relationship to society. They also predict that it will drive the next wave of innovation and productivity growth in the global economy as it opens managers’ eyes to immense human needs that must be met, large new markets to be served, and the internal costs of social deficits—as well as the competitive advantages available from addressing them.

The idea that companies should create shared value carries many implications that corporate leaders are only beginning to understand, which is why we brought together corporate practitioners to share their experiences and discuss evolving practices. On Dec. 8, 2010, executives from 10 major corporations gathered at Goldman Sachs’s New York City headquarters to discuss how their companies were implementing shared value. They were brought together by FSG, the Stanford Social Innovation Review, and the Committee Encouraging Corporate Philanthropy (CECP). Some of the companies—such as Cisco Systems, Hewlett-Packard, and IBM—have been taking a shared value approach for some time. Other companies—such as Western Union, Alcoa, and InterContinental Hotels Group—are new to the approach. But all of the participants—which also included Goldman Sachs, Dow Chemical, Medtronic, and PG&E—are enthusiastic about the results and prospects for the future.

The candid discussion, led by Kramer and FSG managing director John Kania, was wide ranging and posited a number of interesting shifts in the way companies address social problems when they pursue shared value. It profoundly changes the relationship between companies and nonprofit organizations, creating a mutual interdependence and heightened accountability for delivering results. Shared value engages companies more deeply in social issues, holding the promise of far greater resources and a multitude of innovations to address today’s most urgent needs. Above all, it accelerates and expands the potential for social impact as major corporations launch initiatives that reach millions of people at a pace and scale that have rarely been achieved by the nonprofit sector. At the same time, as the participating executives acknowledge, shared value demands a delicate balance between social needs and corporate profitability that is not easily achieved.

ROUNDTABLE PARTICIPANTS:

Talya Bosch, director of corporate social responsibility, Western Union

Roslyn Dickerson, senior vice president of corporate responsibility and public affairs, InterContinental Hotels Group (IHG)

Paul Ellingstad, director of the office of global social innovation, Hewlett-Packard

David Etzwiler, executive director of Medtronic Foundation, and vice president of community affairs, Medtronic (has since left Medtronic)

Reginald Foster, regional manager of corporate citizenship and corporate affairs, IBM

Ezra Garrett, executive director of PG&E Corporation Foundation, and director of community relations, PG&E

John Kania, managing director, FSG

Tony Kingsbury, senior leader, Dow Chemical, and Dow Executive in Residence, Sustainable Products and Solutions Program at the Haas School of Business, University of California, Berkeley

Mark Kramer, co-founder and managing director, FSG

Noa Meyer, vice president, Goldman Sachs

Kathy Mulvany, senior director of corporate affairs, Cisco Systems

Dina Habib Powell, president of Goldman Sachs Foundation, and global head of the office of corporate engagement, Goldman Sachs

Beth Schmitt, director of recycling for Alcoa North American Rolled Products, Alcoa

Mark Kramer: Let’s start with the question of motivation. When did your company begin to adopt the perspective of shared value, and what prompted that change?

Ezra Garrett: At PG&E, a paradigm shift occurred in the aftermath of the mid-2000s energy crisis. Our CEO, Peter Darbee, made a bold public statement: that we believe climate change is real, and that as a member of the utility industry we have to take the leadership role in finding solutions to that problem. So we articulated a vision of being the leading utility company in the United States, and to support that we outlined four simple goals, to be a leader in engaged employees, delighted customers, environmental leadership, and total shareholder return. That reflects the triple bottom line concept of shared value.

We then said, “Why don’t we propose a really aggressive program to help incentivize our customers to use less energy?” Colleagues in the industry—and I don’t mean just the utility industry, but big businesses—asked us: “What in the heck are you thinking? How can you encourage your customers to use less of your product?” But we knew it was the right thing to do and we knew that we could work within that framework to provide offsets to the customers to take those steps.

Where the value creation really happened was when we were able to bake these incentive programs into our corporate strategy. Instead of it being just a PR thing, we really put skin in the game, to make sure that customers actually did reduce their usage. We’re committed to paying a pretty hefty fine if customers don’t meet those goals. And it has worked. Over the past 30 years energy usage in the United States has gone up 50 percent per capita, whereas in our service area it’s remained steady.

The challenge on the philanthropy side of the company was, how do we create a new charitable program that is reflective of our environmental leadership goal? So, for example, we created a program with Habitat for Humanity where we fund the installation of solar on every Habitat home built within our footprint in Northern and Central California. Major change is a challenge for any organization, and for a 100-year-old utility company like us, it really took something as drastic as the energy crisis to get us to initiate that change and see it through.

David Etzwiler: For Medtronic, the shift began when we moved into emerging markets. It became clear to us that the old innovation model that we had used in the United States and other developed countries is not effective when you try to develop and sell products for the middle and the bottom of the economic pyramid. Instead, we had to go into a community and start from scratch by asking the question, “What’s not happening here that could happen, and how do we address it?”

Sometimes the answers to that question are coming from those of us who spend time with NGOs. Other times it’s coming from our government affairs folks. And other times it’s coming from our business model innovation folks. As a result, there was a slowly developing Aha! moment—that we’re really learning innovation through shared value. Our CEO absolutely drank the Kool-Aid with us. He assigned a top-level executive committee to oversee this work. And we engaged in a process that led us to underscore the vision of working to serve folks in the middle and bottom of the economic pyramid.

Kathy Mulvany: At Cisco it really began with our employees. In the early days of Cisco we were based in East Palo Alto [California], which is not the safest neighborhood in the world. Some of our employees wanted to get engaged in the community. We happened to be next to a school, and we thought, “We’re a technology company, let’s go in and wire the school for Internet access.” But as often happens, we realized that it’s one thing to give technology. It’s another thing for that technology to actually have some benefit if nobody knows how to use or maintain it.

Out of that realization, an employee said, “Why don’t we teach the students how to use the technology?” John Morgridge, who was our CEO and chairman at the time, liked the idea, and it led to the creation of the Cisco Networking Academy. It was driven both bottom-up and top-down. You have to have executive leadership that absolutely believes in it and is passionate about it, as John was then, and John Chambers, our current CEO and chairman, is today. He absolutely believes it is relevant to the business. He continually says that social investment and giving back to communities is the right thing to do, and it’s also very good for business.

Roslyn Dickerson: The beginning for IHG was new leadership at the company and a shift in our strategy. Heretofore, we approached the business as an operating company. Heads in beds. We didn’t much care about their experience. We just wanted them in our hotel.

Our new CEO came from Cadbury Schweppes, a consumer brand company, and he began our transition to a brand-led company. Now it isn’t just about the head in the bed. It is the guest’s experience that matters. Our mission as a company today is to create great hotels guests love.

In our research we found that there are a few things that factor into the customer’s experience. First, we discovered that the customers’ love of the experience is directly correlated with the service they receive. If the person working at the hotel is happy, I [the customer] know I’m going to get better service. If they’re better trained, I’m going to get better service. If they’re using healthier products, I know I’m going to get better service.

Another factor that arose in our research about the customer’s experience was the notion of safe hotels. We expected customers to bring up the importance of having a safe hotel. What we didn’t expect was that a safe hotel was associated with having a safe environment and a safe planet. And last, we began to consider a very interesting philosophical question that our board of directors raised after looking at all of the data. And that question was, what’s the role of a hotel in society today? That took us down a path of understanding what the hotel represents to a community. Hotels are a very intimate thing. If you live in a small town, you know. They are the place where you have bar mitzvahs and weddings and some of the best experiences in your life. And it’s also where you go for shelter in times of need. We learned that we already had a connection to the community that we just weren’t leveraging.

Those were the catalysts for us. We’ve got a lot of data and good anecdotal information. Now we’re pulling it together to represent both the environmental sustainability component of this work and the community component of this work.

Reginald Foster: IBM has a long commitment to contributing to society, but recently we found that more and more of our customers were talking and thinking about these things. We did global CEO studies, which found that CEOs as a group were ahead of the public in being concerned about sustainability, climate change, and these kinds of issues. They were worried about the impact on them, on their kids, and so on. So one of our new programs is something called the Smarter Cities Challenge, which will award $50 million in grants over three years to 100 cities around the world to help them solve health, traffic, safety, grid, water, these kinds of problems that are all related to growth and sustainability.

Paul Ellingstad: In the last 10 years Hewlett-Packard has gone though an interesting time. Under our former CEO, Carly Fiorina, we were really engaged in social innovation. It was like clockwork. She would be in Davos one week and in South Africa the next week. We did some fascinating things around digital inclusion in South
Africa in particular. Unfortunately, at that time the company’s financial and operational performance did not consistently match the amazing things that were being done in terms of social impact.

The pendulum then swung under CEO Mark Hurd; the next five years were very focused on financial and operational performance and social impact reverted to a more traditional corporate philanthropy model. Since late 2009 we’ve undergone a transformation, moving from the philanthropy model to begin really looking at how we leverage the 300,000 employees and all the expertise we have in solving social problems.

Kramer: It’s clear that the reason a company embarks on a shared value strategy can vary widely. The shift can be driven by customers, employees, CEOs, markets, and external events. Before we dive into some other questions, I’d like to hear from the rest of you about your shared value programs. Noa, what is Goldman Sachs doing?

Noa Meyer: The Goldman Sachs Foundation is focused on economic growth and opportunity, which is aligned closely with the work of Goldman Sachs the company. We launched 10,000 Women about three years ago, based on research that looked at how increasing the participation of women in the labor force increases GDP. Today, more than 3,000 women in 22 countries have graduated from the program. A little over a year ago we launched 10,000 Small Businesses in the United States. We started in New York and are also in Los Angeles and New Orleans.

Goldman Sachs employees are clamoring to assist those two programs by serving as mentors and providing feedback on business plans. There’s just an enormous amount of interest and desire by our employees to be involved. Our work is obviously serving the communities in which we live and work, but it is also providing the roughly 30,000 people who work for Goldman Sachs opportunities to use their skills in ways that are meaningful for them.

Talya Bosch: Like many other companies here, Western Union is an old one—about 160 years old. We probably started with the idea of shared value as soon as we started moving money, although we certainly wouldn’t have known to call it that at the time. We obviously are proud of our philanthropy and the Our World, Our Family program. We also consider corporate citizenship as giving back to create economic opportunity.

What’s emerging for us is a much more intensive and purposeful focus on the shared value piece. A lot of the money that moves through Western Union is repatriations—sending money home. It’s up to half the GDP in some developing nations. It is double all sources of international aid combined.

What I get to wrestle with every day is how you translate Western Union’s scale into shared value. We care a lot about the underserved, traditionally migrants and the bottom of the pyramid. We also find that small businesses are not necessarily well served. But it actually isn’t as easy as you would think to come up with a practical answer to the question “What do we do to serve the world profitably?”

Beth Schmitt: I’m probably the only person at the table who’s not part of a corporate affairs organization or a foundation. I’m embedded within Alcoa’s North American world products business. That says something about how Alcoa has integrated sustainability as a core business strategy throughout the organization.

Alcoa is an integrated aluminum company, from mining to recycling. I’m responsible for delivering shared value by helping to drive the recycling rate up for all of the rolled products that we sell. Energy savings, greenhouse gas emission savings, all benefit the communities in which we operate. I work with NGOs, government organizations, and other interested parties to increase diversion rates and bring those natural resources back into our operations. It’s a three-pronged approach, developing products that serve customers, serve markets, and serve communities.

Tony Kingsbury: I pulled together a list of 36 new products, which are what I call candidates for breakthroughs to world challenges. Here’s one example. We all hear about the bad oils that are clogging up our arteries and leading to heart disease or diabetes. Dow has innovated healthy high Omega-9 and soon Omega-3 oils. These are canola-based oils, so there’s virtually no difference in how they are grown, and there’s no difference in how they taste. The neat thing about this innovation is that it’s a win, win, win. These healthy oil products are becoming popular in the United States, Canada, Japan, and Europe. We hope soon, throughout the world.

Another example is solar shingles. This is an asphalt shingle but with photovoltaics built into it. We came up with the idea after going out to our customers in the building and construction industry, who told us that the installation cost for photovoltaics can be as much as or more than the actual product. With solar shingles, you can provide photovoltaics much more cost-effectively by dropping installation costs and integrating it into the roof without the need for special construction techniques. We’re just coming out with those, and there’s far more demand for them than we can supply. Now we just have to figure out how to ramp up quickly.

Kramer: Ideally, companies create solutions like those that Dow has, ones that benefit the company, society, and the environment. But that isn’t always the case. As philanthropic programs get integrated more tightly into a firm’s core business it can create problems. Reg, is Smarter Cities purely a philanthropic program? And how do you avoid the appearance or reality of self-dealing, in which your grants might seem to benefit IBM’s consulting business?

Foster: To clarify the terminology, IBM has talked about smarter planet and smarter cities in our business approach and the need to find new solutions to public safety, health, education, electric grid, and other system issues confronting us, especially in cities—where more than half of humanity now live. Smarter Cities Challenge is our competitive philanthropic grant program that allows cities to apply for grants of IBM consulting help to tackle these critical problems. We are bringing the best of our expertise and talent to our philanthropy to help solve problems, which we think is critical to being effective. Similarities will always exist between grants and business when companies give of their expertise, but we will administer the grants with transparency and integrity, and that is what is required to achieve real change.

Bosch: The separation of church and state raises some interesting challenges for us at Western Union. We have given grants to organizations in Uganda to work on how financial literacy information can be distributed via mobile phone. Now, very rapidly, Uganda could become a business opportunity for us. How do we work with our marketing teams, how do we work with our business team, and how do we develop new products for that market while making sure that our philanthropy is effective? We had a great opportunity to work with Mercy Corps, our close partner in Haiti, to fund some of their mobile phone work. We decided not to, because we knew that mobile money would soon be a business play for us.

To give you yet another example, we recently bought a company called Custom House Solutions, which is now Western Union Business Solutions. In the United Kingdom, one of their largest markets is the nonprofit sector. That presents a shared value opportunity as well as a number of challenges. How do we work with nonprofits in our grantmaking who could also become our clients in another arm of the company? How could we use Custom House Solutions to generate shared value? These are tricky issues.

Mulvany: Cisco’s social investment goals are aligned to our business, but when it comes to the Cisco Foundation there can be no direct business benefit to the corporation, so you have to be very aware of the rules of engagement. For example, as we move into health care from a social benefit perspective, we are not going to be funding those engagements through the Cisco Foundation but rather through the corporation.

Kramer: That raises an interesting point. What impact has shared value had on your company’s grantmaking and its decisions about which NGOs to partner with?

Foster: First of all, it dramatically narrows whom you might work with and what you might decide to do with them. It’s narrower but it’s deeper. I don’t want to go quite this far, but we almost wouldn’t do a grant now unless there is value and contribution on both sides. Because not only do we have something specific that we want to accomplish, but we are engaged in a way that we have a window on the results that we would never have had if we had simply written a check. So it’s a much different relationship but a stronger one.

Dickerson: We were engaged with lots of partners, many focused on education, which is so broad I don’t know how you win in that space. And as a hotel company we didn’t feel it was relevant enough to our business—we couldn’t win in that space. Today, we don’t have education as a focus. We have hospitality training as a focus, which is a very specific thing. I’ve been pleasantly surprised at how well nonprofits understand the reasons for the change. One of the things that I’ve also found about having that kind of focus is that it allows you to say “No” respectfully, which is quite important to developing and maintaining relationships.

Dina Powell: That’s true. And to Reg’s point, yes, you are entering into deeper relationships with NGOs. Our partnerships with NGOs and academic institutions are anchored in our shared commitment to achieving measurable results. We work closely with our implementing partners to clearly define what success looks like and then tailor each program and grant to maximize our partners’ ability to reach those goals.

Ellingstad: We’ve found some very good social entrepreneurs, such as Bright Simons, from Ghana, who founded a company called mPedigree that allows people to use their mobile phone to verify whether a medication they purchase is authentic or counterfeit. We developed the technology solution and partnered with mPedigree to bring it to the market. But one of the problems we’ve had is trying to sort through the large number of social entrepreneurs there are around the world and identify the ones we want to work with. One of the things we’ve done to help us filter them and make the process more efficient is to partner with the Schwab Foundation for Social Entrepreneurship, which helps us identify high-potential social entrepreneurs.

Kramer: One of the things that’s so exciting about shared value is the scale on which you all are talking about your projects. Cisco has nearly 4 million graduates of its Networking Academy, Goldman is empowering 10,000 Women, Dow’s solar shingles are flying off the shelves. These are large-scale impacts that nonprofits don’t often reach.

Kingsbury: NGOs are a critical piece in identifying the opportunities, but are not usually able to scale to the appropriate size. The corporate entities can come in and
take these things to scale. Most NGOs are not set up to affect a million lives. If you combine NGOs’ local knowledge with our ability to scale up, you can really create value on both sides.

By the same token, we have to listen to NGOs so that we don’t go to the wrong place or do the wrong thing. Sometimes we come with our preconceived notion of what the solution should look like. Sometimes it’s “Hi, I’m from Midland [Mich., Dow headquarters) and I’m here to help.” Or “Here’s the way we’re going to do it.” We need to listen to them, but then we need to provide the scaling opportunities.

Garrett: We are the second largest landowner in California, so our reach spans a very diverse geography and set of demographics across the state. We are also the sole gas and utility provider for most of the 15 million people living within this footprint, so people have very high expectations of us. If we’re not conducting our business in a way that is responsible and that acknowledges the impact of our business on their neighborhoods and the environment, then it’s big trouble. Big trouble for us, big trouble for our shareholders, and big trouble for our government regulators as well.

Powell: In this increasingly globalized world there are really three legs of the stool that have to work together—government, private sector, and nongovernmental organizations. For many years it was the government that came up with ideas, and the private sector was asked to fund and scale them. Today, many organizations are showing the government that innovative ideas to combat the world’s most pressing problems can come from a variety of places, and the public and private sectors can work together to bring innovative solutions to scale.

One example is the Overseas Private Investment Corporation (OPIC), an independent US agency, which launched a lending facility for women in Monrovia, Liberia. They announced this commitment at the Clinton Global Initiative. They were so excited about the program, which pledged to award $30 million in growth capital to SMEs [small and medium enterprises] in Liberia. The challenge, however, was that Liberia’s tumultuous history had left the economy fragile and without a large supply of qualified loan recipients. And this was especially true for women who had been out of school for years.

We received a call from the chairman of OPIC saying: “We are searching for loan recipients, but it is clear that many entrepreneurs do not have the training to be successful at growing their businesses. Is there any way you would consider a 10,000 Women program in Monrovia?” That was three years ago. Today, 75 women have participated in 10,000 Women and many of them have access to capital. This partnership is an important example of how public-private models are enabling us to join forces to reach broader populations in larger numbers.

Mulvany: The challenge we’ve faced in scaling the Cisco Networking Academy is how you create a program that is globally consistent yet locally relevant. The power of the program is that every student around the world goes through the same curriculum and is eligible for the same certifications in the end. A student getting a 93 in Kabul, Afghanistan, is just as good as a student getting a 93 in San Jose, Calif. That’s the power of the network and why people are so eager. In addition, we don’t push the academy on anyone. What we have found is that success lies in a pull. When communities and countries see the value of information and communications technology skills education and what it can do for capacity building in their country, they want it and ask for it. The only way that the Cisco Networking Academy has been able to scale to 165 countries and a million students a year is because it is a partnership. The educational institutions we partner with have to create the classroom, hire the teacher, promote the courses, and get the students into the classrooms. We provide them with the curriculum and the instructor training as well as the network foundation for all of the assessments and the learning management system. But it absolutely works only because local entities take ownership.

Bosch: We didn’t have a model where we said, “Here, let’s offer this to the world.” We were co-creating what would work. But solutions to some social problems are more easily scalable than others. The notion of working with government in some way might be a scalable idea, but we’ve been struck by how much some of the things we thought would be scalable, programs that we could package, actually need to be customized.

For example, we have had a program for many years in which migrants in the United States raised money for their local communities in Mexico, and it is matched by us and by the governments of the Mexican states where the communities are located. We thought this was a great model that should be scalable anywhere.

Well, not necessarily, even in Mexico. Not all government entities at the federal, state, and local level have money available at the same time. Even though that program hasn’t worked as a global model, it did help us create a new diaspora business program for Africa and a new partnership with the United Nations Development Programme.

Kramer: Most successful organizations have strong measurement systems. There is also a move afoot to create shared measurement systems across many different nonprofits in the same field. How do you measure success and how important is that to sustaining support for shared value programs within your company?

Powell: We have learned through the last few years at 10,000 Women that holding yourself accountable is critical, but how you actually conduct that measurement and assessment is also important because it has the potential to be something that you can share. Our goal was to reach 10,000 Women. Today, the program operates in 22 countries and 3,500 women have been reached with management education, access to capital, mentoring, and networking.

Goldman Sachs’s culture emphasizes quantifiable results. Even before we launched the program, senior leadership expected a system for measuring the numbers of women reached and the impact of the program. Today, we have a designated measurement and evaluation person at each of our programs. In Rwanda, India, China, and Brazil, part of our grant pays for an M&E liaison who tracks the women from the time they enter the program and at various points after graduation to measure job creation and revenue growth.

Mulvany: If you move to the model of shared value and you want business to be more engaged, the business will absolutely want to see measurement. “Show me that there is real social impact. We are willing to potentially invest more if you can show real value.” But it is a challenge to get consistent metrics. We try to encourage a common set of metrics across our NGO partners and our social programs. It would go a long way if there were one set of standards around what social impact is.

Ellingstad: We’re being very, very careful that we don’t get into a marketing campaign style of measurement and evaluation, where we say, “Look how great we are.” You also need to make sure you are measuring the right things over the right time frames. Some of the very first houses that Habitat for Humanity built fell into disrepair because they hadn’t focused on creating a sustainable model. It’s not just building housing, it’s also how you empower the community so that it takes ownership.

John Kania: We’ve been talking a lot about the current state of shared value programs. Looking forward, how do you think shared value will play out in the future, and how might it change at your company?

Etzwiler: In corporate America you will know shared value has taken root when it’s part of the strategic plan. That’s something we are beginning to do at Medtronic. Moving into emerging markets has caused us to look at health differently. It’s a whole different market when you start looking at models of care that exist and don’t exist, and the expertise that doesn’t exist, and how you can play a role in complementing that with shared value.

Dickerson: As time goes on, eventually it’s not shared value, it’s simply new business development. And there are lots of places inside the organization where new business development occurs. It will allow us to have an even broader scope that takes into consideration what’s going on out there in the community, what’s going on in government, and what’s going on in our own business organization.

By demonstrating the ROI of shared value thinking, we are going to have lots more people inside the organization who want a part of that. We haven’t done that yet. But it’s part of what we want to do, to drive it down to each and every brand. What shared value means to an InterContinental Hotel is going to be very different from what it may mean to a Holiday Inn Express. It will be tons of work, but I can see it being integrated into our company over time.

Kingsbury: Will people say, “Let’s give Tony $100 million for Breakthroughs to World Challenges to go work on something?” The answer is no. Products will be developed only if they make business sense. But if we can develop ways to provide lower-cost clean water so that we can enter new markets, then absolutely money will be available. If we don’t, somebody else is going to do it and capture the value there, so why not us?

Schmitt: You have to be committed to shared value for the long term. It can’t be something that is this year’s campaign, and next year you are on to something else. Aluminum is an energy-intensive industry, and I don’t think the energy issue is going to go away. Being efficient, smart, and innovative in energy usage is not just a competitive advantage, it’s a matter of survival. That’s what makes sustainability a very long-term strategy for us.

Ellingstad: We’re going back to where we were when Bill [Hewlett] and Dave [Packard] founded the company—the ethos that you’re not here just to make money for the company and shareholders. It’s about the organization as well as the employees actively contributing to the communities in which they work and live.

If this is going to be sustainable 100 years from now, it’s got to be part of your corporate values, the fact that your company is a part of a broader ecosystem that contributes to creating societal value. Business must work with governments and with NGOs to build better societies and better communities.

The Grameen Foundation opened in 1997 to support and grow the microfinance sector. It was inspired by the success of Grameen Bank, which provides microcredit to the rural poor in Bangladesh. For years, the foundation relied on an ad hoc approach to working with volunteers. But with the growing interest in the microfinance sector, the volunteer program became unwieldy. In November 2008, outside funding from J.P. Morgan enabled the foundation to launch a pilot volunteer program, naming it Bankers Without Borders. Alex Counts, the foundation’s CEO, saw an opportunity to replicate the way some corporations inspire customers and others to take action on behalf of a corporate mission.

The premise of Bankers Without Borders is that a critical mass of skilled professionals, if strategically placed, can reduce costs and help microfinance institutions (MFIs), social enterprises, and the Grameen Foundation itself operate more effectively to alleviate poverty. “It’s time for nonprofits to follow the lead of the commercial sector, which is so successful at mobilizing people to promote its products and brands on essentially a voluntary basis, often using social media,” says Counts. “We hope to mobilize thousands to use their professional skills to help the world’s poor rise out of poverty.”

The Grameen Foundation’s initial goal was to have 300 professionals with finance or other business expertise register to apply for assignments in the microfinance sector—both within and outside the Grameen Foundation—by March 2010. But the number of volunteers exceeded 3,000 by that date without a promotional campaign. By the end of 2010, the database swelled to more than 5,600 registered volunteers, from which 440 volunteers were selected to work on more than 150 microfinance projects. Almost half of the volunteers deployed through 2010 came from the United States and about a quarter from Asia. J.P. Morgan has committed an additional $3 million to the initiative through early 2013.

NEW ROLE FOR VOLUNTEERS

Bankers Without Borders’ success in scaling can be attributed to several factors, but there has been one essential element: redefining the role of volunteers. “Many nonprofits think of volunteer management in a stovepipe, where volunteers are supervised by one designated manager,” explains Shannon Maynard, the initiative’s director. “With skills-based volunteering, that simply won’t work—we teach the entire organization how to be volunteer managers.”

Rethinking volunteerism meant that Bankers Without Borders had to be nimble, similar to a start-up company. The Bankers Without Borders staff constantly asked themselves: What will make the entire process efficient? What will allow the program to scale up? What time commitment will attract volunteers and still produce substantial results?

The Bankers Without Borders staff helps project managers at MFIs, social enterprises, and the Grameen Foundation assess and craft human resource needs. If a manager asks for a volunteer full time for three months, staff will likely offer a small team with complementary skill sets for a shorter term, say up to three weeks, to better suit volunteers’ schedules and foster multidisciplinary collaboration. Bankers Without Borders also streamlined the reporting process for project managers and volunteers, reducing paperwork by using conference calls to gather information.

“I started off as a big skeptic. Volunteerism with highly skilled people can be inefficient, since you have less control over how they work,” says Malini Tolat, a program manager at the Grameen Foundation. “Now I use volunteers quite frequently. We developed very detailed scopes of work and applied the same rigor in interviewing as we would for hiring consultants.”

Tolat used three volunteers at Ruma, a microfranchise based in Indonesia that enables the rural poor to sell prepaid mobile phone airtime. Overall, Tolat has deployed six volunteers to deliver data analytics, trend analyses, market research, and a new management reporting system. The dollar value of their consulting work is estimated at more than $30,000.

For projects that stretch over a longer time frame, Bankers Without Borders has volunteers contribute hours incrementally. Eight employees from MasterCard, for example, worked over a six-month period to create a market entry strategy to support the Grameen Foundation’s program expansion in Colombia. The employees were part of a leadership development program that places select employees on cross-functional projects to build their leadership skills. This was the first time MasterCard worked with an external nonprofit in this capacity; another MasterCard team has been assigned for 2011. Now the Grameen Foundation has a replicable framework for developing market entry strategies in other countries.

What is motivating so many professionals to do this voluntary work? The top three reasons cited by Bankers Without Borders registrants are a desire to help the poor, a strong belief in the work of the Grameen Foundation, and interest in microfinance. Only about 15 percent of the deployed volunteers are paid for their consulting work, which typically comes from a corporate partner of the foundation. The rest of the volunteers work gratis and either have salaried jobs, are retired or semiretired professionals, or are graduate students and professors at American business schools.

Aurélie Daligand, senior legal counsel at danone.communities, a social enterprise incubator based in France, received assistance from an investment banker based in Mumbai, India. The volunteer gave a handful of hours each week over six months to help build a clean drinking water business in India. “I felt like I was a true client, not just pro bono,” says Daligand of the arrangement. “He was very available and his financial expertise and knowledge of the local environment were excellent.”

Thanks to communications technology and the analytical nature of many projects, volunteers often work remotely. In fact, more than half of the volunteer hours contributed to the Grameen Foundation were not in the field, a major factor in scaling. One remote project involved 10 finance professionals who created a country risk assessment framework for 30 developing countries on behalf of the Grameen Foundation. Going forward, Maynard estimates that there will be a 50-50 split between projects worked on remotely vs. in the field.

A CRITICAL TIME

Grameen Foundation executives believe the Bankers Without Borders initiative could not come at a more critical time, as the microfinance sector has been under fire for veering too far from its poverty alleviation mission. “MFIs need to get back to basics, since there’s an element of truth in the criticism of the sector,” says Counts. “Some [MFIs] have lost their way by focusing more on financial profits and less on the social impact aspect.”

Despite its popularity, there is skepticism about Bankers Without Borders, arising from the debate about poverty solutions and measuring program impact. Dean Karlan, professor of economics at Yale University, says: “Bankers Without Borders may have positive benefits and MFIs have reasons to support it; it’s a great way to engage volunteers and raise awareness of poverty. But the question is about impact. Does [the program] alleviate poverty? You need rigorous impact evaluations to show that. Are there data that prove it works?”

The Grameen Foundation has created a Progress out of Poverty Index (PPI) certification process to help MFIs monitor their success in alleviating poverty. PPI is a tool developed by the foundation that helps MFIs determine the poverty level of their clients and then track it over time. Volunteers help evaluate whether MFIs are correctly using the PPI, applying standards developed by microfinance stakeholders.

“I looked at this project as another assignment at J.P. Morgan, and applied the same level of rigor and due diligence,” explains Luis Baca, an associate at J.P. Morgan in London who traveled to Peru, his native country, to conduct a PPI certification. “Though outside the project scope, I interviewed NGOs, agencies, funders, and others in Peru to form my own qualitative assessment about the MFI.”

Starting in January 2011, MFIs certified by the Grameen Foundation will be listed on the Microfinance Information Exchange (MIX) website, which was founded by the Consultative Group to Serve the Poor in 2002 to improve transparency among MFIs and provide a means for standardization. The PPI certification is Grameen Foundation’s first “Blueprint Project”—long-term projects that enable volunteers, specially selected and trained through online classes, to provide services that require less staff involvement.

Bankers Without Borders intends to replicate its volunteer assistance model. In late 2010, it established a global network of in-country organizations, called Alliance members, who can help to identify and scope projects for volunteers. Promuc of Peru, Contactar of Colombia, and Access Development Services of India were selected in a competitive process to be the first Alliance Program members. Each will receive seed capital and operational support to use volunteers to provide pro bono consulting services to MFIs and social enterprises in their regions.

“Ten years from now, you will see the vast majority of microfinance and information communications technology organizations taking advantage of skilled volunteers as a result of our work. And because of those volunteers’ insights and contributions, we all will be smarter at doing our job of helping poor people help themselves,” says Maynard.

Kathy O. Brozek is a writer and management consultant based in San Francisco who works with organizations that have a social mission, including socially responsible investing. Previously, she held finance and marketing positions in the financial services industry

Lobbying and bribery are both time-honored ways to seek influence. The most important difference between them, according to economist Bård Harstad of Northwestern University’s Kellogg School of Management, is not that one is legal and the other a crime. It’s that bribery doesn’t last as long.

Whereas successful lobbying changes the rules, bribery only bends them. Harstad built a mathematical model to track and explain why bribery is more common in poor countries and lobbying in rich ones. “If you are bribing, you get permission to break the rule only once,” says Harstad. “If you want to break the rule later, you have to pay again.” For a small firm paying a small bribe, that is cost-effective. But in a thriving economy, corrupt bureaucrats essentially price themselves out. “When the company grows, the bribes become bigger and bigger. Eventually it’s cheaper for the big company to lobby to change the rules,” says Harstad.

This analysis suggests a natural evolution away from bribery. But a closer look at the model shows that corruption can be self-reinforcing. “The problem is that the more you invest, the more you have to pay in bribes. This then discourages you from investing,” says Harstad. Without that investment, the firms don’t grow and may never reach the threshold where they would switch to lobbying.

So how can developing nations escape this trap? Harstad’s analysis paradoxically suggests that punishing bribery only reinforces it: High penalties for corruption merely increase the cost of bribing, further slowing growth. But that prediction is not necessarily borne out by the facts, says Charlie Monteith, counsel at White & Case in London and a key architect of the UK Bribery Act 2010. In the aftermath of 9/11, the US Department of Justice began enforcing the Foreign Corrupt Practices Act in earnest, says Monteith. “There has been a sea change in the last five to seven years. I see more ethical behavior, and it has, a lot of it, been prompted by enforcement action,” he says.

It’s not just a big stick that motivates change. “The carrot that’s involved for poorer countries is development aid,” Monteith says. For example, Sweden and the Netherlands recently withheld millions of dollars in health aid to Zambia after finding evidence of embezzlement. That loss has got to hurt. But if Zambia clamps down on bribery in response, losing development aid could ultimately turn out to be good for development.

Bård Harstad and Jakob Svensson, “Bribes, Lobbying, and Development,” American Political Science Review, 105, 2011.

Private sector investors in the United States have been similarly enthusiastic, investing a total of $8.9 billion in clean energy companies in 2009.¹ This is a sizable sum, but it does not guarantee that green technologies will provide a sufficient return on investment. Both the public and private sectors spent billions of dollars developing the market for corn-based ethanol over the past 20 years before a consensus emerged that ethanol would not solve the economic and environmental problems it targeted.

A similar story may be playing out in the solar cell industry, as evidenced by Massachusetts’s experience with Evergreen Solar. In 2007, the state invested millions of dollars to entice Evergreen to build a new plant near Boston. The plant did create 800 manufacturing jobs, but the excitement over the deal eventually soured. As solar cell prices plummeted from late 2008 onward, Evergreen faced mounting losses and saw its stock price crater from $15 to 80 cents. Then in January 2011, Evergreen announced it would close its factory and shift production to a joint venture with a Chinese company in central China—this after $43 million in assistance from the government of Massachusetts.²

Massachusetts’s experience should serve as a cautionary tale about investing in green energy. If governments pour large subsidies into green technologies, they run the risk of backing technologies that, like ethanol, are fundamentally flawed. Solar power is a similarly flawed technology if it is deployed in competition with the existing power grid.

We believe there is a better way to evaluate, invest in, and deploy green energy technology. Our research examines the drivers of successful innovation and illustrates how these drivers can yield a set of predictable rules that govern the success of new technologies. We also have developed a set of factors that predict the failure of a new technology. Green energy technologies, just like those that drive personal computers, mobile phones, and software, must follow the rules of innovation and avoid its pitfalls.

For our purposes, green energy technologies are those that either harness power from renewable, sustainable sources or seek to reduce adverse human impact on the environment. Many of these technologies also hold the potential to contribute to energy independence. We include such technologies as solar, wind, and geothermal power, biofuels, and smart power grids, as well as hydrogen and electric vehicle propulsion. In order for these new sources of energy to have the widest possible implementation, investors, technologists, and policymakers must understand not just their potential impact but also their commercial viability. Many technologies can be successful if they are deployed according to sound innovation theory.

WHY ADVANCED TECHNOLOGIES OFTEN FAIL

There are generally four reasons that advanced technologies fail to achieve commercial success: technical challenges, systemic complexity, head-on competition, and because customers don’t want it.

Technical Challenges

The first reason is obvious: The technological approach itself proves to be unworkable or unscalable. The plasmodium parasites that cause malaria, for example, evolve so quickly they have defied eradication by conventional immunological techniques. And similarly, the potential for generating energy from controlled nuclear fusion is still far away, because technological problems repeatedly defy techniques to initiate and control this reaction.

Most green energy technologies face some kind of significant technological hurdle. Solar cell technology has undoubtedly advanced, but it still faces technological hurdles to improving efficiency. Similarly, battery technology, which is critical for electric vehicles, is coming up against natural chemical boundaries. Fuel cells, elements of the smart grid, and wind turbines all run into technological problems.

Systemic Complexity

A second reason promising technologies fail is that they are rarely “plug compatible” with existing value chains. Hydrogen-powered fuel cells promise a means of powering vehicles with no emissions except a trickle of water out the tail pipe. But fuel cells face an extremely long and challenging road to commercial acceptance, as they suffer from extraordinary systemic complexity. The ubiquity of the gasoline filling station is one reason that fuel cells will have a difficult time achieving widespread adoption. The infrastructure required to refuel a hydrogen-powered car does not exist and would require the coordinated investment of billions of dollars. Existing gasoline station equipment cannot be adapted to store and dispense hydrogen. This entire stock of equipment would need to be replaced. Hydrogen-powered cars can catch on only if hydrogen filling stations are liberally sprinkled across our roadways. Unfortunately, such stations will not exist unless there are a lot of hydrogen-powered cars as well. It is a classic technological chicken-and-egg problem that can be overcome only through expensive government mandates and subsidies that would alter the fuel distribution infrastructure in a coordinated way. With such a large and thriving gasoline ecosystem in place, we are more likely to see adoption in technologies that either work with the existing system or bypass it entirely. Gas-electric and plug-in hybrid vehicles are examples of technologies that improve fuel efficiency while working within the constraints of the existing infrastructure.

The refueling station problem is a well-known barrier to hydrogen adoption, but the systemic problems associated with hydrogen production may be even more troubling. Hydrogen does not naturally exist on the earth in the form required for fuel cells. Ironically, the most common form of producing it is to separate hydrogen molecules from natural gas, which produces harmful carbon emissions. The other option to produce pure hydrogen is through electrolysis, which breaks down water into its constituent hydrogen and oxygen molecules. The problem with this method is that even if large-scale electrolyzers were technologically practical, such machines would require large quantities of electricity. With renewable electricity generation still limited, the only cost-effective way to power an electrolyzer would be from fossil fuels, again defeating the purpose of hydrogen-powered vehicles.

Without sufficient capacity of renewable electricity generation, hydrogen-powered vehicles will not solve any environmental problems. For fuel cells to make sense, the entire system of electricity generation must be substantially modified. And perhaps even more daunting: Should this feat be accomplished, every subsequent step in the value chain would require a wholesale redesign of its existing infrastructure. We are quite certain hydrogen fuel cells will find limited success in displacing gasoline-powered engines.

Head-On Competition

The third cause of the commercial failure of advanced technologies is head-on competition with established technologies. When a technology is forced into direct competition against an established foe, it will be adopted only if it is more cost-and performance-effective than the established technology in the markets where it is being used. This creates enormous barriers against commercial success. New technologies have much better success rates when they are aimed initially at nonconsumers—those who are not consuming the existing products or services because of lack of wealth, expertise, or access. These nonconsumers often embrace products with limited functionality or quality, because they are superior to the alternative: no product at all.

Consider the path that the transistor took in overthrowing the vacuum tube. Throughout the early 1950s, most electronics products were made with vacuum tubes—devices the size of a child’s fist that consumed a lot of power. The mass of these devices meant that the televisions and radios from which they were built had to be large. Radios were placed on tabletops and televisions stood on the floor. All of the vacuum tube companies—the giants of consumer electronics, such as RCA, Zenith, General Electric (GE), and Westinghouse— saw the potential of the transistor and spent hundreds of millions (in today’s dollars) trying to make the transistors good enough for the markets where vacuum tubes were used.

Meanwhile, some inventors saw the potential for transistors to create new markets altogether. The first commercial application for transistors was the germanium transistor hearing aid in 1951—an application where vacuum tubes weren’t feasible. Then in 1955 Sony introduced its first pocket radio, a simple, inexpensive, low-performance product. But Sony marketed its radio to teenagers, customers who were delighted to have a limited product because it was better than the alternative: no radio at all. While the vacuum tube companies continued to work on the technology, Sony introduced the world’s first portable transistor television in 1959. Again, it was a limited product. But by making a TV so much more affordable, a new population of customers whose apartments or wallets were not big enough to afford an RCA television now could have one. Again, because the simple Sony product was better than nothing, customers were delighted. New markets emerged as Sony wielded simplicity and affordability to compete against nonconsumption. By the late 1960s, solid-state technology had become good enough that Sony and Panasonic could begin building large televisions and radios. Within about five years, customers had switched over to solid-state electronics, and every one of the vacuum tube businesses vaporized.

Solar and wind power generation are green technologies that, at least in the developed world, are being deployed in competition with the existing electrical grid. As noted, whenever new technologies compete head-on with established systems, challenges loom due to the cost and performance gaps between the new technology and the old. Solar and wind power are no different. Both are more expensive than the existing grid, and both have performance deficiencies related to weather conditions. Even with significant government subsidies to encourage adoption, the percentage of total electricity derived from wind and solar in the United States remains tiny, illustrating the barriers these technologies face to displacing the existing grid.

Customers Don’t Want It

The fourth reason promising technologies fail commercially is that, although they provide technically sophisticated functionality, they do not help customers do a job they need to have done. By job, we mean a fundamental problem a customer needs to solve, including a specific result or outcome. If a technology helps users accomplish a job they are already trying to do in a superior way, it is far more likely to succeed. If a technology tries to solve a job with which a customer isn’t terribly concerned, it is likely to face headwinds.

The rise of digital photography offers an illustration of how consumers will change their behavior in response to new technology, but not the fundamental job they are trying to do. When prints were the only way to view photos, people had the best of intentions to arrange photos in albums, but the vast majority of prints were viewed once, then placed in a shoebox. Despite this tendency, most people would ask for double prints so they could mail the best photos to a family member, not knowing beforehand which prints would turn out well. Once digital cameras were fully adopted, consumers changed their behavior, but not the fundamental job they wanted to perform with photos. Now, the killer app for photos is e-mail. Despite all the systems for online photo albums, the dominant consumer behavior is to attach photos to an e-mail for sharing. The technologies for online photo albums were always going to be challenged as they tried to perform a job that most consumers weren’t trying to do. The challenge is not in changing consumer behavior, but in changing the job that consumers are trying to accomplish.

Although we believe the smart grid will be an important incremental innovation, certain aspects of it run afoul of the jobs-to-be-done concept. The term “smart grid” encompasses a set of technologies that allow both electricity producers and consumers to make better decisions about power use through real-time data. Portions of the smart grid system are necessary, evolutionary improvements to the existing power grid. For example, advanced smart meters benefit power companies by eliminating the need for manual meter reading, automating the billing process, and providing real-time detection of outages.³ We believe smart grid technologies that lower cost or improve performance will be readily adopted by power companies.

But smart grid enthusiasts may be disappointed as they find that the behavioral change from consumers is not as strong as they had anticipated. A subset of smart grid technologies are intended to provide electricity users with price signals to help people manage their power consumption more efficiently. These technologies envision a home in which a consumer, seeing the high cost of electricity from 2 p.m. to 4 p.m. in the summer, will turn down his air conditioning, turn off lights, and lower the temperature in the fridge. The potential savings from this technology could be substantial—as much as 30 percent of a typical consumer’s power bill.

Although smart grid technology makes it possible for consumers to achieve such savings, it does not ensure that consumers will change their behavior. Just as we saw in the photography example, consumers will change their behavior only if the technology helps them accomplish a job they were already trying to do. For frugal consumers who already monitor their power consumption to reduce their power bills, real-time price signals will be welcomed as a way to manage their bill more efficiently. Unfortunately, not all consumers fall into this category. Those who are not looking for a system to help manage electricity usage will probably have little interest in smart grid technologies. They will not change their behavior, because the technology does not help them do a job they already were trying to do.

Are green energy technologies doomed to failure for the reasons we’ve outlined? We don’t think so. What follows are recommendations on how to develop and deploy green energy technology to maximize its chances for success in the developing and the developed world.

GREEN ENERGY IN THE DEVELOPING WORLD

Solar energy is both less reliable and more expensive than traditional power generation, despite its desirable environmental impact. Given its limitations, would-be commercializers of solar energy should ask themselves: Where are there customers who would value a technology that generates unreliable electricity? The answer: the rural villages of India, Mongolia, Indonesia, Tanzania, and other developing nations. These are the locations where solar energy can be successfully commercialized, because solar will be competing against nonconsumption of energy rather than a reliable, inexpensive power grid. Just as Sony’s transistor radio gained acceptance among nonconsumers, green technologies will find enthusiastic reception in the unconnected villages of the developing world.

Commercializing green technology in the developing world has the added benefit of contributing to the fight against carbon emissions. Currently, nearly half of carbon dioxide emissions are from developing nations. According to the U.S. Department of Energy, by 2030 developing nations will produce nearly double the carbon dioxide emissions of developed countries if their energy sources develop along the same lines. So green technology can enable both greater energy consumption and a cleaner path to economic development.

Although competition with nonconsumption will greatly aid its commercial success, green technology faces unique challenges in the developing world. First, technologies succeed best when the business unit responsible for developing and deploying the technology is also located where its targeted customers are. That way, the business unit will have the cost structure and managerial incentives that make pursuing “good enough” products at lower price points an attractive proposition.⁴ For example, when the management of GE’s medical imaging business was largely located in the developed world, it focused on producing the most advanced and highest margin CT and MRI scanners possible. Once GE created an autonomous business unit in China, it was able to develop a low-cost ultrasound machine that had great benefits in rural China. Furthermore, as GE continued to develop these products, it began to find applications for them in the developed world, opening up large markets for its innovative products.

The second requirement for succeeding in the developing world is to sell a product that provides a full solution for a customer need. In the developing world, it may not be enough to sell solar panels. Such a product may be of little use to a village with no electrical infrastructure or appliances. Rather, it is important for companies to deploy a technology that is tied to an application. D.light design, which is based in India but was founded in Silicon Valley, illustrates the importance of understanding customers’ circumstances. Rather than just offer a lamp in a place with unreliable energy or offer a raw solar cell, D.light bundles its lamps with solar panels fit for consumers’ energy requirements, which are small—often around 0.5 watts. Their products are far better than commonly used kerosene alternatives, because they are significantly safer, are more durable, and provide far better light. D.light design has distributed 1.7 million lamps to rural Africa and India; it continues to develop its business.

The third requirement for the developing world is that companies may need to integrate their activities across a wider spectrum of the value chain. In many of these countries, a well-functioning sales and distribution infrastructure with wholesalers and retailers does not exist. As a result, companies that usually rely on partners to sell and distribute their product may find a similar strategy impossible in the developing world. In these regions, companies may need to take on sales and aftermarket servicing to develop their markets. One successful approach is the creation of a network of rural entrepreneurs who sell a company’s products to friends and family. D.light design has developed such a system to increase its reach.

GREEN ENERGY IN THE DEVELOPED WORLD

Green energy adoption faces more daunting challenges in the developed world. With a convenient, low-cost, and pervasive energy infrastructure in place, green technologies must prove themselves more affordable or better performing to displace their competitors. By and large, the only way green energy has been able to meet that standard is through government subsidies that bridge the gap between actual cost and grid parity. Although a small segment of consumers actively seek renewable energy sources out of concern for the environment, the battle to win the hearts and minds of hundreds of millions of developed world consumers will not be won quickly enough to solve our energy and environmental problems. We believe that there are some spaces in which green energy technologies can succeed and thrive in the developed world, but they must comply with the rules of innovation.

One of the green technologies that can find a market is the electric vehicle (EV). The EV contains certain limitations that will prevent it from winning in head-on competition with traditional vehicles. Remember, to win in head-on competition, a technology must be either less expensive or better performing, and the electric vehicle is neither. Despite undeniable progress, no manufacturer has succeeded in bringing the cost of EVs below that of traditional sedans. And even if EVs reach cost parity with gas vehicles, their performance limitations remain. Battery technology caps an EV’s range at 100 miles between recharges. Because a full recharge takes eight to 12 hours, EVs cannot be used for long trips, which make up an important part of the job-to-be-done for which consumers buy a car.⁵ Furthermore, most EVs accelerate slowly and have maximum speeds well below the 80 mph that consumers typically demand.

We believe there is a set of customers who would actively seek out a car with both limited range and acceleration. The parents of American teenagers have precisely the job-to-be-done for which an electric vehicle would be a perfect match. These parents want to allow their teenagers to transport themselves to and from school, work, and friends’ homes, but nowhere else. They would actually prefer a car that does not accelerate quickly or drive on freeways. To complete their appeal to this market segment, EVs need to be priced cheaply so that affluent families could plunk down cash to buy one. Again, this is good news for EV manufacturers, as they can offer a bare-bones version of their vehicles and not worry about their performance relative to standard sedans. Compounding the good news for manufacturers is the fact that by getting a product on the market, they will incrementally improve their EVs, slowly closing the performance gap with gas-powered vehicles. In this way, a low-priced EV could disrupt the predominance of the gas-powered vehicle, just as Sony’s transistor radios disrupted vacuum tube radios.

Although a real market for low-cost electric vehicles exists, it is unlikely that EVs will achieve substantial market share for some time. Disruption often unfolds at a glacial pace, especially in an industry like autos with high capital costs and long design-to-production cycles. For that reason, the primary mode of competition in the auto industry will continue to be a sustaining one. By sustaining competition, we mean that competitors will continue to try to best each other within the framework of well-established technologies, incrementally improving performance or reducing costs.

In industries where sustaining competition dominates, hybrid technologies are likely to be adopted. This is because hybrid technology enables exactly those incremental performance or cost advantages that allow companies to win a head-on competition while remaining within existing systems of use. In the automotive industry, we have already seen hybrid vehicles, such as Toyota’s Prius, make significant inroads as fuel efficiency becomes an increasingly important basis of sustaining competition. Such vehicles do not suffer from any of the problems of systemic complexity that hydrogen- or battery-powered vehicles face. They operate wholly within the existing automotive infrastructure, not requiring the infrastructure to bend to its needs. Hybrid vehicles also may compete very effectively in a head-on manner by being more convenient, if not eventually lower cost. Although current hybrid technology cannot yet win in head-on competition with gasoline vehicles, hybrids are far more likely to be adopted in head-on competition than are pure-play electric vehicles. We are particularly optimistic about the coming generation of plug-in hybrids, which will propel cars up to 40 miles on electricity before requiring the gasoline engine to kick in. This solution provides the vast majority of everyday driving needs on electricity alone, while preserving the flexibility to take longer trips. Early models will not be cost competitive, but as the technology improves and scale advantages arise, cost competitiveness may well be achieved, especially if gasoline prices continue to rise.

CONSERVATION IN THE DEVELOPED WORLD

So long as green technologies follow the rules of successful innovation, they will be adopted readily in the developed world. The problem is that the developed world’s existing energy infrastructure is so cheap and convenient that it creates large barriers to adopting new energy technologies. And with few nonconsumers of energy, they offer hardly any space in which green technologies can take hold organically. This is why governments in developed countries must play a large role in formulating and enforcing conservation mechanisms to reduce energy use.

The recent move by some governments to phase out the incandescent lightbulb is a good example of the kind of conservation measures that are required. The incandescent lightbulb traces its history back to Thomas Edison. These bulbs produce light by heating a filament until it glows inside a glass bulb. Although the technology has served the developed world well for more than a century, it is terribly inefficient in its use of energy. Up to 90 percent of all the energy used in a lightbulb is wasted as heat, with the bulb producing only 15 lumens per watt. By contrast, a compact fluorescent lightbulb (CFL) produces 50 to 100 lumens per watt, and the energy savings more than make up for a CFL’s increased cost ($3 per bulb vs. 50 cents per bulb for incandescents). If a consumer were to spend $90 on 30 CFLs for her house, total energy savings could range from $440 to $1,500 for the five-year life of the bulbs.⁶ The United States has now mandated that the incandescent lightbulb be phased out of the U.S. market in 2012. Experts have estimated that if everyone in the country switches to CFLs, it will eliminate the need for 30 coal-fired power plants, and will save an amount of electricity equivalent to that used by all the homes in Texas each year.⁷

Government-mandated conservation efforts succeed best when they align with the interests of entrenched stakeholders. In the case of the lightbulb, manufacturers find the mandate attractive as CFLs represent a higher priced, higher profit margin product than incandescent bulbs. Consumers also stand to benefit from the energy savings reaped from CFLs. By contrast, California’s attempt to establish quotas for electric vehicles in the early 1990s was challenged from the beginning. As the quotas applied only to California and EV technology was so expensive at the time, it would have been very difficult for automakers to earn a profit on vehicles produced in such low quantities. This ran counter to their natural interest to produce higher volume, higher margin vehicles. The resulting industry opposition eventually caused California to retreat from its proposal. We don’t argue that government should cater to powerful interests, only that it should be prepared for a much more difficult path if conservation mandates create large burdens for industry.

It is undeniable that the world needs cleaner and more sustainable sources of energy, and green energy technologies can contribute to that effort. Yet our research into innovation and technology commercialization cautions us that the development and success of these technologies must conform to well-established rules. It would be a mistake for governments to pour large sums of money into technologies that will have difficulty finding commercial acceptance. But that is precisely the path many governments appear to be following. A better way to develop and deploy green energy technologies is to incubate them in places where they can succeed commercially from the outset.

Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School. He is best known for his book The Innovator’s Dilemma: The Revolutionary Book that Will Change the Way You Do Business,a study of disruptive technologies and their impact on business.

Shuman Talukdar is a business development executive for Silicon Valley startups and a graduate of Harvard Business School (email: st at inspiredvc.com).

Richard Alton is a senior researcher at the Forum for Growth and Innovation at Harvard Business School.

Michael B. Horn is the co-founder and executive director of education of Innosight Institute, as well as the co-author with Clayton Christensen of Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns.

“We tell you the suggested price but the choice is yours,” explains Panera co-founder Ron Shaich, who recently stepped down as CEO to focus more of his energy on philanthropy. (He continues to chair Panera’s board of directors and heads the Panera Bread Foundation.) “If you’ve got a few extra bucks, the right thing is to leave it. If you’re feeling pressure, you can take a discount. If you’ve got nothing, you’re free to enjoy your meal with dignity.”

Since opening its first “restaurant of shared responsibility” last May in a St. Louis suburb, the chain is poised to take its upscale version of a soup kitchen nationwide. A second Panera Cares café opened in November outside Detroit, and a third was slated to open in Portland, Ore., in January. Neighborhoods have been selected to include a mixed clientele, with well-heeled professionals dining side by side with homeless families.

The concept is groundbreaking in the food service sector. “It’s not like a free Grand Slam breakfast that Denny’s offers on one day a year,” Shaich says. “We want this to be sustainable.” Any profits generated by the cafés will be channeled into job training for disadvantaged youth and other community programs. Unlike the Ben & Jerry’s PartnerShops that are franchised to local nonprofits, Panera Cares cafés are managed by the corporate foundation.

The model offers the company a way to put its core strengths to work on social problems. Panera has long been active in philanthropy, donating more than $100 million worth of goods annually to local agencies, Shaich says, “but that product goes out the back door in brown bags. Nobody gets connected to where it goes.” He liked the idea of getting his workforce more personally involved in solving challenges. “How do we take our skills and add more value than just writing a check?”

An answer started to take shape when Shaich heard about a Denver-area nonprofit that was running a no-price café to serve the community’s hungry. The idea sounded promising but had taken years to implement. In the corporate world, Shaich says, he’s used to opening two restaurants a week. He also thought about an experience of helping his young children deliver food to shut-in elderly. “The three of us spent three hours driving to the warehouse, filling bags, and taking food to a couple of people. That’s nine hours of human capital for two bags of food.” The entrepreneur in him knew he could make giving more efficient.

To fine-tune the Panera Cares concept, Shaich visited soup kitchens in various communities. His decades in food service didn’t prepare him for what he saw. Waiting in line for a handout “is an experience that lacks in dignity. With all due respect,” he adds, “it’s negative energy.” That’s when he decided the new cafés needed to offer a full menu, not just bread and soup. “Then it became a dare to ourselves. If we’re serious about offering a high-quality experience to everybody, then we have to put all the power of our brand behind this.”

Patrons have responded favorably, with about 60 percent challengpaying suggested price, 20 percent paying more, and the rest taking a deduction. It averages out to 80 percent to 85 percent of suggested retail, which is more than enough to cover costs, Shaich says.

Nordstrom may be the next national chain to start retailing for charity. The upscale clothier will open a unique store in the SoHo neighborhood of Manhattan in fall 2011. All profits will benefit charitable causes. Devoting a whole store to charity goes beyond cause marketing campaigns like Product RED.

It’s not yet clear what merchandise will be sold or which charities will benefit, says Nordstrom spokeswoman Pamela Lopez. But unlike Panera, Nordstrom will not brand the store as its own. “There will be no Nordstrom sign,” Lopez says. “This is a chance for us to do something unique.” Not coincidentally, the store will offer the company a window into the New York retail market, “where we aspire to have a full-line store eventually.”

Two of the first social development NGOs to transition into commercial microfinance organizations in the early 1990s—both in La Paz, Bolivia—handled the tension in different ways, and with differing success. At Banco Solidario (BancoSol), a visionary leader named Francisco “Pancho” Otero hired seasoned social workers and anthropologists, bankers and lawyers. He created a strong institutional culture around shared development goals that inspired deep commitment from employees. “His big mistake was thinking that would be enough,” says Silvia Dorado-Banacloche, a professor of entrepreneurial management and law at the University of Rhode Island who conducted extensive interviews during BancoSol’s transition period. Otero believed that “by becoming a commercial bank the only thing that changes is the back office.” But BancoSol’s identity soon began to split. Social workers accused bankers of hindering development activities with their nitpicky rules and procedures; bankers considered social workers “dangerous idealists.” The schism paralyzed the bank, which recovered only after it replaced most of the development-oriented staff.

Caja de Ahorro y Prestamo Los Andes saw what was happening at BancoSol and took a different approach. The bank hired recent college graduates and molded them into employees who could pursue development and banking objectives. The extensive training slowed the bank’s growth, but Los Andes maintained a commitment to its hybrid mission and even tackled the notoriously difficult agricultural market.

BancoSol eventually adopted some of Los Andes’ hiring and socialization practices. “I think if you were one of the social worker diehards, you might say the bankers won; but I think the bankers would say we’re very different bankers,” says Michael Chu, former chair of BancoSol. The conflict between profit and social impact “is a tension that can be resolved,” he says.

How? “Any organization that is doing well by doing good will be served by trying to develop their own people,” says Dorado- Banacloche. “It is very important to translate lofty visions into measurable goals.”

Julie Battilana and Silvia Dorado- Banacloche, “Building Sustainable Hybrid Organizations: The Case of Commercial Microfinance Organizations,” Academy of Management Journal, February 2010.

For the past two decades Cambia has been trying to upend that dominant model. Cambia is developing new scientific tools and processes for controlling and manipulating genes, and making them available to all organizations on a progressive pricing model: Large corporations pay a lot, whereas small shops pay little. Cambia’s approach makes it more likely that new drugs will be developed for otherwise ignored diseases, and that new crops will be developed that are more environmentally sustainable.

In this interview with Stanford Social Innovation Review Academic Editor Johanna Mair, Jefferson explains why the current patent process used for biological discovery inhibits innovation, why an open source approach is the answer, and what Cambia is doing to get scientific discovery moving in the right direction.

Johanna Mair: In the early 1990s you started Cambia as a nonprofit organization focused on biological innovation. Why did you do so?

Richard Jefferson: The vision of Cambia dated back to the late 1980s when I was a postdoc at the Plant Breeding Institute in Cambridge, England. While there, I began to realize that the ways in which science was used to solve problems and the types of solutions that were created, were shaped and influenced by who controlled the design and use of new scientific tools. This was during the dawn of biotechnology in agriculture. I sensed that it was necessary to dramatically democratize the process and involve a more diverse group of people in using these powerful new approaches to solve localized and scaled-down problems.

At the time, however, the apparent successes of the biotech industry had convinced many people that the blockbuster mentality would deliver the goods, and that a rent-seeking model was a viable way forward. In that model, you invent a new process, find a drug target, or discover a new gene, then wrap it up in intellectual property protection and try to sell it to the highest bidder. That bidder then has to try to assemble the puzzle into something actually useful. It’s a slow, expensive, and cumbersome process that requires so much capital that the only targets worth shooting for are the blockbuster products. It was not widely perceived how dysfunctional this process could end up making biological innovation.

What is wrong with that model?

When I started, genetic engineering was not yet considered to be the pariah it is today in some circles. It was generally thought that since so much crop development was done in the public sector, it would continue to be a public resource—a commons. I remember talking to directors of Greenpeace International who were quite excited about how biotechnology could eliminate our dependence on chemical agriculture and could be an enabling environment for agriculture to become sustainable.

A few years later it was a very different world. By that time, the control of innovation— including control of the actual toolkits necessary to put biotechnology to work—had been vertically integrated through acquisitions, mergers, and a skein of cross-licenses, to make it a no-go zone for small and medium enterprises. There are now thousands of patents covering almost every stage of the research and development process that could give the holders the rights to stop others in their tracks. That makes for a pretty constipated ecology.

As a result, we have vast acreage of a few crops, controlled by a few industry players, engineered for arguably higher performance in an industrial agriculture paradigm, as well as a public that generally doesn’t like it. Many people and small enterprises were cut out of the process—those who could have brought real creativity and perspective to bear—and local-scale solutions never make it onto the drawing board.

You keep using the word “tool.” What do you mean by that?

In software, tools are databases, web browsers, or programming languages—all methods for manipulating information. In life sciences they are methods or techniques for manipulating or understanding living systems, including genes. While I was in grad school, and then later when I was at the Plant Breeding Institute, I developed GUS, a widely used genetic technique—or tool— that allows you to monitor when, where, and how much a gene acts inside a cell. I distributed it freely to hundreds of laboratories before patenting it or even publishing a paper on it. When I did that I discovered something utterly fascinating—GUS changed the entire field in less than a year, and enabled real progress both scientifically and commercially.

That was very gratifying because it confirmed my premise that a tool, if properly designed and shared, can change the direction and pace of innovation. It led me to think, why couldn’t we have an institution that designed and shared tools for people who are currently outside the loop and used in a way to engage truly holistic problem solving?

The Rockefeller Foundation was a strong supporter of Cambia for many years. How did that happen?

Cambia’s first paying gig was funded by the Rockefeller Foundation, thanks to the visionary leader of the agriculture program, Gary Toenniessen. This only happened after four years of pounding on their door, loitering in their offices, and just not going away. In 1992 they gave us $100,000 and sent us off for a year to troubleshoot their rice program throughout Asia, with a nod and a wink. They knew that what we really wanted to do was to invent a new way of cooperative problem solving, sort of a biological open source, but as long as we did our work in troubleshooting their rice program that was fine. We went back after one year and they were pretty happy with our progress, so they ended up funding us for the next 15 or so years.

Our job was to visit every laboratory that did rice biotechnology in the world, to learn, evaluate, teach, help, invent, and support new technologies that would overcome the barriers these laboratories experienced. Our vectors [the DNA tools that are shuttles for genes] are in use in all those labs almost two decades later, and the people we worked with now run major institutions and companies in Asia, Africa, and Latin America. For us, that work was a great learning exercise because we also became experts in intellectual property and observers and strategists of the culture of the public sector.

Which led to your initiative, the Patent Lens.

Yes, which in turn led to our passion for innovation cartography. The patent system exploded during the biotechnology revolution. It reached such a point of complexity and opacity that almost no one really knew what was going on or who had what rights. The Rockefeller Foundation and Cambia were concerned that there was too much opportunistic and shortsighted use of the patent system by the universities that Rockefeller was funding, and too much consolidation by the multinationals that even then were coming to dominate the landscape. The foundation was funding universities around the world to contribute toward solutions of problems in plant sciences. But most of those universities were filing patents on their work and restricting distribution of their materials, all ostensibly to maximize their financial upside, although few did profit. This was never Rockefeller’s intention. They wanted these technologies to be widely available so that new options could be created that would benefit rice farmers and, of course, poor rice consumers.

So Rockefeller asked us to start shedding light upon the extent of patent coverage globally in agriculture. That work became the Patent Lens. It was the first and still the only nonprofit involved in integrated worldwide patent search. We set out to show who controls what patent rights and share that as public information that could be a basis for community response.

By doing that work we learned a lot about intellectual property. Cambia invented a number of technologies, filed a lot of patents, and did a lot of licensing. Almost every company in agriculture has paid to license our technology. We learned how to do tiered licensing so that it could be equitable with access guaranteed to anyone. We used the revenue stream from those who benefited a lot from the technology, like Monsanto, to help those who otherwise would have had very little access to the technology. This use of tiered pricing to fund a public-good activity was our foray into social enterprise, long before I’d ever heard of that term.

One of Cambia’s early initiatives was called Biological Open Source. Why did you think that open source was the way forward?

We mapped the thickets around the first Spring 2011 • Stanford Social Innovation Review 15 step of making genetically modified plants, dominated then and now by Monsanto and its ilk, and devised a new method that we reasoned would not infringe these patents. We published it in Nature, sent it out to thousands of labs, filed patents, and licensed it to hundreds of players in dozens of countries. The licensees agreed to share improvements to that technology, but still retain full rights to their own use of the tools. The problem was that it was too little, too late. By that time the industry was intensely consolidated in a few hands, and the public had already lost any confidence that their interests were being promoted and protected by a capable public sector.

My work happened more or less in parallel with the development of the free software movement that later morphed into open source. We knew nothing about what was going on in information technology at the time, and we didn’t develop our ideas modeled on open source. We developed our ideas modeled on what we perceived as a terrific opportunity for a general approach to enabling innovation in a field that we knew a lot about.

It’s interesting that what is called open source in software engineering was anticipated by several thousand years of plant and animal domestication that underpinned all of agriculture. We’ve actually had thousands of years of developing the norms and innovation models of open source. For millennia, new varieties of crops were selected or bred by farmers themselves. They were freely available to anyone who could collect the seeds, cuttings, or seedlings. It was impossible to stop seeds from getting out, so the focus was on producing something of value, and accepting that others would use your seeds to make better ones. Of course, that is now dramatically changing in the agricultural industry, since the advent of hybrids— crops whose seeds don’t breed true—and now transgenic crops, heavily controlled by contracts and licenses.

What has been your biggest disappointment since Cambia began?

That would have to be the public sector’s discouraging performance. I’ve felt for a long time that the public sector, in particular universities and national laboratories, has been very ineffective and inefficient as agents of public good. The feature that makes them public is generally the source of their funding, but sadly not the development and disposition of their work.

Right now the metrics they cleave to are things like monetization, spin-offs, publication, and career advancement. None of them have a direct correlation with social value. The metrics of career advancement are not aligned with the metrics of delivering benefits to society. The metrics of monetization of intellectual property are not aligned with the metrics of using intellectual property to create a new crop or medicine.

Tell me about the Initiative for Open Innovation.

It’s the culmination of our lessons from the last two decades. The Initiative for Open Innovation, or IOI, was designed to be a truly open global initiative to change how problem solving is done and by whom.

Let me explain it with a metaphor. In the first several thousand years of human economic development, almost all progress was made by moving physical material from one place to another. Global trade drove the development of civilization. The big problem with moving stuff across space is the space. The biggest risk was that you would hit a reef and lose your ship, or run across a hostile tribe and lose your caravan. So the single biggest tool for risk mitigation that made economics work was the map.

Cartography, the ability to map our physical environment, was the single most important breakthrough in economic development. In the 1400s and 1500s, the great maritime empires of Portugal and Spain dominated global trade because they dominated mapmaking. No one else knew how to make the long-distance passages. The Portuguese and Spanish kept it as a trade secret. In the biggest act of open access guerilla warfare ever done, in 1596 a Dutchman named Jan Huygen van Linschoten stole all the Portolan charts and navigation directions from the Portuguese and published them in Amsterdam. Within a few years the Dutch East India Company and the British East India Company were formed, and the entire landscape of commerce changed. It is unthinkable now that we would have trade in the absence of maps as global public goods.

Yet that is the situation we face in today’s information economy, the lack of publicly available maps.

Indeed. And that is exactly the transition we now have to make in the world of ideas. Today it’s not about moving stuff from one place to another; it’s about converting information through thought processes and creative innovation into new value. It’s the world of ideas rather than the world of things. But we have the same challenge of cartography. We need to create publicly available maps that can help us navigate this new world of information. We need to create as global public goods, a risk mitigation tool so that decisions that are aligned with self-interest and ambition can be made with as little avoidable risk as possible. Right now, the greatest risks are associated with intellectual property, regulatory compliance, and, of course, ignorance. Those can be reduced.

The vision of IOI is to create an ecology in which virtually anyone with ambition and a good idea can enter into the process with as small an entry barrier as possible. Five years ago it would have been considered unrealistic, even impossible. But today, by harnessing such trends as cloud computing, social software, and the trajectories of freedom of government information, there’s no reason we can’t anticipate that within the next few years we will have true innovation cartography that is shaped for diverse people as a decision support tool, just as maps are taken for granted in global trade. That’s our vision, and I think that making this happen will have a massive transformational change in global equity and economics.

The visitors were ushered into a workplace humming with music, its walls covered with floor-to-ceiling murals and steel animal sculptures. There were basketball courts, fishponds, a dance floor, and pinball machines. Habitat CEO David Morris, rebel-with-a-cause businessman and college dropout, singled out a few employees to meet the group. “Everybody, this is Jimmy. Jimmy is a schizophrenic,” said Morris, causing an uncomfortable gasp in the crowd. “No David! No, this is all wrong!” Jimmy interjected. “I’m a paranoid schizophrenic,” he said, looking out at his audience. “But right now I’m OK and I’m not going to jump on any of you.” In an instant, the visitors learned they were not in the “regular” business world anymore. They were on Habitat’s turf.

Between 70 percent and 80 percent of Habitat’s employees have some sort of mental or physical disability, or what Morris calls a “positive distraction.” Among the 50 employees, there are workers with Down syndrome, autism, paranoia, cerebral palsy, brain injury, and various undefined disorders. Some are formerly homeless, others are recovering alcoholics. Habitat takes no government subsidies or tax benefits for its special workforce. There is no social worker on staff, no caseworkers, no nurses. When changes are needed, everyone works together to find solutions. Morris installed an in-house radio station for workers to gain confidence on the microphone, showers for the occasional personal hygiene accident, and a schedule of dance parties and drum circles.

Once, when a bipolar worker became suicidal, Morris came up with a unique, but risky, way to get him to stop whispering wishes to kill himself. “I asked him to come outside with me and I handed him a shovel and told him to dig. When he asked why, I told him that if he wanted suicide so bad, I’d help dig his grave and bury him,” Morris says. The employee threw his shovel down, ran back in the building, and made an announcement—alerting all co-workers never to say they want to take their life, because David will bury them alive.

Morris knows how far to go, because he gets to know his workers as closely as he does his own relatives. Many stay for decades in their job. “To a typical businessperson, Habitat blows a fuse in their mind,” Morris says. “It’s important to us and to me, who is a little eccentric, to have fun at life. We spend so much of our life at work, we should make it like a family and have drum therapy and dancing and art on the walls. Why not?"

GROWTH THROUGH RISK

Morris’s philosophy seems to be working. Since he started Habitat with his father out of a small storefront in 1981, the company has grown into an 80,000-square-foot plant that produces 12,000 synthetic grass carpets a day. Production has branched out, and workers are now also assembling and gluing corrugated pallets. Annual sales are $7 million, and major retailers such as Home Depot, Lowe’s, and Orchard Supply Hardware carry Habitat products.

As word of his exceptional workforce spread through magazines, a spot on CNN, and the book Able! How One Company’s Disabled Workforce Became the Key to Their Extraordinary Success, Morris has become a mentor to other companies and entrepreneurs. Two business college textbooks use Habitat as an example of alternative hiring. Morris, along with Oprah Winfrey and actor Christopher Reeve, are profiled in the book The Heart of America: Ten Core Values That Make Our Country Great.

“Dave is the real deal,” says Randy Lewis, senior vice president of supply chain and logistics for Walgreens. “When we met with David and his folks at his plant in 2007, we experienced the future—or at least what we hope the future to be: a place where the burdens and gifts of life that each of us bears have nothing to do with our ‘worthiness.’ We saw lives changed. More important, we saw how our lives would be changed, too.” Shortly after the visit, Walgreens opened a new distribution center in Anderson, S.C. More than 40 percent of the 700 new hires are disabled, all chosen by a boss who has cerebral palsy.

At first, Morris was reticent to hire anyone with a disability. Growing up in Chattanooga, he knew several people who worked at nonprofits serving the mentally and physically challenged, and they encouraged him to offer jobs. He might not have done it if it hadn’t been for his relationship with a former sister-in-law, who has Down syndrome. He remembered teaching her small tasks, such as making the bed or washing the dishes, and watching her self-esteem rise. Each time she rose to her potential, he gave her slightly more intricate tasks.

So when one of the most persistent charities asked Morris to accept eight workers with mental retardation in 1993, Morris said yes. But they came with a job coach and a special program. They didn’t mesh well with the rest of the group, because the employees looked at the newcomers as less than equal. “We moved away from having a middleman,” Morris says. “It’s better for people to come in as real employees with real pay and real jobs. Otherwise, it’s defeating the purpose, which is to treat people as people. There’s no charity involved here.”

Habitat workers earn competitive wages—$10 to $20 an hour, compared with the $1 to $2 given through many state and federal programs. Absenteeism is practically nonexistent, and there’s very little turnover. Every employee is cross-trained on all plant tasks, from running the press to loading the trucks and gluing foam pad to the undersides of golf driving mats.

After working the kinks out, including dropping his second largest customer after hearing its management team twice make disparaging remarks about his workers, Morris discovered something. Differently abled workers have creative solutions to business problems that are often superior to the tried-and-true methods. One worker, who is deaf and cannot read, learned to sense vibrations in a particularly temperamental strapping machine that was prone to breakdown, costing Habitat hundreds of dollars a month to repair. Now that he can feel an upcoming mechanical problem before it happens, he makes a slight tweak. Today, the machine rarely fails. Once, when another employee with Down syndrome was running a 25-ton press, Morris got nervous because he wasn’t folding the carpets correctly. Morris tried to correct the worker, but a speech impediment made their conversation difficult, and Morris didn’t understand what he was trying to say. It was only afterward that Morris realized the worker had come up with a novel folding technique that enabled him to double his output.

“The biggest disability disabled people have is you and me,” Morris says. “Most people with supposed disabilities know they are able, they are just waiting for the opportunity to show you and me and the rest of the world.”

MORE THAN A PAYCHECK

Sometimes having the best intentions is not enough. A handful of times, Morris has let workers go because they didn’t adapt to the job. He remembers one autistic employee who was so unresponsive, after weeks of trying to engage him by tossing balls for him to catch, there was nothing to do but send him home. Failure also comes when employers try to emulate what Morris does, but for the wrong reasons. Morris has seen big retailers, seeking to improve their bottom line, hire the disabled at subminimum wage, only to foster a segregated workforce that eventually fractures.

“Some do it to meet ADA [Americans with Disabilities Act] standards, or to get the tax breaks, or to look like a socially responsible company,” Morris says. “These same companies will make large donations to nonprofits, so the charities are walking a fine line between keeping their donations coming and standing up for the rights of people with disabilities.”

Forklift driver Martin Arney, 35, would rather lose some of his government benefits if he can replace them with a real paycheck. “This place encourages me to keep going,” says Arney, who was told by doctors that his cerebral palsy would one day prevent him from walking. “I don’t want to be a couch potato my whole life and draw an SSI check. I’m too proud to take handouts like that.”

Arney has been with Habitat for 14 years. One of the main reasons he stays is that he feels safe surrounded by familiar faces. “I’ve been made fun of my whole life, but those kinds of things don’t happen here. If someone makes fun of someone, then we all sit together and talk to that person and correct them,” he says.

Sharon Adams has spent the last 21 of her 46 years rolling, cutting, and gluing carpet at Habitat. She lives with her parents, and she was at first introverted and shy. Adams is now the go-to person to train new employees, is typically the first on the dance floor at celebrations, and has earned the nickname Cinderella for her stunning Halloween costume. “It’s like a family,” she says. “The people here make me laugh and smile and we tell a lot of jokes. I have a lot of friends here.”

Meredith May is an award-winning feature writer for the San Francisco Chronicle. She also teaches journalism at Mills College in Oakland, Calif.