Written by John Carbrey.
This is the second article in a series exploring new approaches to venture creation.
In the first article in this series, I introduced the concepts of the Economics of Mutuality in which a business seeks to earn profit while attempting to solve problems for people and the planet. Such businesses look beyond simple profit maximization and consider their placement within an ecosystem of people and the environment. They intentionally consider how their businesses can be mutually beneficial for both internal and external resources.
My continued reflection on the power of a “mutual economy” in contrast to the market economy to solve critical and complex problems has led me to ask the following provocative questions about value creation, power, and profit.
Value Creation: Do we want a bigger pie or just a big slice?
In a market economy, many companies will strive for a monopoly in order to extract the most profit from its ecosystem. In contrast, in a mutual economic framework a company’s value creation is in a vibrant and healthy ecosystem in which many stakeholders benefit. Instead of acquiring a larger portion of an existing market, those in search of mutually beneficial business plans seek to expand the size of the market itself.
An example of a company intentionally expanding the market is Sabka Dentist, the largest chain of dental clinics in India. Its purpose is to provide affordable dental care to all people in India, particularly the urban poor. Instead of competing for the small but profitable share of wealthy Indians who can afford premium, private dental care, Sabka makes its services affordable to the millions of underserved rural and urban poor. Their business model provides standardization using pre-specified units that are easily installed and allow the company to set up a new clinic within three weeks. In addition, it offers interest-free funding to patients and makes significant investments in training programs.
The company has leveraged its estimated forty percent reduction in the cost of treatment compared to competitors to increase the size of the market of those who can afford dental service.
Additionally, the company makes its strategy available even to competitors so that they can provide affordable dental care and learn from Sabka’s experience. The CEO, when asked why he assists potential competitors, responded: ‘I want all Indians to have access to affordable dental care. What you call competition, I call people working towards my purpose for free so I help them if I can.”’
By sharing their experience and tools, Sabka is part of fostering affordable treatment for as many people as possible — even if they themselves are not administering or profiting from all of that market expansion.
A second example of value creation is Elon Musk’s 2014 release of Tesla’s patents. Musk’s goal was to open-source electric vehicle technology, benefitting other electric car manufacturers — and the world in general — towards the greater cause of transitioning to carbon free transportation.
Power: Do we want to dominate or create a vibrant ecosystem?
Economics of Mutuality focuses on increasing the level of power sharing in ecosystems for the benefit of everyone involved. CEOs willing to decentralize power challenge the underlying principles that confer nearly all benefits on a few. Stakeholders previously excluded from economic activity participate, reducing inequality and disparities of wealth.
Shopify is an excellent example of an e-commerce model that seeks to give power to independent merchants. Shopify even goes as far as calling their mission “arming the rebels” (independent merchants) against Amazon’s growing centralized power.
Amazon has used its extensive power to minimize the power of independent merchants and effectively drive their profit levels on the Amazon platform to zero.
In contrast, Shopify provides both a great customer experience and power sharing with merchants: merchants maintain their branding and can own their relationships with their customers. In a 2015 letter to shareholders, founder Tobi Lütke said, “. . . as a brand, we are virtually invisible to consumers. This is by design, as our job is to make our merchants look their very best in every interaction they have with consumers.”
Featuring the merchants over Shopify’s own name illustrates the core value of power sharing with merchants. If the key to Amazon’s success has been to put the customer first at the expense of merchants, for Shopify the key has been to put the customer and the merchant first. They offer an alternative to Amazon’s ever-increasing power.
Another company modeling power sharing, albeit on a smaller scale, is Acceso, a social enterprise that empowers farmers in rural communities in Latin America with training, inputs like seeds and fertilizers, and market access to clients like Super Selectos (the largest supermarket chain in El Salvador), Subway, and others. Acceso helps smallholder farmer families increase their yield and product quality, access formal markets with steady prices, and benefit from local collection centers. The farmers receive increased incomes and economic stability, benefits previously less available due to the difficulty of maintaining their own holdings and struggling to avoid being swallowed up by larger, more powerful producers.
Profit: What is the right level?
The key question at the center of the Economics of Mutuality innovation is the question of the right level of profit. Instead of maximizing profit for shareholders alone, Economics of Mutuality scales the question to include other stakeholders and asks businesses to consider broader social responsibilities.
Mars, Inc., was ahead of its time in implementing this methodology. In 1947, Mars CEO declared “mutuality of service and benefits” as the “total purpose for which the Company exists,” laying the foundation of what would become the Economics of Mutuality mission launched in 2006. In 2019, nearly eighty years later, a group of 181 business leaders, CEOs of public companies, signed a statement in which they committed to “lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.” Their mission is not just profit maximization aimed at serving shareholders, but a mutuality of benefits available to many more stakeholders.
However, this shift requires changes to measurement and incentive systems for companies and investors. Incentive systems for CEOs don’t match these lofty aspirations because their compensation is often tied exclusively to short term share prices. If we don’t measure the mutuality of benefits to other stakeholders you can’t grow those benefits, and for most companies, measures for social, human, and natural capital are immature.
At the investor level the challenges are even more complex. Private equity fund structures such as the 2/20 model exclusively incent based on short term value creation & extraction over a 3–5 year time period. While the ESG checkbox is plastered on every private equity fund’s investment pitch — there is no measurement of mutuality of benefits and no accountability on performance to investors.
At the core, these concepts go back to an investor’s interest in maximizing other forms of non-financial capital. Many investors have absolutely no moral qualms about investing in businesses that sacrifice these other dimensions. Cigarette companies, for example, have great dividend yields and are attractive investments to many despite their damaging of people and the environment.
Challenges Remain
These concepts are compelling, but there are significant challenges and questions that remain around value creation, power, and profit goals.
First, while the goal to grow the pie and create value is compelling, some industries are in segments where the pie is static or even shrinking. In that context all inter-participant interactions are really zero sum and don’t give opportunity to growing a bigger pie where more people share the benefits.
Next, Peter Thiel argues in Zero to One that the goal of all new businesses is to create monopoly. This is a direct counterargument to moving from domination to power sharing. The “goal is monopoly” argument seems valid because without the venture having a monopoly, the competitors in the industry will compete away the profit.
Finally, how does the question of “what is the right level of profit” apply only to a successful monopoly that needs to choose if it will be a benevolent dictator or a tyrant? Is this question relevant in early-stage venture formation or does a company need to reach a certain maturity and financial strength before considering adjusting a profit target?
Where do we go from here?
As I review these questions, however, one thing seems fairly certain: many of these questions are worth asking, and are best asked at the early stage of venture development — even before the venture is fully formed, because many of these questions go back to the core DNA of a business which, once set, can be challenging to change.
The next article will explore three practical considerations for applying the Economics of Mutuality in business model development and new venture creation. You can read it here.