Enterprise Resilience Management Blog

Profit-backed Social Philosophy

The World Economic Forum in Davos, Switzerland, draws an interesting and diverse crowd. Yesterday I wrote about the young, social entrepreneurs found there by New York Times' columnist Nicholas Kristof [The Rise of the Social Entrepreneur]. Most of those young people are relatively unknown. The Forum also attracts big names, however, like Bill Gates, the founder of Microsoft. John Markoff reports that Gates lectured a packed house on his social philosophy ["Bill Gates: Social Philosopher," New York Times/International Herald Tribune Davos Diary, 24 January 2008].

"Bill Gates [has taken his] first steps toward transforming himself from software baron to social philosopher. His new effort is based on a public challenge he issued during his evening address to corporate executives, in which he urged them to pair the self-interest that is the hallmark of capitalism with interest in the welfare of others, which he asserted was a second important force of human nature. Mr. Gates quoted an early work of Adam Smith to buttress his claim that humans are just as interested in insuring others’ fortunes as their own. 'I'm an optimist, but I'm an impatient optimist,' he said during his speech. 'The world is not getting better fast enough, and it's not getting better for everyone.' Coupled with the $33 billion foundation that he has set up with his wife, Melinda, the new Gates philosophy is a radical shift from the world view he evinced during several decades as a fierce competitor in the personal-computer software industry."

I have noted before that all entrepreneurs are optimists. They have to be. Only someone with an optimistic outlook can boldly ask their friends, family, banks and venture capitalists to invest in their dreams. I think it's fair to say that most entrepreneurs are also impatient. They expect great things to happen quickly, at least entrepreneurs in the information age do. Gates' self-designation as an impatient optimist is a good description of many of those newly wealthy people who have begun to re-invest in society [see my post Philanthropy at the Top of the Economic Pyramid].

"During a telephone interview before his address, Mr. Gates pointed to improved health care as the most effective mechanism for lowering birth rates and thus for indirectly having a positive impact on standards of living and quality of life for world’s poorest billion citizens. 'Things you do with health really are the most important intervention,' he said. Mr. Gates acknowledged that he expected a skeptical reception for his plan, but said he also expected that would change as concrete examples of success emerged. He made reference to the power of extending low-cost wireless networks into developing countries to bring about significant social and economic changes. 'Once you get a country bootstrapped, it's amazing what happens,' he said."

My colleague Tom Barnett and I have been preaching the benefits of connectivity for a long time. We wholeheartedly agree that once people get connected "amazing" things happen. In a follow-up article, Markoff notes that many people have been working to achieve a vision similar to Gates' long before he issued his challenge to business leaders in Davos ["Many Are Already at Work on Fulfilling Gates’s Vision," New York Times, 30 January 2008].

"Bill Gates’s bold Davos challenge to the world's capitalists last week should have come with equally bold footnotes. 'There are billions of people who need the great inventions of the computer age,' he asserted. 'Breakthroughs change lives only where people can afford to buy them.' Conspicuously missing from the appeal, which asserted that human nature is not just driven by greed but also by concern for our fellow beings, was any reference to the work and thinking of the Nobel Peace Prize winner Muhammad Yunus. The microfinance innovator, who is known as the 'banker for the poor,' recently wrote a book, 'Creating a World Without Poverty: Social Business and the Future of Capitalism,' that foreshadows Mr. Gates's newfound social philosophy."

Backing this social philosophy is profit. That might sound crass, but businesses that fail to make a profit are in no position to help anybody. They can't generate jobs. They can't stimulate supporting businesses. They can't invest in infrastructure. The list goes on. Yunus started his Grameen Bank to help individual entrepreneurs who had no access to credit except through usurers charging up to 300 percent annual interest, which drove them deeper into poverty's pockets. Some of these poorest of the poor entrepreneurs have been able to claw their way up the economic chain and have hired others to help them with their small businesses. You don't have to be a big business to provide some social good, but you do have to be successful.

Markoff is skeptical, in fact, that big businesses will, as he puts it, "change their spots." But he points out that Yunus has replicated his success in the banking world with success in the mobile phone world.

"Last week Mr. Gates called on the executives of the largest corporations to add social entrepreneurship to their agenda, a leopard-spot-altering exercise at best. However, in challenging his compatriots, one of the experiments he overlooked was Mr. Yunus's stunning success at Grameen Phone in Bangladesh, an effort he has pioneered during the past decade in partnership with Telenor, a Norwegian wireless carrier. Intended as an experiment to extend wireless communications networks to the world's poorest people, the program has become a remarkable success on multiple levels. Not only did it create a class of 'phone ladies' who brought wealth into village communities, it has grown quickly enough and been profitable enough that Mr. Yunus said this week in Davos that Telenor had decided to break its original promise to his organization and refused to turn over control to allow the program to be run on a not-for-profit basis. The challenge now facing the firm is to replicate its success as a wireless voice provider as a wireless Internet company. This week in Davos, Mr. Yunus said that that transformation was well under way."

Mr. Yunus calls his companies "Grameen" because he wants people to understand they are intended to help the poor. The word comes from the Bengali word "gram," which means village. Grameen means "of the village." How important is it to get the poor access to the Internet? Markoff believes it will help eliminate poverty like the rising sun removes dew from the grass on a frosty morning.

"The deeper implication of that shift [from voice to data capability] would be an advance from a communications to a computing revolution. As voice networks have paved the way into the farthest reaches of the emerging world, it is likely that they will quickly be followed by the Internet and the World Wide Web. That in turn could become a great leveler, bringing markets, electronic commerce and health care networks to the world's poorest. With any luck it will mean that the emerging nations will finally complete the promise of a failed computing experiment played out by a team of French and American computer scientists in Senegal a quarter of a century ago. The original idea was that computing technology would make it possible to skip a stage of economic development, with people in developing nations quickly joining the information society without having to undergo industrialization."

The dream of jumping from an agricultural to an informational society might sound nice, but some industrialization must take place. The information age society requires an educated populace whereas an industrial age society primarily requires a healthy and strong one. Many of the societies in emerging markets will have laborers, but not necessarily educated ones. The best hope for them is to develop a three-footed model, where one foot remains in agriculture, one foot in industry, and one foot in the information services. That strategy provides them with the best possible job creation opportunities. As one generation climbs out of poverty, the next generation becomes better educated and the emphasis on jobs will shift. Markoff ends his column with both hope and concern. He writes:

"[This] brings us back to Mr. Gates's plea at the World Economic Forum last week. Microsoft's research lab in India, he said, was focusing on a variety of projects, ranging from low-cost wireless to new computing interfaces that will allow semi-literate and illiterate people to use computers effectively. These are great ideas, but at Davos this year there were already a proliferation of technology-driven projects in evidence, all targeted at the bottom of the economic pyramid. They indicated that over the next decade the so-called 'digital divide' may prove less of a barrier than previously thought. Because Moore's Law — the doubling of chip density at regular intervals — drives down price while increasing performance, computing has reached an increasing portion of the world’s population at an accelerating rate. Today over three billion people — half the world's population — have cell phones. This year at the World Economic Forum, wireless industry executives predicted that two billion more would be added in the next six or seven years. This underscores the increasingly rapid spread of the Internet, for what is a cell phone but a computer and a radio attached to a wireless data network? The real challenge may prove to be whether the emerging world will modernize without repeating the mistakes of Mr. Gates's developed world that have produced climate and pollution crises."

Had someone predicted twenty years ago that half of the world's population would by now have cell phones, that person would have been considered delusional. We don't know how the world's poor will use the Internet; they have certainly been creative in their use of the cell phone. I think it is safe to predict, however, that they will also do surprising and beneficial things. The world may be about to change for the better.

The Rise of the Social Entrepreneur

New York Times' columnist Nicholas Kristof, while in Davos, Switzerland, covering the World Economic Forum, came across a very different group of people than the normal politicians, business people, and protesters ["The Age of Ambition," 27 January 2008]. He calls them "social entrepreneurs.

"With the American presidential campaign in full swing, the obvious way to change the world might seem to be through politics. But growing numbers of young people are leaping into the fray and doing the job themselves. These are the social entrepreneurs, the 21st-century answer to the student protesters of the 1960s, and they are some of the most interesting people here at the World Economic Forum (not only because they’re half the age of everyone else)."

Some of the social entrepreneurs he met are still in college and yet find the time to try and change the world.

"Andrew Klaber, a 26-year-old playing hooky from Harvard Business School to come here (don’t tell his professors!), is an example of the social entrepreneur. He spent the summer after his sophomore year in college in Thailand and was aghast to see teenage girls being forced into prostitution after their parents had died of AIDS. So he started Orphans Against AIDS (www.orphansagainstaids.org), which pays school-related expenses for hundreds of children who have been orphaned or otherwise affected by AIDS in poor countries. He and his friends volunteer their time and pay administrative costs out of their own pockets so that every penny goes to the children."

Klaber was inspired by another classmate who has since helped expand his organization's reach.

"Mr. Klaber was able to expand the nonprofit organization in Africa through introductions made by Jennifer Staple, who was a year ahead of him when they were in college. When she was a sophomore, Ms. Staple founded an organization in her dorm room to collect old reading glasses in the United States and ship them to poor countries. That group, Unite for Sight, has ballooned, and last year it provided eye care to 200,000 people (www.uniteforsight.org)."

If Kristof is correct, the coming generation may produce a crop of social entrepreneurs.

"In the '60s, perhaps the most remarkable Americans were the civil rights workers and antiwar protesters who started movements that transformed the country. In the 1980s, the most fascinating people were entrepreneurs like Steve Jobs and Bill Gates, who started companies and ended up revolutionizing the way we use technology. Today the most remarkable young people are the social entrepreneurs, those who see a problem in society and roll up their sleeves to address it in new ways."

The question is whether the people Kristof met represent a handful of very special people or the tip of a larger group. He believes the latter to be the case.

"Bill Drayton, the chief executive of an organization called Ashoka that supports social entrepreneurs, likes to say that such people neither hand out fish nor teach people to fish; their aim is to revolutionize the fishing industry. If that sounds insanely ambitious, it is. John Elkington and Pamela Hartigan title their new book on social entrepreneurs 'The Power of Unreasonable People.' Universities are now offering classes in social entrepreneurship, and there are a growing number of role models. Wendy Kopp turned her thesis at Princeton into Teach for America and has had far more impact on schools than the average secretary of education."

Kristof makes it clear that this is not just an American phenomenon. He writes:

"One of the social entrepreneurs here is Soraya Salti, a 37-year-old Jordanian woman who is trying to transform the Arab world by teaching entrepreneurship in schools. Her organization, Injaz, is now training 100,000 Arab students each year to find a market niche, construct a business plan and then launch and nurture a business. The program (www.injaz.org.jo) has spread to 12 Arab countries and is aiming to teach one million students a year. Ms. Salti argues that entrepreneurs can stimulate the economy, give young people a purpose and revitalize the Arab world. Girls in particular have flourished in the program, which has had excellent reviews and is getting support from the U.S. Agency for International Development. My hunch is that Ms. Salti will contribute more to stability and peace in the Middle East than any number of tanks in Iraq, U.N. resolutions or summit meetings. 'If you can capture the youth and change the way they think, then you can change the future,' she said."

Anyone who has followed my blog and understands the philosophy behind Enterra Solutions' Development-in-a-Box™ knows that I agree wholeheartedly with Ms. Salti that "entrepreneurs can stimulate the economy." The company's work in Kurdistan region of Iraq is aimed in part at supporting entrepreneurs. And I certainly hope that Kristof is correct that Ms. Salti's approach "will contribute more to stability and peace in the Middle East than any number of tanks in Iraq, U.N. resolutions or summit meetings." Certainly the Department of Defense's Business Transformation Agency believes that stimulating business is good for peace. Business means jobs and jobs mean hope for a better future. At a time when the news is full of negative stories about the economy, conflicts, and crime, reading a column about hope in the future and about those determined to make the world a better place is refreshing.

Afghan Conflict Confirms Tie Between Security and Investment

In my discussions about Development-in-a-Box™, I have repeatedly stressed that development and security must advance hand-in-hand. Remove security and investment dries up. Remove investment and developing countries remain locked in poverty's grip. One needs look no further than the conflict in Afghanistan to see the connection ["Sharp Drop in Afghan Private Investment," by Fisnik Abrashi, Washington Post, 28 January 2008].

"Private investment in Afghanistan dropped last year to $500 million -- about half the amount invested in 2006 -- due to the worsening security situation in the country, a business group said Monday. The Afghanistan Investment Support Agency said investment last year compared unfavorably to the $1 billion invested in 2006 and the $570 million invested in 2005. Security concerns, the targeting of businessmen by criminal gangs and 'burdensome bureaucracy' were among the key factors that caused the sharp drop, AISA said. 'The targeting of businesses and businesspeople by criminal gangs for ransom has had the most profound impact on the morale of private entrepreneurs and, therefore, on private business and investment,' the statement said. ... The Afghanistan Investment Support Agency was established by the Afghan government in 2003 as an independent outlet for local and international investors. Since its creation, AISA has registered and supported over 11,300 private companies, including more than 1,200 foreign investments."

Targeting businesses and their people has an impact on more than their morale. Couple a bad security environment with poor governance and you have a toxic mix for investment. Despite that, the Afghanis are hopeful that the Chinese hunger for resources will find it investing in the country even with the current security situation.

"Despite the sharp drop last year, AISA believes investments will rise in 2008 to more than $1 billion, in anticipation of a planned investment by a Chinese company, China Metallurgical Group, in a copper mine south of Kabul."

Abrashi notes that 2007 was not a good one in Afghanistan.

"Last year was Afghanistan's most violent since the ouster of the Taliban in the U.S.-led invasion in 2001. More than 6,500 people -- mostly militants -- died as a result, according to an Associated Press count of figures provided by local and international officials. [A recent] clash between police and the Taliban in the Dihrawud district of southern Uruzgan province left eight militants dead and three officers wounded. ... The country has also been affected by record-breaking opium production, which has had a corrupting influence on local officials and provides funds for the Taliban insurgency. Kidnappings for ransom -- mostly of Afghans -- are on the rise in the country."

Investment is critical in a war torn country like Afghanistan, which makes security critical as well. Without investment, jobs will remain scarce and the best paying option for most Afghanis will continue to be growing opium poppies. An economy primarily dependent on the illegal drug trade will ensure that Afghanistan remains a hotbed of insurgency and strife. Support from the local populace is critical, but unless you show them hope of a better future, they will continue to choose what they know best. It's a cruel circle that must be broken. The fact that powerful and well-armed warlords run much of the country (and have their hands deeps into the opium poppy trade) complicates the situation immensely. Nothing happens in the territories they control without their knowledge. They, too, must be convinced that their future is best invested in legitimate business opportunities rather than in the illicit drug trade and that helping secure the peace is critical to that future.

Rational argument, however, does not always work. The current situation in Kenya is a good example of people doing things for emotional rather than rational reasons ["Having Driven Out Business, Kenyan Town Faces Consequences," by Stephanie McCrummen, Washington Post, 28 January 2008].

"Three weeks after burning down the old Kimwa Grand Hotel here, many of the admitted arsonists returned to its charred remains, scavenging sheets of scrap metal, doors and wires. Many did so proudly, even triumphantly, offering an explanation now familiar in this city of broken windows and flowering trees: The business was owned by a supporter of President Mwai Kibaki, whom many here accuse of stealing the Dec. 27 election. 'We have to resort to this to send a message to Kibaki!' said Humphries Odongo, hauling off a share of metal. But there was another reason he was picking through the ruins. With his city half-wrecked and food prices skyrocketing, Odongo said he hoped to sell the scraps so he could eat."

No one could rationally argue that destroying businesses and putting thousands of people out of work in a country desperate for jobs is a smart thing to do. But as numerous studies have shown, emotions (personal and national) cause people to do irrational things to satisfy an emotional need. Some of the perpetrators of destruction in Kenya may have been people who had no job and, therefore, felt that attacking businesses couldn't hurt them. They were wrong. The ripple effect from the destruction and looting hits everyone hard.

"It took just a few days of window-smashing, rock-throwing, car-burning fury to drive most members of Kibaki's tribe, the Kikuyu, out of this opposition stronghold on the edge of Lake Victoria in western Kenya. The riots and looting were part of a wave of violence that followed the disputed election, plunging Kenya into possibly its worst political crisis since independence. But people in Kisumu say they were also venting frustrations with what they consider to be an economic imbalance between themselves and their Kikuyu neighbors, widely perceived across Kenya to be part of a privileged political class. To emphasize that their motives were economic as well as ethnic, Odongo and some of the other looters pointed out that they had also torched several Indian-owned businesses, including a supermarket that was one of the largest employers in Kisumu but whose owner was accused of paying substandard wages. Now, however, people are facing the consequences of driving out the neighbors and business owners they resented: rising unemployment, food shortages and skyrocketing prices. The local chamber of commerce estimates that 5,000 jobs have been lost so far. The damage reflects the larger story across much of Kenya, whose promising economy has been devastated by the post-election crisis."

McCrummen reports that up to a half million jobs could be lost if a solution to the political crisis and a way to end the violence are not found. The tourist trade, she writes, is dead. Some people in the towns devastated by the destruction now face starvation and they hope that business owners driven out will return and once again start hiring. Many of those business owners, however, lost everything and the chances that they will return are slim. The riots were a result of years of bad governance that favored one tribal group over others. Raila Odinga, the candidate who ran against President Kibaki and enjoyed a large pre-election majority in the polls, offered hope to some of the tribes that had felt like outsiders in their own country. The election dashed those hopes and wrought the destruction that followed -- not a rational response but a real one. In both Afghanistan and Kenya, bad governance, poor security, and lack of investment work against development. The international community must do its part to help change all three factors, but it can do nothing if the locals don't do their part.

Search for Oil Alternatives Pushes Food Prices Higher

In several posts I've written about bio-diesel, I've mentioned the fact that diverting food crops into sources of bio-diesel has been causing food prices to rise. Keith Bradsher, writing in the New York Times, provides a good overview of the problem ["A New, Global Oil Quandary: Costly Fuel Means Costly Calories," 19 January 2008].

"Rising prices for cooking oil are forcing residents of Asia’s largest slum, in Mumbai, India, to ration every drop. Bakeries in the United States are fretting over higher shortening costs. And here in Malaysia, brand-new factories built to convert vegetable oil into diesel sit idle, their owners unable to afford the raw material. This is the other oil shock. From India to Indiana, shortages and soaring prices for palm oil, soybean oil and many other types of vegetable oils are the latest, most striking example of a developing global problem: costly food."

How fast are prices rising? Pretty fast it turns out.

"The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter."

Those kinds of price increases affect both rich and poor, but the poor are much less capable of coping.

"In some poor countries, desperation is taking hold. Just in the last week, protests have erupted in Pakistan over wheat shortages, and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs. According to the F.A.O., food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen."

The rise in food prices comes at a time when more and more people have been moving up the economic ladder. Bradsher notes that as income increases so does the demand for a better and more varied diet.

"A startling change is unfolding in the world's food markets. Soaring fuel prices have altered the equation for growing food and transporting it across the globe. Huge demand for biofuels has created tension between using land to produce fuel and using it for food. A growing middle class in the developing world is demanding more protein, from pork and hamburgers to chicken and ice cream. And all this is happening even as global climate may be starting to make it harder to grow food in some of the places best equipped to do so, like Australia. In the last few years, world demand for crops and meat has been rising sharply. It remains an open question how and when the supply will catch up. For the foreseeable future, that probably means higher prices at the grocery store and fatter paychecks for farmers of major crops like corn, wheat and soybeans."

Another big concern at the moment is that the global economy may face inflationary prices and a recession at the same time, brought on by the credit crisis in America and high oil and food prices.

"There may be worse inflation to come. Food experts say steep increases in commodity prices have not fully made their way to street stalls in the developing world or supermarkets in the West. Governments in many poor countries have tried to respond by stepping up food subsidies, imposing or tightening price controls, restricting exports and cutting food import duties. These temporary measures are already breaking down. Across Southeast Asia, for example, families have been hoarding palm oil. Smugglers have been bidding up prices as they move the oil from more subsidized markets, like Malaysia’s, to less subsidized markets, like Singapore's."

Much of the focus of Bradsher's article is on cooking oil. When American's think of cooking oil, their biggest concern is whether or not it contains transfats. The concern is much more basic in the developing world.

"No category of food prices has risen as quickly this winter as so-called edible oils — with sometimes tragic results. When a Carrefour store in Chongqing, China, announced a limited-time cooking oil promotion in November, a stampede of would-be buyers left 3 people dead and 31 injured. Cooking oil may seem a trifling expense in the West. But in the developing world, cooking oil is an important source of calories and represents one of the biggest cash outlays for poor families, which grow much of their own food but have to buy oil in which to cook it."

Bradsher, reporting from Malaysia, uses palm oil to illustrate his point.

"Few crops illustrate the emerging problems in the global food chain as well as palm oil, a vital commodity in much of the world and particularly Asia. From jungles and street markets in Southeast Asia to food companies in the United States and biodiesel factories in Europe, soaring prices for the oil are drawing environmentalists, energy companies, consumers, indigenous peoples and governments into acrimonious disputes. The oil palm is a stout-trunked tree with a spray of frilly fronds at the top that make it look like an enormous sea anemone. The trees, with their distinctive, star-like patterns of leaves, cover an eighth of the entire land area of Malaysia and even greater acreage in nearby Indonesia. The palm is a highly efficient producer of vegetable oil, squeezed from the tree’s thick bunches of plum-size bright red fruit. An acre of oil palms yields as much oil as eight acres of soybeans, the main rival for oil palms; rapeseed, used to make canola oil, is a distant third. Among major crops, only sugar cane comes close to rivaling oil palms in calories of human food per acre. Palm oil prices have jumped nearly 70 percent in the last year because supply has grown slowly while demand has soared."

One can't fault the growers of oil palms for this crisis. They see the enormous profits being made by oil producing countries and by large oil companies and they want their piece of the pie. Commodity markets are notorious for their volatility and producers want to cash in while the market's hot. The problem with oil palms is that you can't plant them in the spring and harvest them in the fall.

"Farmers and plantation companies are responding to the higher prices, clearing hundreds of thousands of acres of tropical forest to replant with rows of oil palms. But an oil palm takes eight years to reach full production. A drought last year in Indonesia and flooding in Peninsular Malaysia helped constrain supply. Worldwide palm oil output climbed just 2.7 percent last year, to 42.1 million tons. At the same time, palm oil demand is growing steeply for a variety of reasons around the globe. They include shifting decisions among farmers about what to plant, rising consumer demand in China and India for edible oils, and Western subsidies for biofuel production."

The same inflationary pressure is affecting other crops as well.

"American farmers have been planting more corn and less soy because demand for corn-based ethanol has pushed up corn prices. American soybean acreage plunged 19 percent last year, producing a drop in soybean oil output and inventories. Chinese farmers also cut back soybean acreage last year, as urban sprawl covered prime farmland and the Chinese government provided more incentives for grain. Yet people in China are also consuming more oils. China not only was the world’s biggest palm oil importer last year, holding steady at 5.2 million tons in the first 11 months of the year, but it also doubled its soybean oil imports to 2.9 million tons, forcing buyers elsewhere to switch to palm oil."

The rise in palm oil demand caught a lot of people by surprise. The reason was primarily because palm oil was considered an unhealthy cooking oil by the health conscious West.

"Concerns about nutrition used to hurt palm oil sales, but they are now starting to help. The oil was long regarded in the West as unhealthy, but it has become an attractive option to replace the chemically altered fats known as trans fats, which have lately come to be seen as the least healthy of all fats."

One interesting develop created by the growing cost of palm oil is that it is rapidly pricing itself out of the bio-diesel market. Large, new bio-diesel plants in Malaysia are sitting idle because they can't turn a profit. Environmentalists are also getting involved in the palm oil controversy.

"The growth of biodiesel, which can be mixed with regular diesel, has been controversial, not only because it competes with food uses of oil but also because of environmental concerns. European conservation groups have been warning that tropical forests are being leveled to make way for oil palm plantations, destroying habitat for orangutans and Sumatran rhinoceroses while also releasing greenhouse gases."

The pricing tension that is built into the system will be interesting to watch. Bio-diesel has come to be viewed as an alternative to high-priced oil, but as increases in demand force commodity prices higher certain crops may price themselves right out of the business. The bottom line is that no good substitute for fossil fuel has yet emerged. Each new suggested alternative brings with it new challenges. I'll discuss one more of those challenges -- waste -- in a later post. With more and more bio-diesel refineries scheduled to come on line in the coming years, I suspect that we'll be reading about food inflation and environmental concerns for a long time.

Globalization's Reverse Investment Trend

The Economist points out a trend that critics of globalization might find surprising -- companies founded in emerging market countries aggressively acquiring companies in richer nations ["Wind of change," 12 January 2008].

"Last month Hansen Transmissions International, a maker of gearboxes for wind turbines, was listed on the London Stock Exchange. Nothing noteworthy about that, you might say, despite the jump in the share price on the first day of trading and the handsome gain since: green technology is all the rage, is it not? But Hansen exemplifies another trend too, which should prove every bit as durable: the rise of multinational companies from emerging economies. Its parent is Suzlon, an Indian firm that began life as a textile manufacturer but is now among the world's five leading makers of wind turbines. Along the way, Suzlon has acquired not only Hansen, originally Belgian, but also REpower, a German wind-energy firm, spending over $2 billion on the pair. The world is now replete with Suzlons: global companies from emerging economies buying businesses in rich countries as well as in poorer places. Another Indian company, Tata Motors, looks likely to add to the list soon, by buying two grand old names of British carmaking, Jaguar and Land Rover, from America's enfeebled Ford. As a symbol of a shift in economic power, this is hard to match."

Critics have insisted that globalization is all about the rich exploiting the poor and economists teach that globalization is about capital moving from rich nations to poorer ones, but this trend bucks those notions.

"Economic theory says that this should not happen. Richer countries should export capital to poorer ones, not the other way round. Economists have had to get used to seeing this turned on its head in recent years, as rich countries have run large current-account deficits and borrowed from China and other emerging economies (notably oil exporters) with huge surpluses. Similarly, foreign direct investment (FDI)—the buying of companies and the building of factories and offices abroad—should also flow from rich to poor, and with it managerial and entrepreneurial prowess."

Economic theorists, however, can take a sigh of relief. The Economist does report that, for the most part, economic theory still holds.

"According to the UN Conference on Trade and Development (UNCTAD), in 2006 the flow of FDI into developing economies exceeded the outflow by more than $200 billion. But the transfer of finance and expertise is by no means all in one direction. Developing economies accounted for one-seventh of FDI outflows in 2006, most of it in the form of takeovers. Indian companies have done most to catch the eye, but firms from Brazil, China and Mexico, in industries from cement to consumer electronics and aircraft manufacture, have also gone global. Up to a point, emerging-market multinationals have been buying Western know-how. But they have been bringing managerial and entrepreneurial skill, as well as just money, to the companies they buy: British managers bear grudging witness to the financial flair of Mexican cement bosses; Boeing and Airbus may have learnt a thing or two from the global supply chains of Brazil's Embraer."

The article reports that although this sounds surprising, it shouldn't be. This is only the latest wave of poor countries gaining a foothold in globalization and then climbing their way up the economic ladder.

"Perhaps no one should be surprised. Half a century ago, Japan was a poor country: today Sony and Toyota are among the best-known and mightiest companies on the planet. South Korea and Taiwan are still listed as developing countries in UNCTAD's tables, but that seems bizarrely outdated for the homes of Samsung and Taiwan Semiconductor. Now another generation is forming. To its critics, globalisation may be little more than a licence for giant Western companies to colonise the emerging world, yet more and more firms from poorer economies are planting their flags in rich ground."

This week's bleak economic developments, brought on by America's credit woes, seems like a strange backdrop to be talking about economic prosperity; but the rest of the world is beginning to realize that basing their economic fortunes on American consumerism makes them vulnerable. Even Secretary of State Condoleezza Rice's assurance in Davos, Switzerland, that the U.S. will remain an engine of economic growth, is likely to change how many nations see the future ["Rice touts U.S. 'engine of growth'," Associated Press, Washington Times, 24 January 2008]. Like any good portfolio manager, they will continue to diversify their customer base because it is in their best interests to do so. To build that customer base, emerging market countries must also become consumers as well as suppliers. The article notes, however, that the liberalization of free trade necessary to make this happen is meeting resistance -- even among those it could help the most. The Economist continues:

"The Doha round of global trade talks has been bogged down, partly in squabbles about farm trade but also over industrial tariffs in the emerging world. The services negotiations are half-hearted and direct talks on FDI were ruled out long ago, largely because of developing countries' fears about rich invaders. And the gains forgone are considerable: a new book by the World Bank estimates that reforming services in developing countries could raise their growth rates by a percentage point. Were OECD countries to allow temporary immigration of skilled workers in service industries, the global gains might exceed $45 billion. A few emerging-market giants—notably India's software firms—have been prepared to stand up for liberalisation. But most have not made their voices heard. How sad for free trade: such companies would provide much better illustrations of the success of globalisation than the familiar Western names do (unless you think Coca-colonisation sounds really cool). And how short-sighted of them. Even if some of these adolescents grew up behind tariff barriers, that represents their past: their future will surely lie in global markets. If the Doha round fails, the next opportunity may be a long time coming."

As I have stressed before, globalization will only continue to benefit the world's economy if the relatively free movement of capital, resources, and people is permitted. Such freedom of movement is by no means inevitable. There are debates about immigration taking place throughout the developed world. And legislatures and parliaments are now concerning themselves with investments being made by Sovereign Wealth Funds, mainly controlled by oil rich nations. With dark economic clouds gathering on the horizon, now is not the time to put the brakes on globalization.

The Potential of Pond Scum

The confluence of high oil prices and global warming has more and more people thinking green. One of the things receiving a lot of attention is bio-fuel. An unintended consequence of this attention, is rising food prices. Corn, for example, is selling for record prices. When the price of corn goes up, the price for other grains also rises. The solution to both conundrums would be a non-food source of bio-fuel -- all the better if it also helps remove greenhouse gases from the atmosphere. Some people think they have found the perfect plant -- algae -- according to an article in BusinessWeek ["Here Comes Pond Scum Power," by Gail Edmondson, 3 December 2007].

"In a world spooked by global warming and thirsty for nonpolluting fuel, lowly algae hold a potent appeal. The plants sop up large quantities of carbon dioxide, a greenhouse gas, and produce tiny globules of fat that can be collected and turned into biodiesel fuel for trucks, cars, and trains. The oils might even be processed into aircraft fuel. One of algae's great virtues is that the plant has so little in common with other sources of fuel. Unlike cornfields that are harvested to produce ethanol, algae farms don't require huge volumes of freshwater, nor do they tie up land that could be used for food crops. Algae flourish in saltwater or even wastewater and grow up to 40 times faster than other plants. Compared with current energy crops, algae have 'the potential to deliver 10 or 100 times more energy per acre,' says Ron C. Pate, a technical expert at Sandia National Labs. That's why industrial giants ranging from Chevron to Honeywell to Boeing are starting up algae business units."

If that sounds too good to be true -- well ... it is. Edmondson admits algae biodiesel isn't practical yet.

"Bringing down the cost of producing algae oil in commercial volumes—billions of gallons—is still a big challenge. 'The scale required to grow algae to a meaningful dimension is staggering,' says Bill Green, managing partner at VantagePoint Venture Partners."

Edmondson points out, however, that bio-fuels from other sources are already in production around the world, but are based on other plants.

"Biodiesel from other plants is already a robust market. In Europe, refiners are producing 1.4 billion gallons a year from rapeseed, soy, and other plants. In all, the world consumed $1.7 billion worth of biodiesel last year. That should grow to $26 billion by 2020, says market researcher Global Insight. In the U.S., demand for such plant-based oils is quickly outstripping supplies."

It is that predicted growth in demand (coupled with assumptions that crude oil prices will remain high) that is spurring investors to look at algae as a source of bio-fuel.

"Algae's mystique [has] attracted the attention of energy entrepreneurs such as Martin Tobias, CEO of Imperium Renewables in Seattle, which is armed with $145 million in venture capital and private equity funding. Imperium buys practically every drop of oil U.S. algae startups are producing. So far it has sold just a few hundred gallons of finished fuel. But Tobias has dedicated a 5 million-gallon refinery to algae oil, and by 2011 he expects startups to be making 100 million gallons a year. At that point, Tobias reckons, the price per gallon will fall to $1.70, from as much as $20 today. 'The only thing missing is the farms,' he says. 'I prefer not to operate a large-scale farm myself, but I may have to do it.' Extracting oil from algae is currently a cumbersome affair that involves drying and processing the plants. But some of the world's top genetic engineers want to create improved algae strains that will produce oil continually, eliminating the most difficult processing steps."

As the construction and operation of coal-fired power plants continues to create controversy, entrepreneurs are looking to the power generation sector as natural partners in this venture.

"Startups in the U.S. and Europe are turning to power companies and local governments to back larger trials, selling the idea that algae can offset some of the power plants' CO2 emissions. On Nov. 2 [2007], German energy group E-On Hansa said it would build a $3.2 million pilot algae farm at its Hamburg power plant with support from the city government. Portuguese biodiesel maker SGC Energia is investing in a $3 million pilot algae farm next to a power plant. It will be up and running in 2008."

According to Edmondson, recent projects have stumbled because dealing with algae is difficult. Anyone with a backyard pool or who lives next to a pond understands how quickly such bodies of water can be overgrown by algae. Algae's rapid growth is both its beauty and its challenge. If algae can be grown and turned into fuel profitably, it will be a great advance in helping ease oil and food prices -- and maybe even help save the environment.

Technology-based Reductions in Energy Consumption Touted

Technology is a wonderful thing, but as my recent post about the Japanese trying to develop robots to replace an aging workforce highlighted, you can't easily take humans out of the equation [Demographics and Robots]. Politicians in the U.S., like those in Japan in counting on technology to solve problems, rather than risking the ire of voters by asking them to change their lifestyles. The case in point is energy consumption. Stephen Mufson, writing in the Washington Post, writes about how the Energy Bill passed by Congress and signed by the President in December will change the products consumers buy in the future ["Power Switch," 20 January 2008].

"From light bulbs to clothes washers, the energy law passed by Congress and signed by President Bush in December will change many of the appliances in the average American home. The incandescent light bulb, invented two centuries ago and perfected and popularized by Thomas Edison in the late 1800s, will become a thing of the past by the middle of the next decade. The look of the future? The curvaceous compact fluorescent bulbs that recently have become popular and other bulbs featuring light-emitting diodes or other advanced technologies. The energy law will also bring about important but less noticeable changes in the way clothes washers, dishwashers, boilers and dehumidifiers use energy and water. The goal is to reduce U.S. electricity use, a major source of greenhouse gases that scientists say contribute to global climate change."

Environmentalists will argue that technology is fine, but, if you really want to make a dent in the amount of greenhouse gases emitted into the air, you have to get to change their consumption practices. In an election year, however, that is not a popular position to take. One of the debates currently underway in Congress is whether to support the construction of new coal-fired power plants. The U.S. is flush with coal. So those looking at energy independence must seriously consider those reserves. The problem, of course, is that coal-fired plants are some of the worst offenders when it comes to emitting greenhouse gases.

"Half of the nation's electricity generation comes from coal-fired plants, which emit carbon dioxide. Moreover, if households cut electricity used for lighting and appliances, it could become easier to introduce electric cars, which could cut oil use without creating the need for a massive, new electricity-generating investment. Five to 10 percent of residential electricity goes into lighting, making it a prime target for policymakers searching for energy savings."

Changing the type of light bulbs consumers use turns out to be a big deal.

"If every American household replaced just one incandescent bulb with a compact fluorescent bulb, the country would conserve enough energy to light 3 million homes and save more than $600 million annually. It would be as if 800,000 cars were taken off the road, according to a Web site maintained by the Energy Department and the Environmental Protection Agency. Cutting down the amount of electricity used for light bulbs makes economic sense for homeowners, too, though most consumers are reluctant to make the switch. 'These bulbs will be more expensive, but for a light bulb that you have on a couple of hours a day, the electricity is more expensive than the bulb,' said Lowell Ungar, a senior analyst at the Alliance to Save Energy. 'It will pay back in a few months.' Compact fluorescent bulbs can screw into existing sockets, and they last many times longer than traditional lights. Homeowners' reluctance prompted lawmakers to illuminate the path forward. The new energy law says that in 2012, any bulb emitting the amount of light a 100-watt bulb does today must use only 72 watts. In 2014, 40-, 60- and 75-watt bulbs will have to cut energy consumption by similar percentages. In 2020, the required energy savings become even more stringent, limiting electricity usage to about a quarter of today's incandescent bulbs."

These kinds of goals are good for stimulating innovation. Although fluorescent bulbs provide an interim answer, they are probably not the final answer because they introduce their own environmental problems.

"General Electric says it has come up with a more efficient incandescent bulb that would meet the intermediate standards to take effect in the next decade, but it hasn't begun selling it. ... Unlike incandescent bulbs, compact fluorescent bulbs contain no filament. They are gas-filled tubes with an electronic ballast. When turned on, an electric current flows through the gas, which emits ultraviolet light. That excites a white phosphor coating, which produces visible light. The tubes are twisted so their shape resembles an incandescent bulb. There are drawbacks, however. The bulbs can fade before burning out. And because the bulbs contain mercury, homeowners must be careful if one breaks."

One promising technology is light-emitting diodes (LEDs).

"They are made more like semiconductors than light bulbs. For now they're too expensive, but costs are coming down. Unlike compact fluorescent bulbs, LEDs don't contain any hazardous materials, [Charlie Jerabek, chief executive of Osram Sylvania] said. What's more, LEDs use half as much energy as compact fluorescent bulbs."

If you want to learn more about LEDs and the man who helped develop them, Michael Schrage recommends reading Bob Johnstone's book Brilliant ["Humbling the Ambitious," Strategy + Business, Winter 2007].

"Johnstone does a brilliant job of describing how well and how persistently an unsung Japanese scientist, Shuji Nakamura, played the innovation game in the electronics industry. You’ve likely never heard of Nakamura, but this engineer was able to solve technical problems that had stumped top electronics firms for more than two decades; he created, for example, the last piece of technology needed to manufacture solid-state white lights known as light-emitting diodes, or LEDs. In his own way, Nakamura’s discovery may prove as high-impact as those of high-tech entrepreneurs such as Intel’s Bob Noyce or Google’s Larry Page and Sergey Brin."

In another article about energy saving technologies, Doug Struck writes about all those appliances consumers kept plugged in drawing power, even though they think they are "off" ["A Big Drop In Emissions Is Possible With Today's Technology," Washington Post, 21 January 2008].

"You can flip off your widescreen TV with the remote control. Power down your computer to standby. Unplug your cellphone from its charger. But as you leave the room, the 'wall warts' -- those small boxes plugged into the wall sockets that power your electronics -- stare with glowing diode eyes in accusation: You are still using power. In homes and offices everywhere, the power drained by idle electronics adds up to what Andy Williams says is a substantial waste. Williams is vice president of a company called On Semiconductor. Using more efficient components and design, his company and others make devices that sharply cut the energy appetite of the 'wall warts,' both on standby and in use. He sees this as a key path to the future that will cut energy use and help curb global warming by ingenious use of technology. 'We're talking about the exact same principle as replacing incandescent light bulbs with compact fluorescent ones,' he said from Phoenix. 'If our products were built into all consumer electronics -- computers, flat-screen TVs, cellphones -- we could save 800 million pounds of carbon emissions.' His is a vision that dances enticingly in contrast to the doomsday predictions of runaway global warming and the oppressive remedies to fix it. Believers say technology will save us, creating a cleaner, cheaper, less-polluting society that will not require such burdensome changes in how we live."

Again, the appeal of this approach is that technologist are saying let me do for you what you are unwilling to do for yourself. I have to admit that going around the house unplugging the "wall warts" isn't something that anyone I know actually does. In such cases, technology can play a large role in helping reduce consumption.

"'I believe with technology pretty much available today or in the very near short term, if we could move those fully into the market, we could get a 30 to 40 percent reduction in greenhouse gases,' said Dana Christensen, associate director of engineering sciences at the Oak Ridge National Laboratory in Tennessee, a government-supported research center that studies this question, among others. The caveat is crucial: if the technology is put to use. That is not as easy as it sounds. And no matter how enthusiastically better technology is adopted, it wouldn't fix the whole problem by itself. But it could go a long way toward the solution, experts say. Technological societies are constantly striving to create ways of doing things more efficiently. Advances in efficiency in the past 30 years have led carbon emissions to grow only half as fast as the world's economy, according to Robert Socolow, a Princeton University engineer. But those savings have been offset by the rise in population and consumption. Still, the potential for energy savings through bright ideas, clever engineering and new inventions is impressive."

Struck goes on to list a number of technologies that were showcased in Toronto, Canada, last year a "Green Living Show."

"One company makes old tires into impermeable and energy-efficient roofs for homes. Another demonstrates an invention that duplicates a pen's movements over the Internet -- signing papers remotely without a trip. On a broader scale, the mundane trappings of our modern life are becoming more efficient. Household appliances, including the thirstiest of them, furnaces and air-conditioners, have steadily diminished their energy consumption in the past three decades. Today's new kitchen refrigerators, for example, use 70 percent less power than those made in the 1970s. More than one-third of all energy used in the United States goes to heat, cool and power buildings. A little more than half of that is for homes; the rest, for commercial buildings. All can be made to use less power. Buildings can be made with efficient materials such as old-fashioned straw covered with stucco or new-fashioned polystyrene boards, instead of plywood; with insulation that doubles the energy-savings rating properties; with heat-exchange systems and fewer leaks; with windows that reject heat and admit light; and with designs that make the most of the sun's energy."

All this sounds great, so why aren't we making greater strides in reducing consumption and gas emissions? Struck explains:

"If the technology exists, what, then, is the problem? The cost of replacing anything, from a power plant to a coffee maker, is the first hurdle. Even if the logic of long-term savings makes it an economical move, individuals and companies often have no money for the initial replacement cost. In construction, for example, when a builder is trying to make a product that can sell for a lower price and a higher profit, he or she has little incentive to use expensive, energy-efficient techniques and materials. Even if all new buildings were constructed efficiently, it would take 50 to 75 years or more to substantially replace the existing stock. Unless owners are encouraged -- or required -- to retrofit their buildings with energy-saving materials, the gains from existing and future technology advances will be slow."

That brings us full circle back to the Congress and its Energy bill. In some cases, the use of energy efficient technologies is going to have to been mandated. The result will be a growing "green economy" sector, which should produce new jobs, foster new innovations, and improve the quality of the environment. Sridhar Pappu reports that Democratic presidential candidates are calling for an increase in "green-collar" workers ["Politicians Power Up With 'Green-Collar' Workers," Washington Post, 23 January 2007].

"When Hal Jordan, the fictional playboy test pilot, was given a power ring from a dying spaceman, thus making him the Green Lantern of Sector 2814 (Earth), he joined an elite military institution called the Green Lantern Corps -- a group dedicated to preserving order in the universe while sporting distinctive green attire. Now, thanks largely to Hillary Clinton, John Edwards and others, they've been joined by a new emerald power: the 'green-collar' worker. 'We need to make sure that we start jump-starting the jobs in this country again,' Clinton said during Monday's Democratic presidential debate in Myrtle Beach, S.C. 'That's why I want to put money into clean-energy jobs, green-collar jobs.' Later, when speaking of his plans of an economic stimulus during his presidency, Edwards said what he had 'proposed for green-collar jobs will create jobs within 30 or so days, so we will have an immediate impact on the economy and stimulate the economy.' This wasn't the first time either Clinton or Edwards has touted such jobs."

An increasing number of green jobs will undoubtedly be created. On the other side, companies that can't cope with the change will go out of business and some jobs will be lost. A switch to green jobs may require retraining for some workers. In the long run, the right investments in the long run could help the U.S. and global economies. There is growing interest in going green and that, I suspect, is a good thing.

Returning to Days of Sailing Ships Prompted by Economics not Romance

The skyrocketing price of oil is a great example of how a horizontal shock affects the system. Everything from gasoline to the price of food is affected. Owners of shipping lines are also concerned that rising oil prices will adversely affect their bottom lines. To help reduce fuel costs, they may turn back to nature and to wind power ["Slower boats to China as ship owners save fuel," by Erik Kirschbaum, Reuters, 20 January 2008]. The device that is being touted for harnessing the wind is not so much a sail as a kite.

"Higher fuel costs and mounting pressure to curb emissions are leading modern merchant fleets to rediscover the ancient power of the sail. The world's first commercial ship powered partly by a giant kite sets off on a maiden voyage from Bremen to Venezuela on [22 January], in an experiment which inventor Stephan Wrage hopes can wipe 20 percent, or $1,600, from the ship's daily fuel bill. 'We aim to prove it pays to protect the environment,' Wrage told Reuters. 'Showing that ecology and economics are not contradictions motivates us all.' The 10,000-tonne 'MS Beluga SkySails' -- which will use a computer-guided kite to harness powerful ocean winds far above the surface and support the engine -- combines modern technology with know-how that has been in use for millennia."

Kirschbaum notes, however, that the high tech kite has competition from another, simpler solution -- slowing down -- the same tactic used by motorists concerned with getting better gas mileage.

"The world's 50,000 merchant ships, which carry 90 percent of traded goods from oil, gas, coal, and grains to electronic goods, emit 800 million tonnes of carbon dioxide each year. That's about 5 percent of the world's total. Also, their fuel costs rose by as much as 70 percent last year. That dramatic increase has ship owners clambering onto a bandwagon to reduce speed as a way to save fuel and cut the greenhouse gases blamed for global warming, said Hermann Klein, an executive at Germanischer Lloyd classification society. 'The number of shipping lines reducing speed to cut fuel costs has been growing steadily,' Klein, whose organization runs safety surveys on more than 6,000 ships worldwide, told Reuters. 'Slowing down by 10 percent can lead to a 25 percent reduction in fuel use. Just last week a big Japanese container liner gave notice of its intention to slow down,' he added. Shipping was excluded from the U.N.'s Kyoto Protocol to slow climate change, and many nations want the industry to be made accountable for its impact on the climate in the successor to Kyoto, which runs to 2012."

If cargo vessels are added to any future protocol, the kite and other ideas for improving fuel efficiency may become popular with shipping lines. For now, however, slowing down seems to be working.

"In Hamburg, the Hapag-Lloyd shipping company is not waiting for 2012. It reacted to rising fuel prices by cutting the throttle on its 140 container ships traveling the world's oceans, ordering its captains to slow down. The company in the second half of last year reduced the standard speed of its ships to 20 knots from 23-1/2 knots, and said it saved a 'substantial amount' of fuel. The calculation used in shipping is complex: longer voyages mean extra operating costs, charter costs, interest costs and other monetary losses. But Hapag-Lloyd said slowing down still paid off handsomely. ... Slowing down has not involved a decrease in capacity for the company. For container ships carrying mainly consumer goods from Hamburg to ports in the Far East, the round-trip at 20 knots now takes 63 days instead of 56, but to make up for this it added a vessel to the route to bring the total to nine."

The company is saving money even with the addition of a ship. It's not clear from the article, however, if emission reductions were negated by the adding the extra vessel. Other lines are reducing speeds with money savings and the environment in mind.

"The world's largest container shipping operator, Danish group A.P. Moller-Maersk, is also going slower to cut emissions -- although Eivind Kolding, chief executive of the group's container arm, told the January event this would mean a delay to clients of 1-1/2 days. He added he believed that was a price customers were willing to pay for the sake of the environment."

If that attitude catches on with other shipping companies, kites may catch on as way to save both money and the environment (like hybrid cars are making it big in the automotive industry). The company making the kites certainly hopes that becomes the case.

"If fuel prices keep rising, innovations like the kite powered 'Beluga SkySails' could also pay off. German-based Beluga Shipping has already ordered two more vessels and Wrage's company has a total of five orders in hand. If the maiden voyage is a success, inventor and chief executive Wrage hopes to double the size of its kites to 320 square meters, and expand them again to 600 square meters in 2009. The company hopes to fit 1,500 ships by 2015."

Although designs for solid sails (more like vertical wings) have been around for a few years, the advantage of kites over those designs is that they don't take up valuable deck space needed for cargo. The world's oceans will continue to be it most important highways, with 90 percent of the world's bulk cargoes continue to move via the sea lanes. Making them efficient and environmentally friendly will remain important whatever the price of crude oil. If transit speeds slow, other efficiencies need to be found. Enterra Solutions is beginning work on an idea for creating a Trusted Supply Chain aimed at making the flow of goods more efficient. Keeping goods flowing over the oceans is an important part of the success of globalization.

Networked Community Solutions

I have tried to keep several threads running through my posts, one of them being connectivity. Connectivity shows up in discussions of national security in the form of globalization. It shows up in the discussion of Development-in-a-Box™ in the form communities of practice. It shows up in the discussion of innovation as discipline clusters. Connectivity of course is central to the discussion of Web 2.0 in the form of social networking. It was, therefore, natural that an article by Karen Stephenson caught my eye since connectivity was central to its message ["The Community Network Solution," Strategy + Business, Winter 2007]. Her assertion is that "in reweaving the social fabric of a city or town, relationships trump rank." She begins her article with a point I've made about Development-in-a-Box: employers, whenever possible, are drawn to places where working conditions are good. When they can't move their business, employers sometimes try to help improve the conditions where they are doing business.

"Business leaders are in­creasingly aware that the health of their enterprise is intimately connected with the health of the communities where they operate. As employers, they sometimes find themselves drawn in to help solve local problems. But they are also often frustrated by those efforts, and no wonder. When a community sets out to address complex problems, such as economic stagnation, sprawl, and failing schools, the ef­fort usually ends up going nowhere. Competing agendas surface, members delegate responsibilities to staff, difficult decisions get postponed. Hopes fade and interest flags as the hidden challenges and underlying conflicts become apparent."

She notes that people often point to human nature or bloated bureaucracy for such failures. Faced with such immovable obstructions people tend to give up, leaving the situation to stagnate or become worse. She insists, however, that the road to failure or success begins when list of those who should participate is drawn up. Most organizers seek leaders from government, business, and community groups.

"And already, from the standpoint of anyone who has studied networks, the initiative is in trouble. Most likely, the organizers took care to involve people who hold high positions in the community. Their list may be lifted directly from a newspaper or magazine feature purporting to name the local 'Power 100.' Thereafter, the whole effort will operate on the unspoken presumption that influence derives primarily from positional power, and that positional power translates into the ability to get things done."

Stephenson writes that anyone who works for a large company knows that how things really get done has little to do with how the organization's chart is depicted.

"Like org charts, 'most powerful' lists reveal nothing about the human qualities of those who occupy senior positions, the web of personal relationships upon which they can draw, or the trust they inspire (or don't inspire) in other people. Yet relationships built on trust are essential if complex initiatives that rely on voluntary efforts are to succeed. People simply will not put themselves on the line for a sustained period of time unless they trust and feel connected with the leaders of the initiative. Moreover, trust and positional power are often inversely correlated: The higher someone's position, the less likely it is that others trust that person. An ambitious local undertaking is practically guaranteed to fizzle if it relies on people whose chief qualification is a high place in the pecking order."

Although her point about large company organization charts makes sense, I suspect her point about positional power is not as easily swallowed. The old aphorism, "if want something done, find the busiest person you know to do it," often describes people in power positions. Stephenson's argument, however, is subtler than that. She believes the types of activity that keep powerful people busy are the wrong kind of activities needed to reach a community goal.

"The most effective local initiatives engage people whose informal networks reach broadly and deeply across sectors and organizations. Such people are often unsung heroes in a community. They might include a uniformed policewoman who sets up a system to link diverse services for victims of domestic violence, an assistant principal who runs a small but innovative program for local gang members, a bakery owner who designs training for immigrant employees in partnership with the local community college, or a fi­nance executive who hosts community meetings in his or her com­pany’s conference room. The titles these individuals hold rarely reflect the contributions they have made or their ability to shape local con­ditions and influence the course of events."

Finding these kinds of people is difficult, Stephenson notes, because they are discovered only through mapping connections.

"Identifying such people is a challenge because they fly below the public radar. Finding them requires not compiling a list but devising a new approach — making a map. This kind of map is a diagram of the informal communications links among people; it reveals the topography of the cultural territory by tracing the webs of relationships through which information is dispersed and resources flow. Because the map shows networks rather than hierarchical standing, it is innately more community-enabling than a list, which automatically orders people into rankings or disconnected categories. The map shows both points of leverage (people who can be tapped for their interest and influence) and points of constraint (people who might have reason to shut down or limit an initiative). It identifies the personal connections that can be harnessed in the service of large-scale change."

Stephenson knows of what she writes because she has spent the last ten years helping local communities create such maps. She discusses two such experiences; one in the U.K. and the other in Philadelphia.

"Both in the United Kingdom and in Philadelphia, the civic leaders who brought [her] in understood from the start that [their] initiative would require businesses, government representatives, nonprofit organizations, and education institutions to put aside competing agendas. Indeed, that's what attracted them. But it was a tall order. There were many subtle obstacles. ... The first step toward renewal, therefore, was to identify those in the community who had the capac­ity to collaborate in a fruitful way. This is where [her] work came in. In years of working with corporations, government agencies, education in­stitutions, and the military, [she has] developed a reliable and replicable system for helping people understand and improve the quality of their professional and social networks."

Stephenson then goes on to detail how her process works:

"We often start by identifying 'connectors': individuals who have inspired enough trust to build lasting, meaningful relationships across a broad range of economic sectors and organizations. Connectors don't always hold high positions, but they wield significant power because they provide the adhesive that binds people together and makes things happen. They are the essential catalysts for change. Our method for identifying connectors has two stages. In Stage One, we conducted a modified 'snowball sample' survey (in which respondents suggest other people to interview). ... We prompted nominations with questions that included:

• Who do you consider highly innovative?
• Who brings ideas about the 'big picture' to his or her efforts?
• Who has the integrity, concern for the common good, and guts needed to get this project done?
• Who would roll up his or her sleeves in order to see this project through to the very end?
• Who would you depend on to help bring together local resources?

... Stage Two represented an effort to understand why connectors had become connectors. ... We asked them to describe their life stories, identify their mentors, and tell us whether they saw themselves as connectors, and if so, why. We asked them to think about the other people in their network who seemed to 'know everyone,' and to describe what all those connectors had in common. We asked them to rate themselves on a scale that ranged from pessimistic to optimistic, and to indicate how comfortable they were at starting new friendships. And we asked them to describe a local civic initiative in which they had participated that required that they connect across sectors. ... Our interviews revealed other significant findings. We noted that connectors had been drawn to the community by their desire to make a difference. Not surprisingly, we also found that connectors were nonconformists. Finally, despite the small number of connectors in academia and the lack of connections among university people, the connectors told us that they had gotten their start as informal leaders through people they met within the university crucible.

... Finally, we asked them to respond to a very different kind of survey — one designed so the responses could be easily analyzed by map-generating software. We showed participants a list of the other connectors and asked them to put a check next to the name of:

• Everyone they considered to be a part of their local community.
• Everyone they believed had the expertise to put ideas into action.
• Everyone with whom they would like to work.

With these answers, we were able to map correspondences that showed potential as well as actual paths for collaboration."

Identifying connectors is important, but it is even more important to get them engaged in a desired project.

"There's no question that connectors have the potential to change their community landscape. They have the collaborative skills to get re­sources flowing. Their connections across sectors can inspire a wide level of trust. But we have learned how much more powerful they can be when connected in a deliberate fashion. ... Once we had our map of connectors, we began to work with local groups to shine a light on these individuals and to connect them with one another. We did this by developing a mentorship program, a set of workshops on leadership, and a competency profile for civic leaders. And we developed a new high school leadership curriculum to identify and coach the next generation of connectors."

Stephenson made another interesting discovery. In both the UK and Philadelphia, she found that new groupings emerged.

"We found a recurring pattern I came to call 'heterarchies': high-trust connections among particular groups of three or more organizations. These groups did not share ownership or governance structures — sometimes public agencies, private companies, and nonprofit organizations were in the same heterarchy — but the people involved all felt they needed each other to get things done. Thus, instead of staying within the boundaries of their workplace hierarchies, these highly connected people kept closely in touch with one another and collaborated regularly. I soon came to realize that, in the increasingly small, flat world in which we live, these heterarchies are fast be­coming the rule, not the exception. ... Networks of trust in heterarchical structures are the key to collaborative success. By contrast, when agencies and sectors retreat to their organizational silos and do not work together, local inertia tends to take hold."

Even in heterarchies, however, it is individual connectors who make the difference.

"The ability to succeed is contagious; if success is rooted in connection, it can spread virally across organizations and communities. But people with high positions are not the connectors who transmit these capabilities to others. ... Until we build better networks in our communities, lack of trust will corrode the democratic process. Conventional leaders can’t move us out of this situation. Community connector projects offer a modest template for returning to the collaborative methods that were the best practices of long ago."

You can't always say that "people with high positions are not the connectors," because sometimes they may be. The fact is, however, that connectors are a very special breed of individual. They seem to come by this talent naturally and, as Stephenson suggests, they are people to be treasured. 

When Micro-lending Turns Ugly

In the past, I have praised micro-lending schemes that offer loans to the poorest of the poor so that they can start working their way up the economic ladder. Until Muhammad Yunus proved that such schemes were workable and profitable, the very poor had no access to credit, except through loan sharks who demanded up to 300 percent annual interest on their loans. As a result the poorest of the poor had no hope of breaking the chains of poverty that kept them economically depressed. Yunus and his Grameen Bank won a Nobel Peace Prize for their work. Others, however, realizing that profits could be made from the poor, have moved in and shouldered out the usurers but without Yunus' sense of ethics and purpose ["The Ugly Side of Micro-Lending," by Keith Epstein and Geri Smith, BusinessWeek, 24 December 2007]. Epstein and Smith report that it is not criminals that have moved in but rather large banks.

"In a gleaming office tower in Mexico City secured with retinal scanners, bulletproof glass, and armed guards, dozens of workers in white lab coats dart around a large operations center monitoring long rows of computers. Along one wall, 54 enormous screens flicker dizzyingly with numbers, graphs, and fever charts: a relentless stream of data. You'd think the urgent mission involved tracking the trajectory of a spacecraft or the workings of a national power grid, not tiny amounts of cash and credit for Mexico's working poor. The transactions are so minuscule they hardly seem worth the bother. The average loan amounts to $257. But for Banco Azteca, a swiftly growing bank affiliated with Latin America's largest household retailer, the small sums represent a torrent of revenue that has caught even its founders by surprise. For three decades, micro-lending was seen as a tool of nonprofit economic development. Now poor people are turning into one of the world's least likely sources of untapped profit, primarily because they will pay interest rates most Americans would consider outrageous, if not usurious."

When Yunus established Grameen Bank he had to work out repayment schemes and eventually settled on just a few simple rules: loans last a year, installments are paid weekly, repayment starts one week after the loan is disbursed, the interest rate is 20 percent, and repayment amounts to 2 percent of the loan payment per week for fifty weeks. You might think that 20 percent interest sounds high, but it is actually lower than most interests rates demanded of the poor -- even in America.

"With no legal limits on interest levels and little government oversight, for-profit banks in Mexico impose annual interest rates on poor borrowers that typically range from 50% to 120%. That compares with a worldwide average of 31% among nonprofit micro-lending institutions, and the 22% to 29% that Americans with bad credit histories incur on credit-card debt."

One reason I like Kiva.org is that it provides information about each of its field partners (the actual micro-lending organizations). Although some of its field partners charge interest rates approaching 40 percent, Kiva's average field partner charges 22 percent -- very much in line with Yunus' guidelines. Compare that to the average "money lender" interest of 84 percent that the poor would have to pay if Kiva's field partners weren't there and you can see that they offer the poor fairly reasonable rates. The Mexican banks are much closer to the usurers' rates than to those charged by Kiva's field partners. Epstein and Smith report that it is not only the high interest rates that border on being criminal it is the banks' aggressive collection methods.

"Azteca's business model succeeds not only because it can charge credit-starved clients almost whatever it wants. Equally important is that low-income Mexicans anxious about maintaining their reputation tend to pay back what they owe, regardless of the hardship. Those who slip behind receive frequent visits from motorcycle-riding collection agents."

Yunus started Grameen Bank because regular bankers just never "got" the concept. The only thing that Azteca "gets" is the profit. It doesn't get the humanitarian goal that motivated Yunus.

"Access to credit opens opportunities for the poor. But it creates tempting hazards as well, which in Mexico are drawing many unsophisticated families into a maze of debts. Pawnshops and loan sharks, whose interest rates of up to 300% have plagued generations of Mexicans, now face rivals offering terms that are less harsh. But along the road to previously unavailable financing, some Mexicans are stumbling badly."

Yunus worked the system to overcome the fact that the poor were often unsophisticated and uneducated. The institutions discussed in the article take advantage of those circumstances to bleed the poor dry. The results can be devastating. Epstein and Smith report that families that can't repay the bank often turn once again to loan sharks and eventually end up losing everything, including their dreams of a middle class life. Yunus insists that access to credit can empower the poor; but access to bad credit can crush them deeper into grinding poverty. Yunus believes his model is workable anywhere in the world, but lenders like Azteca generally follow few if any of the principles that Yunus promotes. Micro-lending is needed. Those that take advantage of the poor are not.

Invention through Evolution

Innovators and innovative companies must be fearless. They cannot be afraid to fail because failure comes with the territory. That is a lesson one of America's greatest innovators and inventors, Thomas Edison, was fond of teaching. The Economist began an article on innovation with Edison's words: "I have not failed. I have just found 10,000 ways that won't work." ["Don't invent, evolve," 8 December 2007 issue] Edison was speaking about his most famous effort, his attempt to perfect the incandescent light bulb. The focus of the article was how the "traditional trial-and-error approach," like the one used by Edison, "can be automated by software that mimics natural selection." The value of such software should be immediately obvious.

"Although 10,000 trial-and-error attempts might sound a little over the top, an emerging technique for developing inventions knocks even Edison’s exhaustive approach into a cocked hat. Evolutionary design, as it is known, allows a computer to run through tens of millions of variations on an invention until it hits on the best solution to a problem. As its name suggests, evolutionary design borrows its ideas from biology. It takes a basic blueprint and mutates it in a bid to improve it without human input. As in biology, most mutations are worse than the original. But a few are better, and these are used to create the next generation."

Computer processor speed makes a huge difference in these efforts. The faster the computer the quicker the algorithms can churn out evolved solutions to a problem. Edison would have been amazed by the process, but he also would probably have been one of the first people to adapt it to his own purposes.

"Evolutionary design uses a computer program called an evolutionary algorithm, which takes the initial parameters of the design (things such as lengths, areas, volumes, currents and voltages) and treats each like one gene in an organism. Collectively, these genes comprise the product’s genome. By randomly mutating these genes and then breeding them with other, similarly mutated genomes, new offspring designs are created. These are subjected to simulated use by a second program. If a particular offspring is shown not to be up to the task, it is discarded. If it is promising, it is selectively bred with other fit offspring to see if the results, when subject to further mutation, can do even better."

In an earlier post [Modeling Swarm Behavior], I noted that researchers are increasingly turning to nature to find answers to today's problems. Whereas the industrial age spawned an engineering mindset -- that is the belief that all problems can be solved by elegant engineering -- the information age has spawned a more biological mindset -- that looking to nature for answers.

"The idea of evolutionary algorithms is not new. Until recently, however, their use has been confined to projects such as refining the aerodynamic profiles of car bodies, aircraft fuselages and wings. That is because only large firms have been able to afford the supercomputers needed to mutate and crossbreed large virtual genomes—and then simulate the behaviour of their offspring—for perhaps 20m generations before the perfect design emerges. What has changed, in this as in so much else, is the availability and cheapness of computing power. According to John Koza of Stanford University, who is one of the pioneers of the field, evolutionary designs that would have taken many months to run on PCs are now feasible in days."

I don't know how long it took Edison to complete his 10,000 experiments with the light bulb, but it certainly was more than a few days -- months I suspect. This speed of development processes has forever changed the R&D landscape.

"The result is that the range of applications to which the principles of evolutionary design are being applied is growing fast. Among those revealed at the Genetic and Evolutionary Computation Conference held in London this summer were long-life USB memory sticks, superfast racing-yacht keels, ultra-high-bandwidth optical fibres, high performance Wi-Fi antennae (evolved to avoid patent fees), cochlear implants that can optimise themselves to individual patients and a cancer-biopsy analyser that was evolved to match a human pathologist’s tumour-spotting skills."

The article ended with the story of the high-performance Wi-Fi antennae.

"Perhaps the most cunning use of an evolutionary algorithm ... is by Dr Koza himself. His team at Stanford developed a Wi-Fi antenna for a client who did not want to pay a patent-licence fee to Cisco Systems. The team fed the algorithm as much data as they could from the Cisco patent and told the software to design around it. It succeeded in doing so. The result is a design that does not infringe Cisco’s patent—and is more efficient to boot. A century and a half after Darwin suggested natural selection as the mechanism of evolution, engineers have proved him right once again."

As computing speeds increase and computing costs decrease, evolutionary algorithms are likely to be used by more and more businesses. Who knows, they might even speed up the patent process which is almost broken. If an algorithm can be shown to be effective in working around current patents, then certification of that algorithm could replace costly and time consuming patent searches. The Patent Office needs to be creative enough to see how new technologies might be used to change the ways it has worked in the past. Using evolutionary algorithms to develop new products more effectively and efficiently is only one use, I suspect, for that technology. As it is introduced to different disciplines, evolutionary algorithms will help solve more than product development challenges. Among them could be logistics challenges, defense challenges, curriculum challenges -- the list goes on and on just like life.

The Coming Age of Cloud Computing

Last October, Steve Lohr reported in the New York Times that Google and IBM were teaming to support research at major universities because they "do not provide the technical training needed for the kind of powerful and highly complex computing Google is famous for." ["Google and I.B.M. Join in 'Cloud Computing' Research," 8 October 2007]. Lohr reported:

"The two companies are investing to build large data centers that students can tap into over the Internet to program and research remotely, which is called 'cloud computing.' Both companies have a deep business interest in this new model in which computing chores increasingly move off individual desktops and out of corporate computer centers to be handled as services over the Internet. Google, the Internet search giant, is the leader in this technology. But companies like Yahoo, Amazon, eBay and Microsoft have built Internet consumer services like search, social networking, Web e-mail and online commerce that use cloud computing. In the corporate market, I.B.M. and others have built Internet services to predict market trends, tailor pricing and optimize procurement and manufacturing