Entrepreneurship, Opportunity, Competition, and Hope. Observations and insights in Troilo, Nicaragua
April 24th, 2013 by kroberte under Entrepreneurship, International, Social Impact,Social Value. 1 Comment.
Written by Professor David Kirsch
Mar 31, 2013
Mar 31, 2013
Over spring break, my family and I participated in a week-long service trip to Nicaragua run by the Yale Alumni Service Corps, a recent creation of the Association of Yale Alumni. I am not a Yale alumnus, and though my wife went to Yale Law School, she has had almost no connection to Yale in the 20+ years since she graduated. The principal criteria for choosing the trip were (1) it fit into our schedule, (2) it would allow our kids to spend a week with Spanish speakers who did not also speak English, (3) it would open our kids’ eyes to the realities of life in the developing world, and (4) it was time to spend spring break doing something other than sitting on a beach talking about doing something.
By all these criteria, the trip was a success, but it also succeeded in a very unexpected way. My own efforts as a member of the “business consulting” group involved meeting with and advising small business owners in the village of Troilo. While other subgroups staffed a medical clinic or put a new roof on the community center or taught in the local school (all activities with immediate, obvious and tangible benefits), I was initially concerned that our “service” was designed to occupy the few of us who were unable to contribute in any other (read: productive) way. But after a week of intensely personal conversations with a dozen local entrepreneurs, I came to see that our efforts may have been more valuable than I had expected. In particular, the experience stimulated me to contemplate some fundamental questions about the role of business in society that I elaborate upon below.
Entrepreneurship and development. How important is entrepreneurship in the development context? While the medical team was saving lives (literally, in several cases), what were we business consultants doing to help the people in the village of Troilo? Our contribution began to come into focus after our first meeting with a young mother named Maria. She was a seamstress and had been making simple skirts using a sewing machine that had been handed down in her family. She bought fabric by the yard in Leon, made a skirt or two and sold them to a reseller in town. Carefully, we talked through the economics of her fledgling business. We discussed the cost of the fabric, the thread, the needles, the buses to and from Leon, and everything else we could think of. We totaled the costs on one side of a page of paper: after ironing out some lumpiness, it worked out to 115 Cordobas per skirt. And then we asked Maria how much the reseller was willing to pay for the finished product? Before she could even get the words out, tears began to well in her eyes as she realized the implications of our analysis: 110 C. The reseller would only pay 110 C for a finished skirt. She was losing money on each one! Over the course of the week, as we continued to work with Maria, we were able to help her identify higher value-added skirts that used more fashionable fabrics or newer designs. And to reduce costs, we encouraged Maria to try to buy fabric in larger quantities and take fewer but more productive trips into Leon. To do so, Maria would need a microloan totaling $75 that she would be able to repay in as little as 3 months. And so it was for many of the people with whom we met in Troilo. When we combined basic business analysis with access to very modest amounts of capital, almost all of the clients who came to meet with our team were able to identify profitable opportunities.
Is the work of identifying and developing these opportunities more important or more valuable than the work of the medical team? Surely not. As we know from Maslow’s “hierarchy of needs,” basic access to healthcare is more fundamental than putting a few hundred extra Cordobas in the pockets of a handful of Troilo families. But over the long run, as basic needs are (hopefully) met by a responsible government committed to establishing a basic social safety net, these aspiring entrepreneurs may prove to be the people upon whom the future of a new Nicaragua will most depend. The gradual enrichment of these families will both allow for greater Maslowian “self-actualization” and create demand for more complex and valuable goods and services and grow the tax base for future government programs.
Nature of opportunities. In my courses on entrepreneurship, I frequently try to convey the idea that opportunities are neither equally distributed nor equally perceived. Some people have access to better opportunities, while others are simply better at perceiving the opportunities available in a given setting. In Troilo, we saw both effects very clearly over the course of the week: the women who showed up to meet with us on Monday morning included a small shopkeeper and several women who were interested in various aspects of pig farming. Though the opportunities available to each of these women differed (some already owned pigs or had more or better experience with various aspects of the process), each had somehow perceived that our arrival represented an opportunity. As the week wore on, several additional people interested in pursuing the same kinds of opportunities also appeared. Perhaps these latecomers heard about us from the early birds, or perhaps they directly observed us offering advice and decided that they too should seek our help. Regardless, our team noticed that the latecomers were decidedly less energetic, less knowledgeable and, in our opinion, less likely to develop successful businesses than the first arrivals. How did the first group learn that we were coming? We did not survey our clients, so we cannot know, but through whatever multiple information channels exist in Troilo, the early birds both became aware of our arrival sooner and judged (hopefully correctly) that working with us represented an opportunity to improve the prospects of their businesses faster than did their late-coming neighbors. In Troilo, the early bird gets the pig.
Competition, growth and inequality. Because opportunities are unequally distributed and perceived, our team faced an ethical dilemma: How could we help the village of Troilo without hurting some of its villagers? This question came into focus as we compared the operations of several local pulperias, small shops that sell snacks, drinks and other supplies. The first shop was owned by Tomesita: She ran a tight ship, and by 11:00 a.m. Monday morning, she already had us buying cold drinks from her shop, which was a short walk from the center of the village. She described her twice-weekly runs into Leon for inventory, which markets there had the best prices, and how she decided upon what to buy and sell. She also showed us her well-kept record of receivables; she offered 15 day-money to those she knew and trusted. Later, we returned to analyze the gross margins on Tomesita’s various products. Just like at home, some products were low margin necessities that she needed to carry like toilet paper, while it turns out that buying eggs by the gross and selling them individually is quite profitable (on a percentage basis). She appreciated our help and quickly saw the benefit of thinking about relative profitability of different types of products.
Contrast this to our visit to Roger’s shop, located a little bit further from the center of the village: Knowing the prices that Tomesita paid for her inventory, we noticed that Roger’s cost of goods was higher across the board, and his prices were either the same or lower. Where Tomesita’s margins were healthy, Roger’s were anemic, at best. His lower profitability led to greater working capital tied up in inventory, smaller and more frequent trips to town, and, ultimately, to a sputtering business. Not surprisingly, Roger, like two other pulperia owners, didn’t show up to meet with us until Wednesday afternoon.
Could we help Tomesita’s competitors? Yes, and we tried to do so without divulging the proprietary information that Tomesita had shared with us. But what are the prospects for these businesses? The hard truth is that not only was Tomesita’s shop more efficient and productive than her competitors today, she was also better positioned to benefit from our advice and therefore to further extend her advantage. This inequality is one of the driving forces of entrepreneurial capitalism, and it operates in a village in Nicaragua just as surely as it does in any other market context. Up to a point, advantages and disadvantages both cumulate, and while we might be able to postpone Roger’s day of reckoning, eventually, the actions of the market would seal the fate of his pulperia.
And here arose the ethical question: because of Tomesita’s advantaged position, we were effectively helping her more than her competitors. Were we, therefore, accelerating the market pressures that had thus far spared the owners of the less competitive pulperias? Surely our purpose was not to hurt any of the business owners in Troilo, but by their very nature, entrepreneurial actions create disequilibrium, and by encouraging and sharpening these actions, we were increasing the rate at which these changes would be felt in the community.
Observations and insights. Finally, I will share three brief vignettes from our time in Troilo that capture unique aspects of the experience.
Luis and Jeff. Jeff, one of our consulting team members, had recently retired from a senior position in a major, multi-national consumer products company where he had overseen sales for the entire Latin American market. Luis, one of our clients, was a craftsman who made bracelets, rings and other trinkets that he sold to resellers in Managua. He was referred to us by the health clinic where he had presented with mild depression and signs of possible repetitive strain injury. He seemed talented but was incapable of earning enough money to support the extended family for which he was responsible. Under the circumstances, who wouldn’t be at least a little depressed? Our team met with him over the course of several days, carefully teasing out the economics of his business. He needed $150 to buy a machine that would both ease the pain of his work and increase his productivity three-fold. The economics favored a micro-loan, but the amount was twice what we had been contemplating with the other villagers. Then, in a stroke of inspiration, Jeff invited Luis to offer his products to our group members after lunch. While Luis was getting ready, Jeff asked what various items would cost, and Luis quoted him the wholesale prices that he was used to receiving from his buyers in Managua. Jeff’s second insight saved the venture: You are selling to individuals so charge retail prices. Luis grossed over $100 in a single hour, committed to save $75 of it towards the purchase of his machine (the rest will be provided via microloan), and went home a much happier man.
Two observations struck me: First, I couldn’t help but marvel at the sight of Jeff helping Luis, the global sales executive with vast knowledge and experience acquired across decades and continents providing simple actionable advice to this struggling craftsman. I didn’t ask, but privately I estimated Jeff’s consulting fees at $15,000-$25,000 per day, yet here he was in Troilo helping Luis. Variations upon this moment were repeated time after time during the week, but in this instance it seemed especially poignant, and it spoke volumes to me about the members of this Yale Alumni Service Corps group of volunteers and about the broader merits of service. Second, I noted that the critical source of revenue was our own groups’ pocketbooks. We all paid a little more than the market required (after all, Luis was prepared to sell at his wholesale price), but importantly, we did not simply collect $100 and hand it to Luis. I suspect that had we started handing out small bills, chaos would have ensued, much as it did when Abbie Hoffman famously threw a wad of bills from the observation deck at the New York Stock Exchange. But with Luis selling his goods, the act of exchange transferred wealth in an orderly process. The magic of the market created value for all involved.
Our better selves. Among the less competitive pulperias that we advised, two were located in or directly in front of the elementary school. As with all of the clients who came to talk to us, we first asked each of the proprietors to tell us about her customers and the products they buy. In these cases, both pulperias sold snacks and sodas to the school children. As we looked at all the “empty calories” available for the youngest kids to buy with an extra Cordoba or two and tried to imagine how to increase sales for these women’s shops, I thought about how long and hard-fought the battle had been to get sugary soft drinks removed from school cafeterias in the U.S. Could we possibly have encouraged the women to offer healthier choices? Could the kids have afforded alternatives to sugar and salt? On the one hand, citizens of both Nicaragua and the U.S. face the challenge of “food sovereignty,” the ability for a community to determine sustainable relationships to the production of food. But let’s face it: this challenge is much easier to address with resources than without them, and seeing hungry children spending scarce resources on processed, packaged snacks brought this point home.
Micro-consignment. My final observation concerns the commodification of networks through social marketing. Community Enterprise Solutions (CES) is an NGO whose Nicaraguan field director (Tim) visited Troilo at our invitation. CES’s development model is an extension of microfinance whereby the NGO provides business training and fronts would-be entrepreneurs inventory of socially beneficial products. If the entrepreneur sells the reading glasses or the solar lamp or the safer cooking stove, she keeps a fraction of the purchase priced and pays CES for the products sold. If no sales occur, the entrepreneur can return the inventory and owe nothing. Unlike the typical microfinance arrangement, if the villager receiving the training fails to generate sales, she doesn’t owe anything more than the original, unsold inventory. Greg van Kirk, founder of CES, calls the model “micro-consignment,” and though I was initially a little skeptical, the women of Troilo were gaga for the idea. To a one, they loved the socially beneficial products that Tim described and wanted to both buy them for their own use and sell them to their neighbors. Even the usually reserved leader of Troilo was excited about micro-consignment. As I thought about social marketing programs in the U.S., from Tupperware to Avon to Herbalife, I also realized why this approach might reasonably appeal to the villagers of Troilo. While in the U.S., we worry about people commodifying too much social capital, in Troilo’s more traditional setting, villagers have more social capital than they need, with few opportunities to exploit it.
All told, spending a week in Troilo challenged some of my assumptions and reinforced others. Development is a lumpy, painful process that necessarily creates winners and losers. In the long run, the sum total of the businesses we helped will only provide small amounts of additional income to the struggling villagers of Troilo. But if these advantages cumulate, as they should, then over time, benefits should accrue to future members of the community, in turn creating greater opportunities for subsequent “business consultants” to help them exploit.
Dr. David Kirsch is Associate Professor of Management and Entrepreneurship in the M&O Department at the University of Maryland’s Robert H. Smith School of Business. Dr. Kirsch is a friend and ally of CSVC and recently advised a team of MBA students enrolled in the Social Venture Consulting Practicum. Dr. Kirsch was also featured in the recent CSVC Winter newsletter.