Università Comerciale Luigi Bocconi

Faculty of Economics

Master of Science Economics and Management of

Innovation and Technology

A Proposal for Sustainable Development in Rural Latin America

through the Deployment of Renewable Energies Technologies

under a Shared Vision Approach

Advisor – SDA Professor Davide Reina, MBA

Second Advisor – SDA Professor Silvia Vianello, PhD.

Master of Science Thesis of:

Alejandro Freund

Matricola - 1459981

Academic Year: 2010-2011

Milano, Italy - June 17th, 2011

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Table of Contents

Abstract ..................................................................................................... 6

Key Words and Concepts: ....................................................................................................... 6

Acknowledgements........................................................................................ 7

Introduction .............................................................................................. 10

A General Overview of Renewable Energies and Sustainability ............................... 15

Historical Context ................................................................................................................. 15

Green Movement and Sustainability ..................................................................................... 18

Renewable Energy ................................................................................................................. 21

Renewable Energy and Sustainable Development ................................................................. 26

Review of the Literature and Theoretical Framework ........................................... 30

Creating a Shared Value (Porter and Kramer; 2011) ............................................................. 30

Creating Shared Value in Practice .............................................................................................. 33

Green and Competitive: Ending the Stalemate (Porter and van der Linde; 1995) .................. 35

Cradle to Cradle: Remaking the Way we Make Things (Braungart & McDonough; 2008) ...... 37

Sustainability as the Key Driver of Innovation (Nidumolu, Prahalad, Rangaswami; 2009) .... 40

A Natural-Resource-Based View of the Firm (Hart; 1995) ..................................................... 42

The Big Idea: The Sustainability Imperative (Lubin and Esty; 2010) ..................................... 46

Global Sustainability and the Creative Destruction of Industries (Hart and Milstein; 1999) . 48

Business Cases / Data ................................................................................... 52

Micro-Solar Power Implementation in Africa ......................................................................... 52

“How the Poor May Boost Clean Tech” .................................................................................. 52

Astonfield .............................................................................................................................. 53

Creating Shared Value (CSV) ................................................................................................ 54

Urbi: “rent-to-own” ............................................................................................................ 54

Water Health International: an innovative financing model ............................................... 54

Waste Concern: hybrid profit/non-profit ........................................................................... 55

Nestle / Nespresso: CSV vs. Fair-Trade ............................................................................. 55

Global Sustainability and the Creative Destruction of Industries ......................................... 55

Daewoo .............................................................................................................................. 56

Grameen Bank: “The Village Bank” ................................................................................... 56

Problem Statement ...................................................................................... 58

Problem Statement ................................................................................................................ 58

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Prior Work ............................................................................................................................. 59

Justification of this Paper ..................................................................................................... 59

Motifs for Geographical Location ........................................................................................... 62

Problems and Potential Hindrance in Latin America ......................................................... 64

Presentation of Work and Methodology ............................................................ 66

Business Model / Framework ............................................................................................... 70

Conclusions ............................................................................................... 74

Bibliography ............................................................................................. 76

Braungart & McDonough. 2008. Cradle to Cradle: Remaking the Way we Make Things.

London: Vintage. ................................................................................................................... 76

Appendix .................................................................................................. 78

References ................................................................................................ 82

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Abstract

Sustainable development and renewable energies are strongly linked together. The basic

condition for any kind of economic development rests greatly on the availability of energy

sources. High electricity transmission costs have much impeded the connection of rural areas to

national grids. The possibility of deploying clean technologies for alternative fuels that can

circumvent the centralized energy grid can provide an interesting alternative for the production

of energy. Additionally, the combustion of traditional fossil-based fuels produces hazardous by-

products that further deteriorate the environment and pose health threats on local communities.

Multiple theoretical frameworks have portrayed an upgrading of our current economical system,

under which the preconceived trade-offs between business and environment/society can actually

become mutually benefiting. A „shared-value‟ approach depicts the groundwork for including

previously peripheral aspects to strategic business planning – environment and society – into the

core vision of a firm.

The aim of this paper is to incorporate the principles of the „shared-value‟ approach into a

business model that can assist in the sustainable development of the rural areas of Latin America

through the enabling of local clusters. The main premise of the project is to harness the potential

of renewable energies to create a virtuous cycle for development and build-upon the

opportunities that should spur from the improvement of local conditions.

Key Words and Concepts:

Energy; renewable energy; alternative energy/fuels; environment; sustainable development;

sustainability; clean-technologies; green movement; local clusters; business model; strategic

planning; shared value; and innovation.

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Acknowledgements

Before moving forward with this essay, I would like to clarify why various parts of this paper

will be written in the plural form. In first place, I would like to point out that the many unseen

contributions by my mentor, SDA Bocconi Professor Davide Reina, merit in their own right the

plurality prose. The rapport began when I took Professor Reina‟s course - Green Marketing -

during my second year of my Master of Science degree in Economics and Management of

Innovation and Technology at Università Bocconi (MSc. EMIT). The multiple examples given in

class, the literature we reviewed and the insightful after-class dialogues, motivated me to put on

paper the flow of disjointed ideas I have had for several years and employ this essay as a means

to organize the initiative into a coherent business model for future implementation (which for the

purpose of this research will occasionally be referred to as “the project(s)”).

In addition to this source of insight, I had the opportunity of having a very inspiring exchange of

ideas with SDA Bocconi Professor, Boris Durisin, who is a specialist in technology innovation

management and analysis of new market innovation. I thank him for encouraging me to use the

opportunity of writing my graduation paper to construct a business framework with practical

future implications. This conversation deeply altered my approach to this paper as my intentions

evolved from writing for the purpose of contributing to knowledge and fueling debate, to truly

motivating me to seize this occasion to construct the scaffold for this project as Wendy Kopp did

with “Teach for America”i.

Moreover, Bocconi Professor Stefano Pogutz, Director of the Master in Economics and

Management of Energy and the Environment and coordinator of the Green Management and

Sustainability major for the MSc. EMIT, advised me as to the conceptual and theoretical

approach that should prelude this research.

I would also like to show my appreciation to SDA Bocconi Professor Silvia Vianello, for her

collaboration in this essay as my second advisor. Professor Vianello assisted me a great deal in

determining a proper marketing approach for this paper.

Additionally, I have the great fortune of having the support from my father, Kurt, who has

extensive experience and knowledge on topics of technology, social and economic development,

i “As a college senior, Wendy Kopp proposed Teach For America's creation in her Princeton University undergraduate thesis. She was convinced that many in her generation were searching for a way to assume a significant responsibility that would make a real difference in the world and that top college students would choose teaching over more lucrative opportunities if a prominent teacher corps existed.” - http://www.teachforamerica.org/about-us/our-history/

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politics and energy, based both on his academic background (PhD. DIC Chemistry from Imperial

College of Science and Technology, London) and professional experience (entrepreneur,

columnist, speaker, and developer of renewable energy projects).

I am also thankful to the contributions and discussions I constantly engage with my cousin,

Pablo Freund, with whom I share many passions as well as the intentions of undertaking this

project and putting in practice our ideas for sustainable development in the region where we

grew up. Currently he is pursuing a Master of Science degree in Sustainability Management at

The Earth Institute, Columbia University in New York.

Furthermore, there are several people with whom I have avidly interacted during the past several

years and continue to do so regarding this idea and that are some way or another linked to this

endeavor. Several of these persons have expressed their eagerness to engage in this venture once

we decide to move forwards. Accordingly, I want to thank my two friends, Martin Jara (MSc.

Business Development and Internationalisation; Umea Universitet, Sweden) and Jason Byron

(MA. Public Policy with a focus in Local and Territorial Development; Facultad

Latinoamericana de Ciencias Sociales, Ecuador) for their input in this paper.

I would also like to express my gratitude to my mother, Barbara, and to my grandmother, Ingrid,

for providing me with emotional support during my Master‟s degree and especially in these final

months which have been fully dedicated to producing this research paper.

Therefore, taking into account all the intellectual contributions I received, occasionally I have to

recur to the plural form.

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“Companies that persist in treating climate change solely as a CSR issue, rather than a business problem, will risk the greatest consequences.” (Michael Porter; Harvard)

“What Defense [industry] has been to the world’s leaders for the past 40 years, the Environment will be for the next 40. “ (The Economist)

“Corporate environmentalism is not philanthropy but an indispensable new approach to the business model.” (André Hoffmann; Roche / WWF)

“Access to energy is a precondition for the function and development of society.” (Vattenfall)

"We are seeing the birth of a new perspective of the world, where ecology and economics are two sides of the same coin." (Leif Johansson; CEO Volvo Group)

"The definition of insanity is doing the same thing over and over again and expecting different results." (Albert Einstein)

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Introduction

The case for human-caused climate change can no longer be refuted. The scientific community,

in addition to the most recent report from the Intergovernmental Panel on Climate Change

(IPCC) – the „AR5‟ (Fifth Assessment Report) - has reached a consensus based on extensive

empirical evidence.1

This paradigm shift opens up a plethora of opportunities to engage in projects under the Porter

and Kramer (2010) “Creating Shared Value” framework (CSV here in after)2. The guiding

principle of this concept is that companies can boost their competitiveness while at the same time

contribute to the social and economic context in which they operate. This might seem trivial to

many, as classical neoliberal economics explains that the simple act of producing profits results

in collective improvements for society. However, this classical view of capitalism has been

disputed recurrently over the last several years, as many of the private benefits generated by

firms have not necessarily translated to improvements for society; from the financial crisis to

ongoing environmental catastrophes, this benevolent view of capitalism continues to be

challenged. The point is not to challenge the capitalist model; on the contrary, capitalism has

proved to be the most proficient approach to improving standards of living and catering to

human needs.3 The main premise behind the CSV view is that it is in accordance with the

self-interest of the firm to broaden its narrow-scoped vision and re-learn to connect with

society in ways that will truly benefit both the firm and society as a whole in a “win-win”

scenario by enlarging the pool of value.

The previous status quo exposed irreconcilable and contradicting positions between nature

(ecology) and business (economy). However, under this new paradigm, we are seeing multiple

examples where the trade-off between social benefits versus private costs can actually follow a

mutually beneficial relationship; increasing public welfare whilst decreasing costs incurred by

industry (thereby increasing its profits). The reduction in costs can be mainly reflected as an

increase in efficiency of production, better use of materials, reduction of waste and tax levies,

and decrease in liabilities, while concurrently adding value to products and improving brand

image and relationships with stakeholdersii. On the other side of the coin, better air quality,

reduced water pollution, cutback in carbon dioxide (CO₂) emissions and green house gasses

(GHG‟s), and reduction of landfills are some of the collateral benefits for society and

ii The Stanford Research institute defined stakeholders as "those groups without whose support the organization

would cease to exist."

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environment. “Pollution prevention may save not only the cost of installing and operating end-

of-pipe pollution-control devices, but is also may increase productivity and efficiency (Smart,

1992; Schmidheiny, 1992 – extracted from Hart, 1995). Less waste means better utilization of

inputs, resulting in lower costs for raw materials and waste disposal (Young, 1991).”

The objective of this essay is to review existing literature and business cases that fit

harmoniously with the general CSV mindset and construct a business model, based primarily on

the implementation of renewable energy technologies that can be deployed and replicated in

rural areas of developing nations, focusing primarily on the Andean Region in Latin America.

Another principle that conducts this project is following and incorporating different sustainable

development and sustainability guidelines. For example, integrating various principles from

“One Planet Living”4 initiative by the World Wildlife Foundation (WWF), whose main axiom is

that “living sustainably should mean a better quality of life,” will be an important basis to

improving the quality of life of the people directly or indirectly linked to this project.

Reasons are not short behind the decision to base this business model in this geographical area.

A more detailed analysis of these motivating factors will be covered in its specific section.

However, to have a rough idea behind the location selection, the following reasons are presented.

Firstly, my core network of contacts and potential collaborators is mainly based in the region due

to the fact that I was born and raised there. Moreover, Latin America has experienced a decade

of strong growth, improvement in institutions, political and economical stability, and has showed

a strong will to have a voice in the world‟s affairs.

Many rising global actors tend to adhere to best global practices by benchmarking to exemplary

legislation, as well as the incorporation of latest technologies. If we consider that the Green

Movement is here to stay, we can optimistically assume that this phenomenon will continue to

create a contagious effect. The rationale behind a more stable outlook for the move towards a

clean-energy future and sustainable business model and all its implications on politics, society

and economy will be presented further along this essay. Nevertheless, it is important to point out

that a combination of crucial catalysts – such as price volatility of hydrocarbon resources, pursue

of energy sovereignty, political support for clean technologies, and growing public awareness of

environmental issues – have created a new long-term stable business landscape.

Finally, to a great extent, the economical benefits of this decade of growth in Latin American

have not translated accordingly to the more marginal and rural areas. This is not only a pivotal

motivation for this essay and series of projects; it is a clear motivator of our decision to target

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Latin America. We also see this as an unattended market with vast potential where we have the

opportunity to enjoy a „first mover advantage‟.5 The paper developed by C. K. Prahalad (2004),

“The Fortune at the Bottom of the Pyramid” (BOP) shows that there is an enormous opportunity

to serve this mass market. Bangladeshi professor Mohamed Yunus took it a step further and

proved that the apparently riskier lower-end market actually had higher repaying rates than the

vast majority of financial institutions around the globe through his „micro-credit‟ organization

(and this is even contemplating that these loans were made without direct collateral).

Schumpeter understood that economics and capitalism should be analyzed in an evolving and

disruptive context.6 Accordingly, the objective of this business model is to tackle various issues

regarding the development of the rural Andean region in a series of stages that evolve as these

communities advance and progress. The idea is to lay out a scheme with different stages of

implementation that will closely follow the development of the location in which it operates.

Somewhat following what Abraham Maslow (1943; 1954) proposed in “A Theory of Human

Motivation” and furthermore in “Motivation and Personality,” my idea is to have this business

model adapt and evolve in parallel with the community it serves and implement projects that

cater to the contextual and growing needs.

As a result, the first stage of the business model – being the core stage covered in this paper, as

we cannot fully contemplate the multiple paths that will spur – is based on the installation of

renewable energy technologies. The decision to concentrate on renewable energy is based on the

following pillars: compatibility of this industry with economical, environmental and societal

sustainability; energy and electricity as the basis for any kind of potential development; and the

availability of funding due to government and business commitment to a cleaner future.

However, it is not the intention of this paper to scrutinize and rigorously favor one technology

over another. The selection of the technology mix (tidal/current, wind, solar, geothermal, algae

biofuels, waste to energy, etc.) will be subject to case by case analysis, depending on the inherent

and relative conditions of each location, as well as other circumstances such as, connectivity to

the local or national grid and cost effectiveness of energy production. Additionally, the path to a

cleaner energy future will not depend exclusively on one technology, but actually on the

diversification of the energy matrix and continuous improvements and new developments. For

example, wind and solar energy are not necessarily competitors, but actually great complements.

During the summer periods, the solar panels have better yields. However, the windy conditions

of the winter result in more energy generation for eolic (wind) energy. The selection of

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technology to be deployed in each area, therefore, can seen to be subject to specific conditions of

the particular case and the specific partnerships we develop with suppliers.

One of the main challenges encompassing this business model will be to find an appropriate

method or strategy to include and bind stakeholders. The objective is to align interests that a

priori could seem conflicting and incorporate their input from the beginning of each project. This

will probably require intense public relations and lobbying before we can get the projects up and

running. It will be essential to get the different stakeholders (primarily the local community and

the cooperatives, government, investors and suppliers) on board by communicating with them

our goals and making sure they understand that we will embrace their perspectives, without

violating our vision and principles. In the chapters regarding the actual business model and

methodology, we will review a business model proposed by “Corporación Empresarial Indigena

del Ecuador” that addresses this issue through an equity-stake division that includes all of the

related parties.

Two strategies that could assist us in this area are the ones exposed by Hart (1995) in “A Natural

Resource Based View of the Firm”7:

“Proposition 2b: Firms that adopt product-stewardship strategies will evidence inclusion of

external stakeholders in product-development and planning process.

Proposition 2c: over time, a product-stewardship strategy will extend beyond the preemption of

firm-specific resources and use of Life Cycle Analysis to become a stakeholder-oriented

(legitimacy-based) process.”

LCA or Life Cycle Analysis is used to assess the environmental burden created by a product

system “cradle to grave” (Davis, 1993; Keoleian & Menerey, 1993).

Furthermore, in the same academic paper, Hart (1995) cleverly points out that our economic

models and management practices have omitted the inherent biophysical constraints of the

planet. Based on extensive literature, a clear connection between resources, capabilities and

competitive advantage can be pointed out (Andrews 1971; Hofer and Schendel 1978; Snow and

Hrebiniak 1980). The theory based on the Resource-Based View of the Firm explains that

competitive advantages developed by a firm can be sustained if the resources are not readily

available and the capabilities are not easily replicable. Additionally, the most important aspect in

order to achieve a sustained competitive advantage is that the resources should be tacit and

socially complex (Teece 1987; Winter 1987). Therefore, based on the fact that we are trying to

construct a difficult-to-imitate, but easily-replicable and for-profit business model, we also have

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to identify key capabilities that will translate into the competitive advantages for the company

carrying out the projects. Consequently, the main competitive advantages of this model will be

based on: long-term oriented partnerships with different stakeholders; the development of

internal competences and specific know-how; and a flexible and adaptable business model that

we can replicate throughout the region.

One final clarification before moving forward; the vision of the business model is to contribute

to the advancement and improvement of communities through a sustainable development

approach while utilizing a for-profit business model. Hence, a vital axis of this business structure

is employing one of the three key ways in which companies can „create shared value

opportunities‟ – “enabling local cluster development.”

The fact that we need to build upon our previously mentioned competitive advantages does not

imply the idea of creating for ourselves a situation of monopolistic – inefficient - competition.

We understand that for a true situation of sustainable development and progress to spur in these

communities, a wide range of needs will need to be covered by multiple organizations, i.e.:

private (business), public (governmental or municipal) and non-governmental.

Thus, it is in our own self-interest that other players (both complementary and competitors) enter

our intended geographical markets. Nonetheless, by acknowledging the harsh realities of the

business world, it is clear we must also approach the situation through a pragmatic frame and

produce a business model that can sustain itself and endure in time by preventing an imitation of

our business approach.

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A General Overview of Renewable Energies and Sustainability

This section will provide an overview of concepts related to sustainability, sustainable

development, and renewable energies, as well as a revision of the historical context and

conditions under which these issues have evolved. The idea is to revise key aspects of industrial

development, the origination of the „green movement‟ and the reasons that point to a positive

and stable outlook for these interrelated topics.

Historical Context

Even though retrospective analysis can never alter the past, the technique is important for

reviewing the lessons of history and understanding the implications it had on the subsequent

events. Through this analysis, we can better grasp the mistakes we made and be better prepared

to avoid them in the future. With no intention of stimulating a debate or reminiscing on what

could have been, I feel it is still necessary to briefly examine some of the factors that led us to

the complicated environmental crisis we face nowadays.

The Industrial Revolution marked a pivotal point in human history that provoked a series of

profound changes and effects on the social, cultural and economic aspects of life.8 Beginning in

the United Kingdom and expanding at different rates to continental Europe and the rest of the

world, the Industrial Revolution radically transformed production techniques in a series of

sectors, such as: metallurgy, mining, chemicals, textiles, glass making, and machinery. Its effects

were so deep that it affected the social and demographic configurations of civilization by

enticing a massive urbanization motivated by the better income opportunities that the new

factories provided. In parallel, the productivity enhancement urged the need for more efficient

methods of transportation that could cater the expansion of markets. This was greatly enabled by

the construction of inland waterways, railways and upgrading of roads.9 The reconfiguration and

improvement in methods of trade and commerce further amplified spillover effects through the

transfer of products, technology, and know-how. The construction of factories and the ability to

send goods to distant places demanded more efficient methods of shipping. The impressive

increase in production yields and commerce was possible in great part through the

implementation of steam power, coal-powered machines, the use of water wheels, and, further

on, petroleum-based vehicles.

Furthermore, the exponential population increase in the last 150 years that was made possible

thanks to the Industrial Revolution has added a great deal of pressure to the natural cycles of

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resource replenishment. According to the British newspaper, the Guardian, we will need to

produce more food during the next fifty years than what has been produced in the past 10,000

years combined.10

Since the end of WWII, our population has almost quadrupled and is on pace

to reach nine billion people before 2050.11

It is true that technological advances have increased

the crop yields many times over; nevertheless, scientists argue that there is an inherent limit to

this expansion.

Though these drastic changes resulted in an extended period of increase in incomes and

arguably, improvement in standards of living12

, many of the destructive consequences were not

fully contemplated a priori. In the book “Cradle to Cradle” (C2C herein forth), Braungart and

McDonough (2002) describe in a very eloquent manner some of the implications of the

Industrial Revolution and the evolution towards a carbon-based economy. They begin by arguing

that the continuous push for economic growth brought about by technological change lead to an

ever-growing thirst for energy, which in turn set in motion the development of the coal mining

and petroleum industry. During this time, a common notion of “conquering the wild” reigned, as

natural resources seemed unlimited. Mother Nature was not only seen as the provider of

resources, but also as a “perpetually regenerative” body. An interesting extract from poet and

philosopher Ralf W. Emerson grasps the general perception of the natural world at that time,

“essences unchanged by man: space, the air, the river, the leaf.”

This leads us to think that people were naïve or ignorant to the fact that their actions were having

negative effects on nature. Nonetheless, we shouldn‟t judge them in such a harsh manner, as

even today, with vast proof and consensus from the scientific community, as well as multiple

reports by intergovernmental panels, many people still refute these claims and discard them as

„green-party‟ or environmentalist propaganda.

Despite accusations and controversies behind the legacies of Henry Ford and John D.

Rockefeller, both have been exceedingly influential characters in the history of American

industrial development and capitalism in general. Ford is more famously known for developing

the assembly line technique for mass production and for creating a situation of “welfare

capitalism” or “industrial paternalism”13

by more than doubling going salaries to „$5-per-day‟

with the idea of attracting talented human capital and increasing the demand for his cars.iii

On the

iii Henry Ford understood that with the current salaries at that time, his mass produced automobiles would eclipse the potential demand. Thus, by increasing the salaries of his employees (and indirectly forcing other companies to do so as well), in essence, he created his own market.

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other side, Rockefeller‟s petroleum business, already controlling over 85% of the extraction and

commercialization of oil at the beginning of the twentieth century14

, continued to grow aided by

the expansion of Ford‟s business throughout the United States due to the fact that his company,

Standard Oil, had the capability of supplying the necessary ingredient for fueling the cars.

Through its discriminatory control of railways and oil pipelines, Standard Oil operated under a

monopolistic configuration that was much enhanced by the mutually benefiting relationship with

Ford15

. Consequently, this situation heavily impaired the development of innovations based on

electricity, hydrogen and other sources, such as inventions from Nikola Tesla16

in the

electromagnetic field which, arguably, could have altered the outcome of the energy industry. In

addition to this, a series of likely improvements could have potentially reconfigured the oil

industry from its origins if competitors would have had the chance of surviving, possibly

yielding in a cleaner and more efficient oil industry right from the start. To avoid engaging in

what could be a thesis of its own, it is better to simply state that the configuration of the oil

industry and its influence on American and global politics greatly impeded the development of

financially viable clean technologies for many decades.

Aside from all the positive things that emerged from the Industrial Revolution – better

healthcare, increased lifespan, superior literacy rates, and improved standards of living - a

retrospective review of history depicts it as a system of production that actually resulted in:

severe air, soil, and water pollution; production of hazardous materials; vast landfills filled with

valuable materials; erosion of biodiversity and cultural practices; and depletion of natural

resources at unsustainable rates.17

It is safe to infer that these negative outcomes were not premeditated and that the orchestrators of

such a system– if we assume that it was actually pre-designed - simply behaved according to the

principles of classical economics, implying that an improvement in personal welfare (acting in

one‟s self-interest) would result in general welfare. People were merely ceasing the

unprecedented opportunity of profiting from what seemed like an ever-expanding boom.

The obsession for growth could lead us to ponder upon an interesting perspective of this

economic model: why do we so blindly measure progress through Gross Domestic Product

(GDP) indices? It is true that there is a strong positive correlation between improvements in

standards of living and increase in GDP. However, a wide array of variables are not being

properly measured and contemplated. As the American novelist and environmental supporter,

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Edward Abbey, wrote in „White Water Ramblers‟, “Growth for growth‟s sake is a cancerous

madness.”18

The book “Cradle to Cradle” shows a very good example of misinterpretation of

economic progress by demonstrating how the Exxon Valdez oil spill in the state of Alaska

actually improved the local economy, by stimulating local businesses due to the amounts of

people that were coming to assist in the cleanup efforts. It is clear that GDP measurement is very

practical for general comparison of economic wellbeing, but it can become a dangerous tool if it

is myopically driving public policy and using its central objective.

The rationale behind including these aspects of the Industrial Revolution and twentieth century

economics is to assist us in the construction of a framework that incorporates the benefits of

economic growth, while simultaneously minimizing its negative aspects. One of the main

reasons of why the intended business model will be carried out in the rural areas of the Andean

region is because we have the opportunity of actually designing and planning the developments

in „greenfields.‟iv We can use this opportunity to develop these projects with thorough planning

from the start and avoid having to „unlearn‟ what are commonly thought to be conventional

byproducts of economic prosperity. The fact that these towns and rural areas have relatively little

contact with intense economic activity means that they have immense room for progress.

More importantly, based on the premise that these areas have not been influenced by business

activity, we can benchmark right from the start to the best practices and implement proper

sustainability guidelines with the expectation that they will translate into a economic prosperity

under the theoretical frameworks briefly reviewed in the introduction of this paper („Shared

Value‟; „Bottom of the Pyramid‟; „Natural Resource-Based View of the Firm‟; „Sustainability as

the Key Driver for Innovation‟; and „Cradle-to-Cradle‟). In the „Literature Review‟, a summary

of the more important concepts will be presented in a manner that will attempt to guide the

reader into understanding how each of these frameworks plays a role and fits together to provide

the proper support for addressing the main problem of this academic paper – contributing to the

prosperity of rural areas of the Andean region through the implementation of renewable energy

technologies under a „shared value‟ approach.

Green Movement and Sustainability

iv Greenfields are projects that lack constraints imposed by prior work; there is no need to bulldoze or remodel any

existing constructions.

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There are multiple issues and circumstances that have influenced the development of the topics

mentioned in this heading. Enlightenment philosophers such as Thoreau and Rousseau planted

abstract thinking ideals for the basis on environmentalism.19

However, it was not until the

proliferation of the Industrial Revolution that a more organized approach towards ecology and

conservationism was conceptualized and put in practice as a reaction to the evident negative

side-effects of the economic bonanza.20

The concepts of „Green Economics‟ began to take shape

by contemplating the concerns regarding the well-being of the biosphere and humans in general.

Furthermore, „Green Politics or the Green Movement‟ began to take shape around the idea that

classical capitalism is myopic in that it only focuses on pure economic growth, while isolating

the „full costs‟ (environmental conditions and social problems) of economic expansion.21

One of

the guiding ideals behind the green movement is the idea that economic progress should not

focus strictly on materialism, but also deeply examine its impact on quality of life through a

holistic lens. Also, the globalization of markets and supply chains has been a focal point of

debate for Green Politics, as it is thought to threaten cultures and the natural world by producing

a situation of „global economic monoculture‟.22

One additional key turning point was during the

1970‟s „energy crisis‟ which brought attention to the reality that the modern socio-economic

configuration depended too closely on the oil industry, which in turn depended overwhelmingly

on petroleum produced in the politically unstable region of The Middle East.23

As these issues were beginning to draw more attention from the media and the public, scientific

investigation began to examine some of these claims and improved its impetus. Moreover,

Rachel Carson‟s (1962) “Silent Spring” is generally recognized for laying the groundwork for

the environmental movement24

by exposing evidence regarding the vicious effects that pesticides

produced by the giant chemicals industry were having on nature. According to Braungart and

McDonough (2002), prior to this point, environmentalism was a narrow synonym for protests in

lure of the evident harm produced by current manufacturing and trade practices.

The 1992 Earth Summit in Rio collected representatives from over 150 nations and dozens of

global leaders to find solutions to tackle the now-obvious indications of environmental

destruction. Despite the fact that no tangible agreements were accomplished, a very positive

aspect emerged – „Eco-Efficiency‟, which C2C defines as doing more with less. Five years later,

the Kyoto Protocol was acclaimed as a big success – despite the fact that the most pollutant and

consuming country (United States) did not sign nor ratify the accord. The United Nations

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Framework Convention on Climate Change (FCCC or UNFCCC) prepared the protocol on the

main premise of targeting „global warming‟.

The objective of this international treaty was to stabilize the concentration of greenhouse gases

(GHG‟s) in the atmosphere at a level that would not translate into further man-inflicted climate

changes. The Protocol devised three main mechanisms to enable this plan: „Emissions Trading

Scheme (ETS)‟, „Clean Development Mechanisms (CDM)‟, and „Joint Implementation (JI)‟.25

These tools resulted in the creation of „Carbon-Credits‟, which have been one of its most

concrete, and to some extent, fruitful results of this treaty. The basic idea is that „Annex I‟

countriesv can buy GHG emission credits from other countries in the accord. These „credits‟ can

be either traded through financial exchanges, projects in „non-Annex I‟ countries that reduce

emissions, and from other countries in Annex I category that have emitted less than their allowed

quota.26

Even though it took many decades of intense debate and struggle to create a broad awareness on

the importance of measuring the impacts of our un-sustainable economic model on the

environment and on society, we reached a point where this consciousness gained enough

momentum to make academics, politicians, businesspeople, and society challenge traditional

business practices and generate innovative solutions to tackle these issues. The theoretical

frameworks selected for this thesis have been greatly facilitated by this broad awakening.

To finalize this subsection, the main components, concepts and definitions of sustainability and

sustainable development are presented. In order to avoid confusion and debate among the varied,

and sometimes, contradicting interpretations, we will use the more accepted definition enacted

by the „Brundtland Report‟ (1987) of the United Nations (UN) which defines sustainable

development as “development that meets the needs of the present without compromising the

ability of future generations to meet their own needs.”27

The three main pillars of sustainability

are: environment, society, and the economy.

Another interesting way of exposing sustainability is based the C2C framework which implies a

“biomimetic approach to the design of systems.”28

The conjecture is that industrial production

systems should mimic the natural processes of the biospherevi by replenishing the system through

the same materials it produces, in an enduring cyclical manner instead of the conventional

v Annex I countries are classified as industrialized countries and countries in transition. They have agreed to reduce their collective GHG emissions by 5.2% from the 1990 level vi Biosphere - the global addition of all the ecosystems

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„cradle to grave‟ blueprint. This approach explains that the industrial processes should protect

the ecosystems through the manufacturing of high-quality and environmentally safe products that

allow a closed-loop flow of synthetic and organic materials. For example, instead of producing

traditional plastic bags, we can produce organic bags made out of agricultural byproducts that

when discarded, can actually biodegrade properly and contribute to nature‟s metabolism.

The World Wildlife Fund (WWF) created a guideline titled, “One Planet Living” which provides

ten principles for sustainability based on „ecological footprint‟ as its key indicator:29

I. Zero Carbon

II. Zero Waste

III. Sustainable Transport

IV. Local and Sustainable Markets

V. Local and Sustainable Food

VI. Sustainable Water

VII. Natural Habitats and Wildlife

VIII. Culture and Heritage

IX. Equity and Fair Trade

X. Health and Happiness

Additionally, we expose the four system conditions for a sustainable society presented by the

“Natural Step Framework‟s”vii

; nature is not subject to systematically increasing:30

1. “concentrations of substances extracted from the Earth's crust (reduction in our

dependence on fossil fuels and metals);

2. concentrations of substances produced by society (reduction in the use of synthetic

chemicals that persist in nature);

3. degradation by physical means and, in that society (reduce our destruction of nature);

4. people are not subject to conditions that systematically undermine their capacity to meet

their needs” (ensure that we are not stopping people from meeting their needs)31

Hence, there are multiple definitions for sustainability. However, for the purpose of this essay,

we will center on the ones presented earlier in this section.

Renewable Energy

The most essential ingredient for the proper functioning of the planet is energy.32

Modern

economies and businesses fully depend on energy. The system would not be able to operate

vii The Natural Step (a non-profit organization) was founded in Sweden in 1989 by scientist Karl-Henrik Robèrt in which he laid out the conditions for the sustainability of mankind activities on the planet based on the laws of thermodynamics. - http://www.thenaturalstep.org/en/canada/our-story/

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without an uninterrupted supply of affordable energy. Humans have understood that through the

implementation of energy, we can increase our productivity many times over. Energy is crucial

for all of our activities; for further development, increases in productivity, and improvements in

standards of living. The main problem is that we have been depleting the existing energy sources

that take hundreds of thousands of years to form at rates that do not allow the cycle of

replenishment to do its‟ task appropriately.

Moreover, burning of fossil fuels - the main sources of our energy consumption - produces toxic

byproducts that the biosphere cannot properly digest and that affect the health of the ecosystem

and human beings. The political and cultural shifts during the past few decades have paved the

way for a new energy paradigm in which technological advances have allowed renewable energy

sources to contribute at a continuously growing pace in the energy matrix.

Renewable energies derive from natural resources – wind, rain, water tides, and geothermal heat

– which originate or fully depend on sunlight or the earth‟s core. The term renewable implies

that they are naturally replenished, meaning that they are constantly regenerated through the

natural cycles of the planet. Traditionally, civilization has always depended on renewable energy

for its needs; primarily using firewood (biomass) for heating and cooking. Thus, renewable

energy is not an invention of this past century; it has been around since the beginning of man.

During the first century of the current era, Heron, a Greek engineer from Alexandria employed a

„windwheel‟ to power a machine.33

Three centuries later, a depiction of a „prayer wheel‟ is

shown below.34

Furthermore, it has been said that Hammurabi, the emperor of Babylonia had the

intention of harnessing wind power for an irrigation project over 3,500 years ago.35

viii

viii Image source: http://www.top-alternative-energy-sources.com/images/watermill_Medieval.jpg

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Jumping ahead in the historical timeline, we find some limited uses of wind power before WWI

in places like Denmark, Scotland, USSR, and the USA, but their competitiveness was largely

overshadowed by more efficient fossil-fuel vapor plants.

The most common renewable energy technologies are: biomass, hydroelectric power, wind

(eolic), solar, geothermal, and ocean (tide). In 2008, these types of renewable energies provided

roughly 13 per cent of global energy supply.36

However, we are still in a situation where coal,

gas and petroleum represented 85 percent of world energy production.ix All of these methods of

producing energy can be properly complemented and do not need to compete for resources.

Biomass implies the burning of biological material such as waste, plant and animal matter,

timber, hydrogen gas and alcohol fuels. Hydroelectric power uses the gravitational force of

water to rotate turbines at the bottom of a damn turning potential energy into kinetic energy, thus

producing electricity. Hydroelectricity accounts for roughly 20 per cent of world electricity

production in 200637

and also accounts for over 80 per cent of electricity derived from renewable

energy sources.x

Wind energy involves the rotation of eolic turbines through the passing of wind. Wind energy is

a very promising technology, as extensive research and development (R&D) has lowered its

costs almost to a point where it can compete with conventional energy sources. Being the basis

for all energy forms, it is somewhat bizarre that we have not been able to effusively harness

solar energy. An interesting fact is that the sunlight that hits Earth‟s surface could represent up

to 10,000 times the amount of energy consumed by humans.xi Solar energy has taken many

decades to develop and is still relatively far from reaching „grid-parity‟xii

. Nonetheless, solar

energy is gaining momentum mainly through mass production and higher efficiencies. Twoxiii

main technologies exist: photovoltaic panels (PV) – which directly convert sunlight into energy –

ix Nuclear energy represented about 2% of global energy production x It is important to understand that electricity production is only a part of total energy production. Biomass is

directly converted into heat without passing through an electrical state. Nevertheless, new technologies have enabled the production of electricity through the incineration of biomass, creating heat that produces vapor, which in turn causes turbines to rotate (electricity production is based on the rotation of turbines through the conversion of potential energy into kinetic energy, and using the kinetic energy to produce mechanical energy) xi According to ‘SolarCentury’, Solar PV has the potential of generating up to 10,000 times the amount of energy

humans directly use on Earth. This claim might pose as highly exaggerated, but it still implies that the potential energy we could convert from sunlight is massive. xii

Grid-parity refers to the point where electricity derived from renewable energies is equal to the cost of traditional electricity extracted from the grid. xiii

Third-generation technologies have produced interesting advances. Within the Solar Energy we find CSP or CST – “Concentrated solar power (CSP) systems, also known as concentrated solar thermal (CST) systems, are systems that use mirrors or lenses to concentrate a large area of sunlight, or solar thermal energy, onto a small area.” - http://en.wikipedia.org/wiki/Concentrated_solar_power

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and photo thermal – for water heating, cooking. Photo thermal can produce very high

temperatures to produce pressured-steam-driven electric generators. Due to its relatively simple

installation requirements and its off-grid operability, solar energy is gaining much impetus in

projects for remote under-developed and developing areas.

Geothermal energy uses the thermal energy that is stored within the planet‟s crust. The manner

of employing its inherent energy is by drilling holes in the Earth‟s surface – usually near tectonic

areas – and using that heat to convert it into energy. Lastly, one of the more debated technologies

is tidal or water energy. The principle is employing the kinetic force exerted by the movement

of water to produce the already mentioned effect of propelling a turbine.

A final note on biofuels to conclude this section; liquid fuels such as, ethanol and biodiesel are

usually analyzed under a different scope that the other sources of renewable energy. This is

mainly due to the fact that it is still heavily debated whether they have an overall positive impact

in our transition towards a clean and sustainable landscape as they compete with food crops

(which might fuel a „food crisis‟) and also further incentive the depletion of natural areas such as

the jungles in Indonesia and the Brazilian Amazon. However, it is worth mentioning that there is

a gigantic window of opportunity for the development of algae-derived fuels to replace

hydrocarbons and crop-usage. Algaculturexiv

has two great advantages: it has the capacity of

replenishing at a very fast pace and it can use land that is not suitable for food crops.

Another highly positive aspect of renewable energies is there is much room for improvement and

further reductions in costs. The positive effects of economies of scale and technological

innovations have greatly improved their yields and reduced their production and operational

costs. On the other hand, non-renewable energy sources are more prone to fluctuations in prices

due to their limited availability and exposure to politically unstable countries/regions, such as:

Venezuela, Libya, and The Middle East. Furthermore, the potential technological improvements

for traditional energy sourcesxv

are rather marginal, as they have already been through extensive

periods of industrial and commercial applications. In “Our Choice: A Plan to Solve the Climate

Crisis” (2009), Al Gore points out three main factors why renewable energies can further

improve their performance and decrease their costs:

xiv Algae farming xv

For the purpose of this paper, we will sometimes refer to fossil-fuels or hydrocarbon resources as “traditional energy sources.”

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1. The sources that fuel renewable energy technologies are limitless and free – air, water

flow, wind, sunlight, etc. – therefore, once the infrastructure is in place the relative

operational costs are quite low.

2. To reiterate on what has been said already, fossil fuels are at a stage of maturity that

somewhat hinders the possibility of potential improvements. In contrast, renewable

energies have vast potential room for advancement.

3. Clear political, business and civil commitments to clean energies are allowing production

volumes to increase rapidly through incentives for Research and Development (R&D)

and also through concise policies and goals.38

The latest United Nations Report on Climate Change (May 2011) from the „Working Group III:

Mitigation on Climate Change‟ stipulated some very promising conclusions.39

The Report states

that some technologies have already reached an efficiency level that allows them to contend non-

renewable energy sources in isolation of policies and subsidies. Furthermore, it points out that

renewable energies are part of a broad portfolio of climate mitigation efforts and that dedicated

national policies are imperative for rapid deployment of technologies. According to an

Australian newspaper – The Sydney Morning Herald - a leaked draft from the report estimates

that up to 80 per cent of the world energy supply can be fulfilled with alternative energies by

2050.40

More importantly, it clearly states the potential of renewables to provide the much

needed power for development to poor regions and also enhance energy security for countries

that heavily depend on foreign oil from unstable regions of the world, with the aim of reaching

energy independence and curbing carbon dioxide (CO₂) emissions into the atmosphere.

Even though it is not the main objective of the thesis to provide a deep examination of the pro‟s

and con‟s of renewable energies and the differences among them, it is nonetheless necessary to

understand the dissident perspectives. It is worth pointing out again that this approach is in

accordance with the implementation of the business model we are creating, which will state

inclusion of different opinions regarding all matters as a guiding principle.

A first downside of renewable energies is that they are mainly targeted at producing electricity,

which does not even fuel half of our global energy consumption.xvi

The problem with electricity

is that the current technologies for energy storage in its electrical state are not cost-efficient.xvii

However, there is a good prospect for further advances in technologies for energy storage

transformed into different forms of hydrogen (as gas or metal hybrids). Hydrogen has the great

advantage of producing water (hydro) as its residual matter. Furthermore, intermittence of

xvi

For example, transportation industry primarily depends on petroleum based liquid fuels such as diesel and gasoline. xvii Nonetheless, there are other ways of storing the energy. For example, ‘pumped-storage’ hydroelectricity stores energy in the form of elevated water. When demand is low, the electricity generated from the turbines is used to pump water into reservoirs or storage facilities and release it in periods of ‘peak-demand’.

- 26 -

sunlight and wind currents does not provide a proper „baseload‟ capacity.xviii

However, wind and

solar energy can be compatible, as during the low-sunlight seasons (winter and autumn), the

wind blows stronger. Conversely, during the opposite seasons, sunlight shines during longer

periods and at a higher intensity. One additional disadvantage for renewable energies is the

amount of land needed for producing one unit of energy (possibly except for algae derived fuel).

This means that large-scale projects tend to be located in distant places – due to cheaper land

availability – and therefore require expensive transmission lines (which have the problem of

losing a percentage of electricity in proportion to the distance it must carry it).

A final critique to the renewable energies sector is their dependence on public policy in the form

of incentives, translating to subsidies which are derived from fiscal income. However, this

assessment looses validity when you contemplate two points: firstly, the UN Report states that

many of the technologies are at a stage that allows them to compete with traditional hydrocarbon

resources. Additionally, it clarifies that room for improvement is immeasurable. Secondly, the

non-renewable energies industry (nuclear, petroleum, coal, and gas) has been and continues to be

subsidized.41

Renewable Energy and Sustainable Development

Renewable energies are not only important for their potential in assisting our energy needs that

feed our industrial model in its thirst for growth, but also in providing a new energy paradigm

which does not involve the depletion of natural resources and the damage of the environment. In

conjunction, clean energy sources have the capacity of meeting the needs of almost 2 billion

people that have little to no access to electricity.42

For example, solar panels can provide

energy to distant rural areas by leapfrogging the traditional centralized grid systems that

many times are not even connected to these remote areas. According to the UN (2005)

Report: The Millennium Development Goals Report, renewable energy has the capability of

assisting in achieving some of the eight chartered goals in the report:

1. Eradicate Extreme Poverty and Hunger

2. Achieve Universal Primary Education

3. Promote Gender Equality and Empower Women

xviii

“Baseload demand is the minimum amount of power that a utility or distribution company must make available to its customers, or the amount of power required to meet minimum demands based on reasonable expectations of customer requirements.” (Energy Dictionary) - http://www.energyvortex.com/energydictionary/baseload__base_load__baseload_demand.html

- 27 -

4. Reduce Child Mortality

5. Improve Maternal Health

6. Combat HIV/AIDS, Malaria and other Diseases

7. Ensure Environmental Sustainability

8. Develop a Global Partnership for Development

Even though some of these may seem completely unrelated to renewable energy, they are all

intertwined and mutually enhancing. For example, by providing renewable energy in the form of

electricity to low-income households, women can complete house chores more efficiently and

have more time to take better care of their children and also engage in a commercial activity,

thus improving the household income, which can be translated into better nutrition and

healthcare.xix

Moreover, the availability of electricity can provide house illumination – basic

lighting for houses – that enables people to study during the night and work during the day,

which provides opportunities for further improvements in human capital and personal and

professional development.43

Another great advantage of renewable energy sources is their capacity to create or boost

economic activity. As we saw in the previous chapters, energy has the capacity to increase

productivity and yields many times over. For example, by providing electricity to these remote

areas, crop yields can increase substantially, improving the prospect for the entire community

through better salaries, increased commerce, attraction of investment, and development of

parallel businesses.xx

To reiterate on what has been already discussed in previous sections, the replacement of fossil-

fuels with clean energy sources helps tackle some of the myriad of problems regarding climate

change. Renewable energy sources have incomparably lower GHG emissions during their life

cycles, while at the same time producing the same intended benefit: energy provision. The

deployment of renewable energy sources can provide additional sources of incomes to

developing nations by selling „carbon-credits‟ to other countries. A great advantage of these

„credits‟ is that they can be traded prior to the launch of a carbon-free project, thus providing part

of the needed capital to finance them. For example, a project for converting municipal solid

waste (MSW) into energy (be it electricity or eco-diesel) is eligible for trading these credits

xix

It is a harsh reality that in most of the developing and under-developed world, the women are in charge of the household chores such as cleaning, cooking, and taking care of the children. Therefore, there is no intention of gender-discriminating when assessing the situation from this angle. Mohammed Yunus’ micro-credit model (Grameen Bank) is mostly based on providing financing to women instead of men. xx Increased incomes translate into improvement in standards of living

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through a broker that discounts the expected „credits‟ produced during the lifespan of project and

sells through the ETS.xxi

Alternative or renewable energies also have the faculty of making electricity generation less

reliant on natural gas or coal, which assists any community or country in securing its energy

needs through the local production of energy and avoiding dependence of foreign natural

resources and its inherent volatility.44

Up to this point, many people have proposed nuclear power as a non-renewable, but relatively

clean energy source. However, the recent disasters at the nuclear facilities in Fukushima, Japan,

made clear the extremely harmful potential that a „nuclear meltdown‟xxii

poses. The world was

quickly reminded of the catastrophic effects of the „Chernobyl Disaster‟ in the mid 1980‟s,

where according to a Russian publication almost one million excess deaths resulted from

radioactive contamination and clean-up efforts have taken up billions of dollars, as well as

years.45

Even so, vested interests and political commitments will continue to leave the window

open for nuclear energy.

Many countries, including Germany, were quick to reaffirm their commitment to renewable

energies and to plan a thorough re-examination of existing nuclear power to determine effective

dates when nuclear facilities are to be retired. According to the BBC, “Germany's coalition

government has announced a reversal of policy that will see all the country's nuclear power

plants phased out by 2022.”46

In addition to this, uranium and plutonium – key ingredients in

nuclear power – pose an additional threat as they can potentially be enriched to levels where they

can produce weapons of mass destruction. For example, most of the global community is highly

concerned with Iran‟s true intentions behind the development of nuclear power.47

Finally, the enhancement of a country‟s reputation can be greatly derived through commitments

to clean energy. Not only companies, but also governments can attract foreign investments and

improve development prospects. According to the UN Report, renewable energy is considered

one of the more future-oriented and innovative sectors and it can provide a good basis for

business opportunities. Countries can easily win trust from international companies and

organizations through the implementation of solid, long-term oriented, public policies that create

a stable panorama for investment.

xxi Emissions Trading Scheme xxii

Nuclear meltdown is an informal term for a severe nuclear reactor accident that results in core damage from overheating.

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To conclude this part of the essay, I would like to indicate that all these factors point in one

direction: the formation of a “perfect storm”xxiii

, of sorts, through concrete political support,

hydrocarbon resources instability, and broad „green‟ awareness. According to the UN

Environment Programme48

, “climate change concerns, coupled with high oil prices, peak oil, and

increasing government support, are driving increasing renewable energy legislation, incentives

and commercialization.” Nonetheless, further expansion of clean energies is not relentless and

still has to overcome many obstacles displayed in vested interests, improper public policies and

incentive structures that harness technological developments and improvements, and subsidies to

traditional energy sources.49

xxiii

“A perfect storm is an expression that describes an event where a rare combination of circumstances will affect a situation drastically.” - Andrew Stern (2008). "Wordsmiths, avoid these words." Reuters.

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Review of the Literature and Theoretical Framework

The review of the literature will allow us to formulate a proper theoretical framework that will

serve as the basis for the business model that we aim to construct, which optimistically will serve

as a means of achieving sustainable development in the Andean region through the

implementation of small-scale renewable energy technologies. This section will provide an

examination of seven academic papers and business reviews that provide insight, research and

implications of the topics related to sustainability and environmentalism from the business and

economic perspectives.

Creating a Shared Value (Porter and Kramer; 2011)50

In “Creating a Shared Value” (CSV hereafter), Porter and Kramer describe a situation in which

capitalism is being heavily attacked by society and by politicians due to its inefficiency in

translating concrete benefits to society; benefits such as, health and wellbeing. This conflict is

causing politicians to hinder further economic growth efforts through the implementation of

inadequate policies and regulations. These policies have been institutionalized through the

misconception of a supposed trade-off between business efficiency and social prosperity.

Traditional business practices are seen as misaligned with social goals and this has caused the

legitimacy of the private enterprise to descend to unprecedented levels in contemporary times.

Two main problems arise: the first is that political leaders understand that society depends

heavily on the prosperity of business; and secondly, “capitalism is an unparalleled vehicle for

meeting human needs, improving efficiency, creating jobs, and building wealth.”

All being said, the authors suggest that capitalism has to reinvent itself and redefine itself around

the concept of “Creating Shared Value” – a concept that will be further explored in the

following paragraphs. Porter and Kramer argue that through this new configuration of capitalism

a wave of innovation and growth will be unleashed and that the true potential of capitalism will

be exploited, thus enabling it to flourish while simultaneously meeting societal needs without

further deteriorating the environment.

Strategic analysis and academic theory have contributed in the molding of economic models in

the past century; the concern is that the actual extent of creating economic value has diminished,

thus impeding businesses from harnessing their full potential, and with this, the possibility of

tackling widespread social challenges. The article explains that many companies are

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profiting at the expense of society by boosting their revenues through „demand-push‟ and

marketing-amplified approaches that shorten product life cycles (PLC) and stimulate

consumerism and materialism without considering its drawbacks. Therefore, companies are

inflating their short-term profits without seeking ways that truly benefit society. The rise of

environmental concerns and sustainable development challenges led companies to start tackling

reputational problems through the „Corporate Social Responsibility‟ (CSR)xxiv

lens. Even though

this has been a good preliminary initiative for businesses to revise harming corporate practices, it

has placed societal concerns as peripheral issues. The CSV approach explains that social and

ecological concerns should be at the core of strategic thinking and incorporated into the

firm‟s operating guidelines.

The authors propose that the solution lies in the principle of shared value. This novel

methodology implies that companies should create economic value while addressing social

challenges and needs. CSV does not entail charity work or the founding of NGO‟sxxv

to solve

these needs; it suggests a major redirection in the way companies should achieve success.

Companies need to understand that issues such as, nutrition, education, health, environmental

destruction, and more recently, the mortgage crisis, are highly related to its activities and that

they affect its own long-term viability.

“Shared Value can be defined as policies and operating practices that enhance the

competitiveness of a company while simultaneously advancing the economic and social

conditions in the communities in which it operates. It focuses on identifying and expanding the

connections between societal and economic progress.”

The article backs its findings through examples of companies as, General Electric, IBM, Intel,

Google, Johnson and Johnson, Nestle, Wal-Mart, and Unilever, which have begun to redesign

their business models by redefining the interrelations that mutually enhance social and corporate

performance. We will further explore some of these examples in the „Business Cases‟ section of

this essay.

Porter and Kramer explain that classical economic theory supposes that the mere act of

producing profits through self-interest will yield the most efficient economic combination and

xxiv

“CSR policy functions as a built-in, self-regulating mechanism whereby business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms.” - D Wood, 'Corporate Social Performance Revisited' (1991) 16(4) The Academy of Management Review (extracted from Wikipedia). See Annex 1 for a comparison chart between CSR and CSV. xxv NGOs are defined by the World Bank as "private organizations that pursue activities to relieve suffering, promote the interests of the poor, protect the environment, provide basic social services, or undertake community development" Operational Directive 14.70 - Duke University Libraries. (extracted from Wikipedia)

- 32 -

that general welfare will increase correspondingly. Nonetheless, decades of empirical analysis on

capitalism show that the State must institute policies that reallocate economical gains in the form

of public goods. CSV goes further along this path by pointing out that the concept of “sharing

value” does not imply the redistribution of private profits, but actually enlarging the total pool of

social and economic value. The authors are not proposing to eliminate capitalism and create a

new system of economic configuration. On the contrary, they simply demonstrate the

weaknesses in our current conception of capitalism by showing that this is the most efficient

model to produce economic and social welfare. However, companies need to expand its scope

and produce benefits for the entire society. The writers illustrate that working within the CSV

framework is fully aligned with the capitalist mindset in which seeking our best interests will

produce the best outcome and that these actually result in producing better tangible benefits for

society. The suggestion is to re-think the traditional business approach and understand that

“what‟s good for society is actually good for business” and not the other way around.

Companies have long-missed many opportunities to enhance their profits by actively lobbying

and avoiding policies instead of embracing these changes and regulations as opportunities to

challenge their business practices. Furthermore, social issues and internal inefficiencies translate

into costs for companies – for example: wasted resources, accidents, and need for further

employee training to counterbalance lack of prior education or coaching. As Schumpeter cleverly

pointed out, economic analysis should be performed in its dynamic context and not in a static

one. Companies shouldn‟t bluntly consider that remedial efforts will either reduce revenues or

increase costs, but should understand that through innovation, exploration of new markets and

increases in productivity they can offset some of the short-term expenses mentioned and improve

their own competitive position.

As managers have the bad habit of treating social concerns as peripheral, they have been blind to

spotting the inherent connections and mutually benefiting relationships between the social sphere

and the business world. This is greatly due to the fact that businesses have not used the same

approach towards the analysis of value as they have with their operations. Economic progress is

addressed using value principles which define it as „benefits minus costs‟. CSV proposes that

social and economic progress should be measured using the same metric. To aggravate the

situation even more, thinking in terms of value within the political and social spectrum is far

more uncommon. Porter and Kramer advocate that collaboration between firms and governments

and NGO‟s would highly rise if this simple concept is homogenized.

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Creating Shared Value in Practice

If companies begin to treat environmental issues as productivity drivers rather than obligations to

succumb to policies and outside pressure, important innovations will spur. Paradoxically, most

shared value practices have emerged from social entrepreneurs and companies with more limited

resources. A common trait is that these small firms have understood that “not all profit is equal”

(in direct reference to opportunistic, short-sighted profits). The authors propose three key ways

in which shared value opportunities can arise:

1. Reconceive products and markets

2. Redefine productivity in the value chain

3. Enable local cluster development

These three approaches form a virtuous cycle of shared value that acts as a catalyst by enabling

new opportunities through the improvement in value in each area. Based on the premise that the

objective of this paper is to stimulate progress in under-developed areas, we will focus mainly on

the third avenue for accomplishing shared value. The inception for this approach arises from a

deep revision of all societal needs and benefits, as well as harms that can be incarnated in the

firm‟s products and business model. Due to the dynamic aspect of this framework, new

opportunities will constantly appear as the prosperity of the market grows. Therefore, an open

perception and keen sensitivity through the constant exploration of evolving social needs will

allow companies to discover new opportunities to increase their market presence. This

reinforcing cycle will allow entrepreneurs to continuously open new markets and redefine their

growth potentials.

The idea that companies are autarchic and self-contained is incongruous. Nevertheless, if we take

the view of traditional economic theory to the extreme, we could say that this has led many

companies to believe that they can act in their own self-interest without considering exogenous

variables. Innovation and operational efficiency are both highly influenced by „clusters‟.xxvi

Clusters are enhanced by the presence of trade associations, educational institutions, public

policies, transparency, health systems, and infrastructure, among other factors. Firms should

recognize gaps and deficiencies in the systems and analyze which aspects affect its operability

the greatest and find innovative solutions to collaborate with local authorities and communities

to disentangle such constraints.

xxvi Clusters are “geographic concentrations of firms, related businesses, suppliers, service providers, and logistical infrastructure in a particular area – IT in Silicon Valley, flower cutting in Kenya, and diamond cutting in Surat, India.” – extracted from CSV (Porter and Kramer, 2011)

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CSV can be reflected when companies contribute in the improvement on local conditions that

actually enhance its own productivity. These initiatives will be much more effective than

traditional CSR programs that often try to target broad and unrelated issues without using a value

lens. If companies work together with local partners, they can enable transparent and efficient

markets that allow them to secure the provision of much needed resources for production and

position themselves better in relation to the competition. By collaborating in the improvement of

local conditions, companies can find ways to assist in the upgrading of products and would be

more willing to pay higher prices for better quality inputs. As societal needs progress and local

incomes increase, a self-reinforcing cycle of economic and social development becomes

empowered. Similar to the example of Henry Ford‟s „$5 per day‟, where he realized that he

could enlarge his own market by increasing people‟s incomes, the CSV approach takes this many

steps further.

Traditional procurement practices in the last few decades have striven to find the cheapest

suppliers and exert power to further lower costs. „Fair-trade‟ purchasing was conceived as an

innovative approach to CSR. However, this technique is a redistribution approach that does little

to enlarge the pie. In the „Business Cases‟ section we will examine how Nestlé/Nespresso

redesigned its procurement through a CSV scheme. It is worth pointing out that early studies on

cocoa farming in the African nation of Cote d‟Ivoire showed that the „fair-trade‟ approach can

increase farmer earnings by 10 – 20 per cent. On the other hand, a shared value approach can

actually increase farmer incomes by over 300 per cent! Through the provision of technology and

financing, as well as by assisting local producers in accessing inputs – i.e.: energy, machinery,

and fertilizers – firms can secure increasing volumes of higher quality products.

Porter and Kramer stress the importance of „Social Entrepreneurs‟ – category under which our

„Project‟ will probably be labeled – in their ability to scale up at a much faster pace than non-

profit organizations, as their social programs are usually incapable to continue operating or

expanding due to their inability to self-sustain. In addition to this, social entrepreneurs produce

new product concepts that tackle societal needs through the implementation of feasible business

models. Their advantage is represented in their capacity to analyze problems through a broad

perspective that is not subject to constricted corporate mentality. Through this, they can explore

new business opportunities in a more proactive manner, as well as change more agilely in an

ever-evolving context.

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Creating a shared value blurs the divisory line between the for-profit and the non-profit models.

A new species of hybrid business model appears and many of the issues shown in the diagram

below are central in the strategic objectives of the firm.

xxvii

Under-developed nations and developing nations with extensive rural areas have an

immeasurable space for progressing and advancing.xxviii

To construct a business model that

targets these areas one must first understand that majority of the needs that are common in the

developed world are far up the hierarchical pyramid of needs. These areas, or markets if you

will, still lack basics such as - proper housing, electricity, running water, balanced nutrition, and

primary or secondary education. Companies that target these basic needs as part of their business

proposal are in an optimal position to expand their offerings in parallel to the development of

their markets. As we saw, catering to these needs does not necessarily entail a trade-off. CSV can

unravel the “next wave of business growth and innovation” through the reconciliation societal

and enterprise success. “CSV represents a broader conception of Adam Smith‟s invisible hand; it

is not philanthropy but self-interested behavior to create economic value by creating societal

value.”

Green and Competitive: Ending the Stalemate (Porter and van der Linde; 1995)

xxvii

Extracted from CSV (Porter and Kramer, 2011) xxviii In many parts of this essay I will avoid using the word ‘growth’ due to its deep affinity to classic capitalism.

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The academic paper presented in this section clears-up a misconception in the idea that there is a

fixed and inherent trade-off between economy and ecology; where increased social

(environmental in this case) benefits necessarily reduce a firm‟s profits (i.e.: prevention and

clean-up costs). It is important to place this essay in its context, as it was written in 1995 when

public policy regarding the environment was not as advanced as today. Nonetheless, this paper

poses an interesting framework with prescriptions that will suit the purpose of the essay.

Politicians have pursued stringent policies that businesses have perceived as threats that will

necessarily increases costs and erode competitiveness. This situation has resulted in a stalemate.

Through theoretical analysis and empirical research, the authors argue that “tougher

environmental standards actually can enhance competitiveness by pushing companies to use

resources more productively, and managers must start to recognize environmental improvement

as an economic and competitive opportunity, not as an annoying cost or an inevitable threat.”

By incorporating the environment into strategic and operational thinking, companies can

innovate to increase resource productivity. Properly designed public policies have the possibility

of inducing creative thinking that can result in innovations that improve resource efficiencies

reflected in - better usage of raw materials, labor capacity, and power management. The

enhanced productivity should easily offset the increased direct costs of compliance to

environmental standards.

Once again we see that business managers, environmentalist, and politicians analyze economic

impacts of environmental regulation through a myopic and static lens, instead of embracing the

opportunities that enhanced operational efficiencies can produce in their dynamic context.

If we accept the premise that pollution is equal to inefficiency, then we can consider that

pollution can be seen as economic waste. Regulators and business leaders have the bad habit of

focusing on the short-term effects that environmental remediation efforts have on their balance

sheets instead of considering the opportunity costs of pollution. These costs refer to inefficient

use of resources, reduced quality of products, and wasted efforts. Customers usually bear the

extra costs when buying products that waste energy or contaminate the environment.

Recalling the „Quality revolution‟ in the 1980‟s, we can hardly question today the idea that

innovations can simultaneously improve the quality of products while decreasing the production

costs. Porter and van der Linde propose that the new view on pollution as a result of resource

inefficiency is much related to the previous idea. Nevertheless, before the „Quality movement‟,

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business executives believed that this was a situation of fixed trade-off. The reasoning for

sustainability follows the same guidelines:xxix

“Use inputs more efficiently

Eliminate the need for hazardous, hard-to-handle materials

Eliminate unneeded activities”

The authors illustrate that a new breed of environmentalists – “The New Environmentalists”xxx

–

have the capability of working dexterously with businesses by promoting the best practices and

acting as educators. Rather than spending so much time and resources on litigations and „anti-

business campaigns‟, these groups could accomplish much more by cooperating with business

leaders to further investigate environmental issues and spread useful information to consumers

and companies.

Aside from the debate regarding the accurate extent of the damage of the environment, from the

profit-maximizing agent point of view, there is no reason to operate under the current framework

where private costs are much in excess of what they could be. Business leaders should not waste

so many efforts through intense lobbying and expensive environmental lawyers in order to find

legal-loopholes. Instead, they should ask themselves – “what are we wasting and how can we

enhance customer value?” Possible explanations to this irrationality could be ignorance and

rigid mental frameworks.

Cradle to Cradle: Remaking the Way we Make Things (Braungart & McDonough; 2008)

“The way we raise our children would do more to change the world than empire-builders and

new industries.”

Braungart (a German chemist) and McDonough (an American architect) propose a radical

change in the linear – „cradle to grave‟ – industrial production system that put us in the very

delicate environmental situation we currently face. Cradle to Cradle (C2C hereinafter) takes the

basic operating principles from nature, in which waste equals food, and incorporates them into

an industrial system that functions in a cyclical manner. The book explains how vast amounts of

valuable materials end up in our heavily polluted landfills with little possibility of re-

employment. Traditional agricultural practices understood that they need to repay the fields in

xxix

Please see Annex 2 for the following table – “Environmental Improvement Can Benefit Resource Productivity” xxx Please see Annex 3 on an extract from the article regarding “The New Environmentalists”

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exchange for what it extracted. C2C puts forward the idea of translating the principle of “the law

of return” to our industrial and commercial practices. For example, by using vegetable-derived

instead of plastic-derived bags we are providing nutrients for future crops once these are

disposed.

The traditional linear exploitation of natural resources that fuels our economic model is very

much like depending solely on your savings for your daily expenses – it is simply not viable.

This model is affecting climate changes and environmental degradation and we are experiencing

a situation of more drastic weather variability – hotter summers, colder winters and stronger

storms.

Our planet is mainly composed of two discrete metabolisms: the biological and the technical.

The first one refers to nature‟s cycles. The latter alludes to the technosphere; these are the cycles

within the industrial system. The technical metabolism depends on the biosphere for extracting is

technical materials (resources). The authors‟ argument is that through a reconfiguration of the

design in the industrial cycle, goods manufactured by industries can safely feed both

metabolisms, thus providing proper nutrition for their perpetuation.

Through reconnection with all the natural cycles that harmoniously function under the sun, we

can reorganize our economic systems by combining ancient practices with the latest technologies

to produce environmentally-friendly designs that yield better outputs for everyone (the same

principle proposed by the CSV view in the previous section, where it is not a matter of

redistribution, but a matter of enlarging the pie). The following diagram proposes a balancing of

the three main components that co-exist in this planet:

As Albert Einstein cleverly pointed out, "the definition of insanity is doing the same thing over

and over again and expecting different results.” The C2C approach exemplifies this statement

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by showing that even though our instincts would tell us that „eco-efficiency‟ is good, it does

nothing more than simply curbing our speed of ecological decay, as it belongs to the same

system that led us to this complicated situation. “Efficient destruction is harder to detect and

thus harder to stop. Efficiency is a valuable tool when conceived as a transitional strategy to

help the current system slow down and turn around.” Braungart and McDonough assimilate

their C2C approach to a „Community of Ants‟:

“Safely and effectively handle their own material wastes and those of other species;

Grow and harvest their own food while nurturing the ecosystem of which they are a part

of;

Construct houses, farms, dumps, living quarters, and food-storage facilities from

materials that can be truly recycled;

Create disinfectants and medicines that are healthy, safe, and biodegradable;

Maintain soil health for the entire planet”

Probably the example of how ants engage their world cannot be directly translated into our

reality. However, it serves its purpose as to challenging people to question the current industrial

paradigm and seek innovative solutions that benefit all of society.

To close this chapter on the Cradle to Cradle methodology, the guiding principles for a proper

implementation of this system are presented:

1. “Signal your intention – Commit to a new paradigm, rather than to an incremental

improvement of the old;

2. Restore – strive for “good growth,” not just economic growth;

3. Be ready to innovate further – no matter how good your product is remember that

perfection of an existing product is not necessarily the best investment one can make;

4. Innovation requires noticing signals outside the company itself: signals in the

community, the environment, and the world at large. Be open to “feedforward,” not just

feedback;

5. Understand and prepare for the learning curve – the ability to adapt and innovate

requires a “loose fit” – room for growing in a new way;

6. Exert intergenerational responsibility – In 1789 Thomas Jefferson wrote a letter to James

Madison in which he argued that a federal bond should be repaid within one generation

of the debt. “The earth belongs… to the living… No man can by natural right oblige the

lands he occupied, or the persons who succeeded him in that occupation, to the payment

of debts contracted by him. For if he could, he might, during his own life, eat up the

usufruct of the lands for several generations to come, and then the lands would belong to

the dead, and not to the living.”

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Sustainability as the Key Driver of Innovation (Nidumolu, Prahalad, Rangaswami; 2009)

Much in line with the previous articles presented, the authors of this paper argument that there is

a general misconception regarding the idea that “making our operations sustainable and

developing green products places us at a disadvantage vis-á-vis rivals in developing countries

that don‟t face the same pressures.” Additionally, business executives keep treating issues of

sustainability and environmental decay as if they were exclusively jurisdiction of their CSRxxxi

departments.

The authors seem to think that voluntary actions to promote stronger regulations are not going to

be enough to make businesses „sustainable‟ (meaning environmentally and socially conscious in

this context). They also say that educating consumers so that they coerce companies to become

more sustainable is good, but may not be enough to fully solve the problem. Therefore,

companies need to re-think their approach towards sustainability and grasp the idea that

sustainability can drive innovations that will benefit them in the long-term.

Research from thirty large enterprises showed that sustainability initiatives are a mother lode of

technological and organizational innovations, and that they increase the financial returns, as well

as reputation, which also contributes to the viability of the business. Here are some of the ways

in which these initiatives can be translated into tangible results. In first place, tackling

sustainability challenges can lead to innovations that can decrease costs and boost revenues. By

promoting an environmentally-friendly attitude, companies optimize their inputs, which in turn

decreases costs. Accordingly, this raises revenues due to the commercialization of better quality

products that should result from this process. Likewise, new products and business divisions can

offshoot from this creative process. The authors go as far as stating that “in the future, only

companies that make sustainability a goal will achieve competitive advantages.” This will result

in a profound re-shaping of business models, technologies, processes, and products. If companies

treat sustainability as a main component of strategic planning, they will be able to enjoy early-

mover advantages that can translate into competencies that will further raise barriers of entry.

Considering that ecological issues are here to stay, these competitive advantages will permit

companies to be at the forefront of sustainability strategies and better positioned than the

competition.

xxxi Corporate Social Responsibility

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To accomplish a business framework within a sustainability approach, there are five stagesxxxii

that will assist companies in reaching this perspective:

1. “View Compliance as an Opportunity

2. Make Value Chains Sustainable

3. Design Sustainable Products and Services

4. Develop New Business Models

5. Create „Next-Practice‟ Platforms”

The first stage proposes that companies view environmental standards and public reforms as

opportunities to gain first-mover advantages that might foster innovation. By meeting new

norms, companies have time to experiment with new technologies and materials. For example,

Hewlett-Packard (HP) realized that lead was a toxic material and that eventually it would be

banned. Therefore, it started eliminating its usage years before it became compulsory. This

situation allowed HP to be ahead of competition and promoting new standards to the industry

through encouraging suppliers to abide to their requirements. The indicated also enabled HP to

enjoy great relations with politicians, which empowered them to be part of commissions for

creating future environmental regulations in the European Union. Firms in the front line of

regulations can more easily identify new business opportunities.

The second stage talks about making value chains more sustainable and training suppliers and

local providers to become more environmentally-aware. This can improve the image of the

company through enhanced reputation and also reduce procurement costs.

The next step examines how to re-design products and services to make them sustainable. If

companies can understand the public‟s concerns, they can use them to examine the „product life

cycles‟ and learn new ways to merge marketing knowledge to improve their value chains.

Procter and Gamble (P&G) and Clorox have been at the vanguard of innovation regarding the

use of eco-friendly products for households. Even though the public relations (PR) benefits have

been immense, the competencies they have developed through these processes will surely help

them dominate tomorrow‟s markets.

The fourth stage describes the situation where companies develop new business models to

nourish their sustainability strategies. Sustainability is much more than simply polishing-up

the „customer value proposition‟. In order to develop new business models, companies have to

challenge their operational practices. Companies must act in a more entrepreneurial manner to

xxxii See Annex 4 for the original table

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identify new ways of delivering value to customers. Firms that manage to incorporate these

principles can use their experience to achieve profound innovation within this framework

(sustainability), where the positive side-effects of their actions result in exponential gains that

trickle their way to broader markets.

The final stage implies the creation of „next-practice‟ platforms that can create radical

innovations that alter the market conditions in favor of the daring companies. For example,

ideas such as, developing waterless detergents, breeding rice that grows without water, or using

biodegradable packaging that helps seed new plants and trees?, should be part of the creative

brainstorming that should yield in new paradigms.

The transition to a low-carbon economy requires much leadership and talent. The current

economical system has exerted too much pressure on our natural habitat, while only tending to

the needs of about a quarter of its continuously growing population. With the advent of emerging

economies and their populations into the „economic structure‟, we will need to find creative

ways of co-existing with the ecosystem.

A Natural-Resource-Based View of the Firm (Hart; 1995)

The first two paragraphs will serve the purpose of introducing the reader into the theory of the

„Resource-based-view of the Firm‟ (RBV) and allow him/her to understand the importance of

developing strong internal competencies. Ergo, we move to the main topic of this paper which

takes the view of the RBV, but incorporates a new dimension – „nature‟ to the theory.

Management theory explains that „competitive advantages‟ enable companies to endure in time.

The „Resource-based‟ theory proposes that the essential elements for „sustainable competitive

advantages‟ derive from „costly-to-copy‟ firm capabilities and resources (Barney, 1991;

Wernerfelt, 1994). The diagram below explains the interrelations between resources, firm

capabilities, and competitive advantages:

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xxxiii

Decisions regarding the time of entry in a market and the intensity of commitment with which a

company enters a market are essential to securing the proper competitive advantages

(Ghemawat, 1986; Lieberman & Montgomery, 1988). As we reviewed previously, „first-mover

advantage‟ can assist in raising the barriers to entry, through the implementation of standards for

the industry or privileged access to supplies, clients, among other factors. Through a preemptive

strategy or „preemptive commitment‟, a firm can increase its chances in dominating a specific

market or niche within the market (Porter, 1980). Additionally, employees, as well as physical,

financial, and intangible assets - which constitute the resources of a firm - should facilitate

efforts to raise the „barriers to imitation‟ (Rumelt, 1984). Specific combinations of strategically

important resources also contribute in the viability of a company in the long-term (Barney,

1991; Reed & DeFillippi, 1990).

Hart points out that circumstances such as an exclusivity deal with suppliers or brand image and

reputation can also contribute in this task. Ultimately, and possibly more importantly, these

resources should be hard to clone due to their „tacit‟ (casually ambiguous) or „socially complex‟

character. Tacit refers to resources that are “skill-based and people intensive,” and are

accumulated through a process of „learning-by-doing‟ which camouflages them in the eyes of

competition (Itami, 1987; Polanyi, 1962). On the other hand, socially complex resources are

xxxiii Extracted from the A Natural-Resource-Based View of the Firm (Hart, Stuart), 1995.

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entangled within the human capital of a firm in such a way that they cannot be extracted from the

specific firm nor easily replicated in a different context (Barney, 1991; Reed & DeFillippi,

1990).

Hart contends that the „Resource-based view of the Firm‟ (RBV) has missed a critical factor:

contemplating the natural environment limitations into the equation. The “Natural-Resource-

based view of the Firm‟ offers a conceptual framework through three interconnected strategies

that incorporate the environmental challenges into a firm‟s strategy. “Given the growing

magnitude of ecological problems, the omission of natural environment constraints has rendered

existing theory inadequate as a basis for identifying important emerging sources of competitive

advantage.” In accordance with this view, Hamel and Prahalad (1989 and 1994) stated the

significance of “competing for the future” as a disregarded aspect of competitive advantage. This

is much in line with the already mentioned Schumpeterian view of strategizing in a dynamic

context. If companies compete exclusively based on their current resource and competencies‟

configuration, they risk either being eventually imitated or becoming obsolete. Technological

discontinuities or exogenous changes can leave current competencies obsolete (Tushman &

Anderson, 1986). A situation may arise when core competencies turn into „core rigidities‟ which

impede a company in maintaining its competitive edge, and with it, its market share (Leonard-

Barton, 1992). All these points induce Hart to argument that the dimension of „sustainability‟ is

crucial and it must become an integral part of strategic analysis.

When the biophysical environment is at the core of strategic planning, firms are instigated to

innovate and to develop new capabilities through the incorporation and development of new

resources (not necessarily physical materials). Our current economic model will result in

irreversible damages to the earth‟s natural systems. Hart argues that this is “nothing less than a

paradigm shift for strategic management.” The sources of future competitive advantages will

be based increasingly in firm‟s capacity to minimize waste, create eco-friendly products,

and collaborate technologically with emerging markets (Gladwin, 1992; Hart 1994;

Schmidheiny, 1992).

The new view of a firm‟s resources offered by Hart shows the following three interdependent

strategies:

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Based on the focus of this thesis, we will anchor on the third strategy: „Sustainable

Development‟. This strategy also commands that important efforts be made to lessen the

negative externalities that economic activity in the “North” have caused and continue on causing

in the “South.”xxxiv

Despite holding less than 20 per cent of the world‟s population, the „North‟

accounts for over 80 per cent of economic activity (Schmidheiny, 1992). In the time this paper

was written, most of the environmental concerns were focused primarily in these wealthy

countries. Even though this paper was written before “Creating Shared Value” by Porter and

Kramer, it already proposed that the „key resource‟ to achieving a „competitive advantage‟ for

„future position‟ is precisely „shared vision‟.

However, the „World Commission on Environment and Development‟ wrote an extensive report

– labeled “The Brundtland Report” – in 1987 showing very strong association between problems

such as, deforestation, desertification, loss of biodiversity, and social-political disintegration,

and issues such as poverty, population growth, the cycle of debt, and resource depletion in the

developing world (Ehrlich & Ehrlich, 1991; Homer-Dixon et al. 1993; Kaplan, 1994). Aside

from the clear environmental and social issues - which should concern companies - they have a

direct impact on the costs of raw materials.

To conclude, a list of propositions that fit the intended business model is presented:

Proposition 2b: Firms that adopt product-stewardship strategies will evidence inclusion

of external stakeholders in product-development and planning processes.

Proposition 2c: Over time, a product-stewardship strategy will extend beyond the

preemption of firm-specific resources and use of LCAxxxv

to become a stakeholder-

oriented (legitimacy-based) process.

xxxiv

Extracted The North-South Divide is a socio-economic and political division that exists between the wealthy developed countries, known collectively as "the North,” and the poorer developing countries (least developed countries), or "the South." - (extracted from Wikipedia) xxxv

LCA – Life Cycle Analysis; it implies the revision of the entire life-cycle of a product, from raw material to final disposition.

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Proposition 3a: Firms that have a demonstrated capability in establishing shared vision

rare skills) will be able to accumulate the resources necessary for sustainable

development more quickly than firms without such prior capability.

Proposition 3c: Over time, a sustainable-development strategy will extend beyond the

firm to include collaboration among the public and private organizations needed to bring

about substantial technological change.

The Big Idea: The Sustainability Imperative (Lubin and Esty; 2010)

“Most executives know that how they respond to the challenge of sustainability will profoundly

affect the competitiveness – and perhaps even the survival – of their organizations.”

The present academic article portrays „sustainability‟ as an emerging “business megatrend.”

Research conducted by Lubin and Esty reveals that the forces that have produced radical shocks

in the competitive arena have been based on the so called „business megatrends‟. As exposed in

the book by John Naisbitt in 1982, “Megatrends: Ten New Directions Transforming Our Lives,”

megatrends – such as the 1980‟s Quality revolution, the rise of the Information Society,

Globalization of the economic system, and the shift from hierarchical configurations to network-

based work relations – have produced radical social and economic changes (Naisbitt, 1982).

Sustainability belongs to this market-shifting trend based on the premise that in the past

several years, issues concerning the environment have increasingly affected and influenced

the capacity of firms to deliver value to their markets. Additionally companies have been

undergoing intense pressures from both shareholders and stakeholders. The fact that our supply

chains are globally intertwined has led to a situation where ecological challenges have the power

to directly reflect on balance sheets (i.e.: increases in costs, aggravated liabilities, and decreases

in share price). All this points in one direction: “managers can no longer afford to ignore

sustainability as a central factor in their companies‟ long-term competitiveness.”

Lubin and Esty propose that these megatrends share common traits that make them, up to a great

extent, foreseeable. Megatrends require that companies adapt and innovate to avoid being

conquered by competition. The following is a list of what were the four principles of value

creation of the Quality and IT megatrends:

1. “Focus on reducing cost, risks, and waste and deliver proof-of-value;

2. Redesign selected products, processes, or business functions to optimize their

performance;

3. Drive revenue growth by integrating innovative approaches into core strategies;

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4. Differentiate value proposition through new business models that use these innovations

to enhance corporate culture, brand leadership and other intangibles to secure durable

competitive advantage.”

During both of these megatrends, agnostics believed that firms were “flushing money down the

drain.” In reality, quite the opposite resulted from these changes in the course of business

practices and the main lesson is that firms seeking advantages through „sustainability‟ can tackle

two main issues at the same time:

1. “Formulating a vision for value creation and executing on it – in other words – they must

re-think what they do in order to capture this evolving source of value

2. They must recast how they operate, expanding their capacity to execute with new

management structures, methods, executive roles, and processes tailored to

sustainability‟s demands.”

Simply for the purpose of bringing back into context the core theme of this essay – contributing

to the sustainable development of rural areas in the Andean region through the

implementation of renewable energy technologies under a „shared value‟ approach – the

idea is that the business model we aim to construct will create a positive reinforcing cycle of

development. The first stage of the project plans a deployment of renewable energy technologies

to cover the basic need of electricity and power. The second and third stage of the business

model envisions a consulting business for micro-producers that assists them in improving the

quality of their products as well as increasing their yields.

Based on the premise that lack of capital is one of the main issues in these rural and un-attended

markets, we expect to set-up some kind of commodity trading division that can allow us to

receive part of the payments in crops (such as what Daewoo has done in Uzbekistan, Vietnam,

and Burma, which we will review in the „Business Case‟ section). I put the word „commodity‟ in

italics, because precisely we are trying to avoid that framing. To accomplish sustainable

development and create a „shared vision‟, we are actually aiming to de-commoditize products

and add value through different techniques seen in this literature review. Henceforth, the present

article we are reviewing shows not only why the essay and intended business model is important,

but also shows how it can deal with the ever-more-important issues of sustainability and

environmental decay.

To further support my paper, the authors portray the essentials to mobilizing an „eco-premium‟

strategy. It proposes that through this methodology, firm‟s can, in a first stage, reduce their costs

and increase their profits, and further on, increase their enterprise value through increasing the

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value of intangible assets – such as, brand and reputation. A second strategy delineates shifting

from commodity-based inputs to value-added inputs, thus increasing the overall quality of

products. In a recent analysis performed by Julie Fox Gorte (PhD.)xxxvi

on a Mercer research

survey (2009) “found that firms with better social and environmental performance tend to have

lower costs of capital due to lower risk. Researches show that green brands outperform their

competitors in valuation also.”51

Lubin and Esty suggest that as the IT and Quality megatrends did in their time, sustainability

will not only affect every business area, every internal function, every employee, but also

the entire strategic approach under which all firms operate. They assert that gaining or

keeping the lead in a megatrend is more than sharing a vision; it requires execution in five key

areas: leadership, methods, strategy, management, and reporting.

Global Sustainability and the Creative Destruction of Industries (Hart and Milstein; 1999)

This text proposes that managers need to distinguish among the three main markets that compose

the global economy when assessing new business opportunities – consumer, emerging, and

survival. The first one refers to the developed and established markets of the „North‟ (i.e.: EU,

USA, and Japan); the second one considers the developing countries – primarily their urban

areas; and the third market – and the one we will mainly focus on – refers to a socio-economic

configuration plagued with poverty and desperation, primarily based in urban slums, rural towns,

and shanty villages.

The importance of the surviving market is core to the topic of my paper, as it describes a

highly unattended market with vast unnoticed needs that holds over half of the human

population and offers a massive opportunity for companies that come in with long-term

value propositions. This group of people is mainly „subsistence-oriented‟ and caters their needs

directly from nature through no industrial processing.

Hart and Milstein suggest that the challenge of global sustainability fits perfectly with what

economist Joseph Schumpeter coined as „creative destruction‟ – proposing that capitalism is

driven by a dynamic context of disruptions and disequilibrium which radically change the

xxxvi

“Julie Fox Gorte is the Senior Vice President for Sustainable Investing at Pax World Management Corporation. She oversees environmental, social, and governance-related research on prospective and current investments as well as Pax’s shareholder advocacy and work on public policy advocacy.” - http://www.stopextinction.org/board/204-foxgorte.html

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economical configuration. This translates to the following: innovative business models and

value propositions that place sustainability at its core should be able to challenge

incumbent industries and profit from a new era of bonanza.

Much in line with the „Cradle to Cradle‟, approach, the authors of this academic paper argue that

mere „greening‟ is part of a traditional business practice of „continuous improvements‟.

However, if firms truly aim to unsettle the current economic paradigms, the aim should be for

„creative destruction‟ through the deployment of new technologies, exploration of new

markets, and reconfiguration of business models. „Incremental‟ (or continuous) improvements

tend to rationalize industries as we will see in the following example. Conversely,

„discontinuous‟ (or radical) destruction actually restructures industrial models.

For example, the „Responsible Care‟ program designed and engaged by the leaders of the

chemicals industry (mainly Dow Chemical and DuPont) managed to shift the public and media

perception from immoral polluters to responsible companies through their improved

environmental attitudes. Nevertheless, it does not solve the underlying and fundamental

problems related to the chemical industry – such as continued production of synthetic materials

that further damage the biosphere. Even though the action seems to be „responsible‟, it actually

frustrates the prospects of the industry to radically innovate because now the incumbent firms

are in a much better position in relation to the competitors which use their examples as a

benchmark.

If we follow the definition of sustainable development depicted in this paper – “the ability of the

current generation to meet its needs without compromising the ability of future generations to

meet theirs” – it fits the idea behind a situation of „creative destruction‟ due to its profound shift

in the system that has ruled our economic practices in the past many decades. The authors go as

far as suggesting that entrepreneurs and innovators who truly grasp the principles of

sustainable development have one of the “biggest business opportunities in the history of

commerce.”

The „surviving‟ economy encroaches over half of the world‟s population. Due to lack of

infrastructure and restrictive spending power, only a small number of companies have been

brave enough to invest in what they assume as speculative propositions with few concrete exit-

strategies. Yet, managers are overlooking a vastly unexploited market that represents a market

with vast latent, and potentially increasing, needs. This also implies that there is minimal

competition, which facilitates the operability and the financial prospects of firms.

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Given the fact that under the current scenario, where less than a quarter of the world‟s population

has ushered the planet to the brink of an „environmental meltdown‟, the products and

technologies that have enabled the developed (or consumer) economy to increase their standards

of living to unprecedented levels has rendered inadequate for meeting the current and future

needs of the rest of the population without fully depleting the natural environment and its

resources. If an environmental meltdown were to occur, our scenery would be nothing but “dead

rivers, mountains of garbage, noxious air, cesspools of toxic waste that jeopardize public health

and prospects for future development.”

In contrast to the „consumer‟ or „emerging‟ economies, the business approach to the survival

economy should be focused on “meeting basic needs.” As rural communities develop and

progress, there are incipient pressures for migration. Political, social and environmental issues

arise from this situation, and stabilization of this demographic configuration is essential to

sustainable development. This presents “an unprecedented business opportunity for visionary

firms.” On one side, companies can use this argument to garner political support for

development of projects that can avert mass migration to the densely populated urban centers.

On the other side, firms can further improve their prospects through the enabling of „clusters‟

which creates a virtuous cycle for development.

Hart and Milstein present a relevant case for the energy industry, evidencing the fact that though

solar panels may still be uncompetitive for the consumer economy, and even the emerging

economy, they present an interesting option for the survival markets as „grid-based systems‟ for

power generation are prohibitively costly. Transmission lines can cost anywhere in the ranges of

$20,000 to $40,000 per milexxxvii

to mount, thus making alternative sources of energy such as –

small hydropower, small-scale wind farms, and solar photovoltaics – an attractive option.

“Establishing a foothold in the survival economy allows companies to meet basic needs in

the short-run and grow as those needs mature.”

In the next chapter („Business Cases‟), we will see how the highly regarded Grameen Bank

started by offering micro-credit in Bangladesh and evolved its business to provide

telecommunications services, including, mobile, computer, and internet services.

The following table extracted from the article shows the “New Metrics” of under the

„sustainability‟ paradigm:

xxxvii One kilometer = 0.62 miles

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By assisting communities reach their basic needs, companies can contribute in developing a solid

economic foundation that allows this market to increase their living standards and achieve

prosperity. Firms that approach these markets with broad strategies that contemplate the

development of social infrastructure can position themselves to grow as the local economy

progresses and add new dimensions to their businesses. Plans for training, educating, and

improving the local conditions can improve the company‟s own financial results, as well as

increasing the pool of wealth for the entire community. This will enable a commanding firm to

introduce new services and products to cover the growing needs of a thriving community.

Business leaders and social entrepreneurs have an unprecedented opportunity to engage

sustainable development as the main driving force of the „creative destruction‟ process the

current century.

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Business Cases / Data

This section will provide a brief summary of a series of business cases and practical applications

that capture the ideas proposed in the „literature review‟ and well as from other sources.

Micro-Solar Power Implementation in Africa52

“The Rise of Renewable Energy” by Daniel Kammen (2006), shows how a poor country in

Africa – Kenya – can be the world leader in installed solar power systems per capita (though not

by energy-generating capacity). Over 30,000 tiny solar panels are commercialized there on an

annual basis. The costs of installation of a mini solar panel are around $100 US Dollars and can

produce in the ranges from 12 to 30 watts. The electricity produced by these systems is usually

used to charge a car battery which then provides enough electricity to light a few fluorescent

lamps, a house appliance, or power a small television for several hours. Even though most of

these cheap solar panels use amorphous silicon as the base material for their cells instead of the

much more efficient crystalline cells, their prices are much more accessible. This is a solid

alternative for the one-third of the planet that has no access to electrical power. Further advances

in battery technologies and low-cost photovoltaics could accelerate this trend.

In line with this concept, a group of engineering students from the UK built a mini power

collection station in Uganda.53

Their project entailed building a small hut covered with solar

panels on its roof. They bought a few dozen car batteries to collect the energy generated from the

photovoltaic cells. Their business model works as following: customers - previously used to

walking as much as two hours to simply charge their mobile phones - rent the charged battery

packs and take them to power their homes or small businesses (i.e.: a mini convenience store or a

small restaurant). They showed an example of a woman who owned one of these small

restaurants in a village who more than doubled her revenue through the possibility of opening

when the sunlight was gone, as well as increasing her cooking-efficiency. This very small project

also enabled kids to continue studying without interfering with their daily chores or jobs, as the

electricity allowed them to study during the afternoon.

“How the Poor May Boost Clean Tech”54

This article was extracted from an online publication called “RenewableEnergy.com” and shows

a few examples of how companies can serve as incubators to create truly price-competitive

products that can drive technology costs down. For example, California-based Greenhouse

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Holdings builds eco-friendly infrastructure and has a profitable business in the USA. However,

the Founder and CEOxxxviii

said that under-developed countries provide a great opportunity due

to their lack of energy infrastructure. He points out that these markets can be quite interesting

niche due to the lack of competition. A report by “Clean Energy Group” proposed that poor areas

can teach companies to package a product around its core function and then translate them to

create products for the „developed world‟ using the same „low-cost‟ approach. General Electric

(GE) designed an ultrasound machine for rural areas where the local clinics had extremely

limited budgets. Later on, GE conveyed this cheaper alternative to the more developed markets.

A similar case occurred with Siemens India‟s NMR equipment.

Though it may seem counter-intuitive a priori, the circumstances are often more fit for scaling-up

innovative technologies in these areas than in more developed markets. Renewable energy

innovators that focus on under-developed markets are not competing against “cheap coal-fired

electricity,” but actually simply providing power where none exists and covering a basic need.

Professor Clayton Christensen from Harvard states the following, “in contrast to wealthy nations

where consumption of electricity and gasoline is ubiquitous, developing nations are an ideal

place to commercialize green technologies. In these countries, there is so much „non-

consumption‟ that clean-technologies need only be better than the alternative: nothing.”55

Astonfield

Astonfield is a renewable energy company focused on providing inexpensive energy solutions in

South Asia. Keeping sustainable development at the core of its strategy, the firm works with

local municipalities to address the challenges of energy through the implementation of clean-tech

solutions that can boost economic growth. The company does not work with proprietary

technology so it partners with top-tier suppliers.

Their strategy is based on three core elements: promoting sustainable development, economic

growth, and environmental sustainability. By working closely with local communities and

governments, Astonfield can envisage the needs of the people and improve the quality of lives of

the markets is powers. Lack of consistent and affordable energy supplies are a huge obstacle to

progress. Through the deployment of alternative energy solutions, Astonfield provides electricity

to villages that have in some cases never seen it. The company collaborates in the economic

growth of these rural areas through “educational opportunities, better healthcare, new local

xxxviii Chief Executive Officer

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entrepreneurship, and increased productivity of farms and small businesses.” Additionally, the

company promotes environmental sustainability by using biomass and municipal waste to

produce electricity, thus reducing the sizes of the heavily polluted landfills that plague poor rural

areas. As of 2009, the company had plans to invest $4 billion US Dollars in energy

investments.56

Creating Shared Value (CSV)

As we discussed in the previous chapter, the „pie-enlarging‟ approach of CSV has proved to have

some very good results in the practical world.

Urbi: “rent-to-own”

This article provides an example of a Mexican construction and real estate venture – Urbi –

which created an innovative approach to construction and commercialization. Their business

model launched a mortgage-financing plan labeled, “rent-to-own.” This is much in contrast to

the American banking industry‟s approach to housing which left an innumerous amount of

people on the streets through an „unsustainable financing‟ model. Urbi has built over a quarter

million homes in its 30 years in business, through its “unique and replicable business

processes.”xxxix

Water Health International: an innovative financing model

Another great example of a rapidly-expanding for-profit company is Water Health International.

This company uses a creative water purification method based on the use of ultraviolet rays

which “inactivates microorganisms through disruption of their DNA processes.” This company

is providing clean water at a very cheap price to over one million people worldwide. Their

innovative financing modelxl

allows them to deliver their integrated solution to communities with

scare resources. People pay a small fee for the water they collect and this is used to repay the

loans and cover operational expenses. The company hires local community members to operate

these “micro-utilities,” thus assisting in local employment. In parallel, entrepreneurial

opportunities have resulted from these projects, as the residents can further sell the purified water

to neighboring communities. Its investors include the Acumen Fund, the World Bank, and Dow

Chemical‟s venture capital fund.

xxxix

See more at - http://www.urbi.com/su/su_au.asp xl See more at - http://www.waterhealth.com/water-solutions/project-financing.php

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Waste Concern: hybrid profit/non-profit

Waste Concern is a hybrid profit/non-profit company founded in 1995 that operates primarily in

Bangladesh. Their company motto is “Waste is a Resource” and they act upon it by composting

waste and converting it into organic fertilizers to increase crop yields. Their business model has

expanded to include renewable energies and other related projects along the lines of sustainable

development and poverty reduction. Waste Concern has created a profitable model that is mainly

based on the sale of fertilizers and through the emission (trading) of carbon credits. This

company has been capitalized by the Lions Club and the UN Development Program and has

contributed to reducing CO₂ emissions as well as improving local health conditions in the

communities it serves.

Nestle / Nespresso: CSV vs. Fair-Trade

Coming back to the issue of „fair trade‟ and its implications on local communities, we study the

case of Nestle / Nespresso. Nestle realized that securing a consistent stream of specialized coffee

is very difficult. As most of the coffee is grown mainly by local growers in poor rural regions of

Latin America and Africa, they are subject to a “cycle of low productivity, poor quality, and

environmental degradation that limits production volumes.” Nestle approached this issue by

reconfiguring their procurement; first they began collaborating intensively with local farmers by

providing assistance and training on best-practices for cultivation, then by backing financial

loans, and finally by assisting them in securing necessary inputs (fertilizers, pesticides, seeds,

plant stocks, etc.).

Through the establishment of local quality control facilities at the points of purchase, they were

enabled to differentiate and pay a better price for better coffee produce directly to the farmers.

This added an interesting dimension to the traditional practices – incentives. Now coffee growers

have the proper motivation to produce better beans and to work with Nestle to increase their

crop-yields and reduce the environmental impacts of their farming. This model has decreased the

transaction costs and has empowered the farmers who have seen important increases in their

profits, thus have been more inclined to further increase their production which translates to

hiring more employees and improving the prospects for the entire community.

Global Sustainability and the Creative Destruction of Industries

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The final business cases have been extracted from the Hart and Milstein article which shows how

to approach the „Survival Economy‟ which is based on “meeting basic needs.”

Daewoo

The South Korean chaebol (conglomerate) Daewoo understood that competing head-on with

American, European, and Japanese companies in the tech-intensive and competitive markets of

the „consumer economy‟ was extremely difficult, therefore it decided to transfer its industrial

base to under-developed and emerging counties such as, Uzbekistan, Vietnam, Burma, and

Brazil. It figured that in these markets, it had a better chance of engaging in long-term

development projects in the areas of environmental management, production, and infrastructure.

The lack of capital did not impede Daewoo from interacting with the local economy, as it

accepted barter as a system for exchanging goods. This generated a new business: commodity

trading; it used its global network to trade the goods it received as payments. By entering

markets before the competition, the company has been able to build strong relationships with the

local communities and governments that will allow it to cover the needs of these vastly

unexploited markets, and grow in parallel to their progress.

Grameen Bank: “The Village Bank”

The last example provided is one that has profoundly shifted the perceptions of global business

leaders regarding the „bottom of the pyramid‟ based on the growth and market-penetration

achieved by Grameen Bank. An extraordinary fact is that this bank had repayment rates of

around 99% - rates much higher than the majority of banks in the developed economies. In the

late 1970‟s, Bangladeshi professor of economics, Mohammed Yunus (Nobel Peace Prize 2006),

set himself on a quest to improve the lives of poor people in the rural areas of his country. Yunus

discovered that very small loans with „no collateral‟ (further on coined as „micro-credit‟) had a

huge impact on these peoples economies. Through microcredit, these people were able to

“establish creditworthiness and financial self-sufficiency.”

The business model is based on a system of “solidarity groups”; they consist of a small group of

people that apply for loans together and its „members‟ act as a species of guarantors. Yunus

proposed that through this methodology, the informal groups would collaborate with each other

to form micro-ventures or to assist each other in making their microcredits produce a profit.

Towards the end of the 1980‟s, Grameen Bank began to expand its business through tackling

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broader needs. Among the business lines it created are, Grameen Fisheries Foundation, Grameen

Agriculture Foundation, Grameen Trust, Grameen Telecom, and TheVillage Phone.

Aside from the extremely bumpy road that Grameen companies have had to endure - from

politically-motivated scrutiny and leftist guerrilla interference, to brainwashing of „clients‟ from

religious leaders, among other – it has proved to be a tremendously successful approach to

tending to the needs of the poorest while maintaining a solid financial position. The goal of

empowering women was achieved as many of them started earning more than their husbands.

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Problem Statement

The following chapter is composed of three main parts. The first part one will reiterate the

problem or concern we have been addressing in this essay. The second part will attempt to show

that this issue has not been directly or fully addressed by the existing literature or business

models. Finally, the third part will be aimed at justifying why the proposed initiative deserves

attention and is worthwhile reading.

Problem Statement

The main purpose of this study is to create a business model for the implementation of small-

scale renewable energy projects in the rural areas of the Andean region with the objective of

laying a proper basis for sustainable development in the communities we engage with. This

business model incorporates components from the theoretical frameworks and empirical analysis

revised in the „Literature Review‟ that promote a new paradigm under which society and nature

are at the core of strategic business planning. The core of the business model is based on the

view proposed by Porter and Kramer – Creating a Shared Value (CSV). This approach proposes

a revision of traditional business practices and aims to entice managers to re-connect with

societal and environmental needs in a manner that enlarges the pool of value.

The objective is to provide a possible solution for “the cycle of debt, poverty, population growth,

and resource depletion in the developing world that are a primary force behind problems such as

desertification, deforestation, loss of biodiversity, and social-political disintegration” (Ehrlich &

Ehrlich, 1991; Homer-Dixon et al. 1993; Kaplan, 1994). The idea is that through this business

model we could alter this vicious-cycle and persuade local governments to take part in our

endeavor, as well as draw the necessary support of the local communities.

As the theory we reviewed has illustrated, neither businesses nor politicians have been able to

tackle many of the problems and basic needs that the bottom half of the planet is forced to

endure. Therefore, by creating a framework for renewable energy entrepreneurship, we believe

that we can induce a self-reinforcing cycle of progress and development. As energy is a

precondition for any kind of hope for development, and this business approach can provide part

of this necessary disentanglement, then the virtuous cycle for sustainable development can be

ignited.

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Therefore, we aim to build a business model that will include multiple stakeholders in the

planning of projects and maintain a flexible approach that can allow us to replicate projects in

various different locations within the same region. The vision is to collaborate in making these

rural areas advance and progress through a sustainable development approach, and generate the

necessary conditions that will enable the creation of clusters.

Prior Work

The connections between sustainable development and renewable energies have been pointed out

throughout the literature, business cases, and other reports. Furthermore, we have seen how a

new breed of social entrepreneurs has made an impact in different rural areas of the world, yet

focusing mainly on Africa and Asia. In my perspective, the value added by this paper is to

provide a „Shared Value‟ framework under which renewable energies can be as a basis for

enabling local clusters in rural Latin America, while respecting guidelines for sustainable

development and best-practices of sustainability.

Justification of this Paper

Wendy Kopp founded “Teach for America” in 1990 based on her senior thesis at Princeton

University in 1989. The aim of this non-profit was to “eliminate educational inequality by

enlisting the nation‟s most promising future leaders to teach for two or more years in low-income

communities throughout the USA.”xli

It aspired to motivate these „teachers‟ to commit to

tackling the root causes for the achievement gap displayed in America‟s poorer communities.

Teach for America achieved to mobilize resources and stimulate graduates to take this

opportunity to improve the situation for the poor and overcome the challenges imposed by

inequality of education.

In the same way that Ms. Kopp employed her thesis to layout the building blocks for her project,

I aim to do the same with mine. The objective of my graduate thesis is to combine the most

relevant principles and concepts from the theory and business cases in order to propose a

business model that can assist the rural areas of Latin America in developing in a sustainable

manner through the implementation of renewable energy projects.

xli http://www.teachforamerica.org/

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Renewable energy can provide energy to remote areas in a clean and sustainable manner. It can

also contribute to the development of rural communities, by providing electricity to power

homes and small (micro) businesses. Clean technologies can also provide the basis for the

emergence of parallel businesses which can assist the local communities in improving their

standards of living. Additionally, renewable energy projects are entitled to carbon-bonds which

can provide financing for main or tangential activities. Governments can also benefit from an

improved reputation which can help them attract foreign investments.

Another situation that motivates this research is to find ways of translating to the rural

communities or balancing (upwards) the benefits that the urban areas of Latin America have

enjoyed from this extended period of growth.

Moreover, as Prahalad explains in “Bottom of the Pyramid,” that there is a vast, unattended

market which still needs to cover its own basic necessities. Further on, as these communities

progress, firms that have built strong relationships with their „clients‟ can grow and cater their

evolving needs.

As we saw in the literature review, classical economics assumes that the markets will

automatically produce the most efficient outcome for society. Nevertheless, we are seeing a

growing conflict between capitalism (as it is currently conceived) and society (including

politicians and the environment in this case) due to its inability to properly transfer benefits to

the communities it serves (or exploits). The CSV view proposes that the full potential of

capitalism is yet to be seen and that business leaders will come to recognize that meeting social

needs and respecting the environment will produce more value to all the parts involved –

“what‟s good for society is actually good for business.” Many companies have embraced some

of these principles and have begun to redesign their business models by redefining the

interrelations that mutually enhance social and corporate performance.

Sustainability has gone from being a peripheral concern to a pivotal matter in our world. Climate

change is close to altering the natural cycles of life permanently. Businesses have neglected the

inherent biophysical constraints of nature. Volatility of hydrocarbon resources has increased due

to their dependence on unstable regions and because they are being depleted at unsustainable

rates. Clean technologies have gained a lot of turf in the past few decades and this trend has

accelerated in the last five to eight years. Political support for green technologies has

increasingly influenced policy-making through incentives for technological development and

deployment.

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All this translates into the following:

Sustainability can drive innovations that will benefit companies in the long-term57

Firms in the front line of regulations can more easily identify new business

opportunities58

The sources of future competitive advantages will be based increasingly in firm‟s

capacity to minimize waste, create eco-friendly products, and collaborate technologically

with emerging markets59

Sustainability belongs to a market-shifting trend (megatrend) based on the premise that in

the past several years, issues concerning the environment have increasingly affected and

influenced the capacity of firms to deliver value to their markets.60

Innovative business models and value propositions that place sustainability at its core

will be able to challenge incumbent industries and profit from a new era of bonanza61

Entrepreneurs and innovators who truly grasp the principles of sustainable development

have one of the “biggest business opportunities in the history of commerce”62

Business leaders and social entrepreneurs have an unprecedented opportunity to

transform sustainable development into the main driving force of the „creative

destruction‟ process the current century63

Renewable energy can contribute to sustainable development by decoupling development

constraints and reducing toxic emissions64

“Developing countries have an important stake in the future – this is where most of the

1.4 billion people without access to electricity live yet also where some of the best

conditions exist for renewable energy development”65

“Lack of energy entrenches poverty, constrains the delivery of social services, limits

opportunities for women, and erodes environmental sustainability at the local, national,

and global levels. Much greater access to energy services is essential to address this

situation and to support the achievement of the Millennium Development Goals”66

I have a firm belief that this paper will provide a solid alternative for addressing many of the

issues mentioned in this section, in addition to contributing to the better understanding of the

sustainability paradigm through the combination of key interrelated aspects of economical,

social, and environmental progress.

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Motifs for Geographical Location

In strategic management and marketing, the concept of „first-mover advantage‟ is greatly

recognized as an opportunity to: gain a commanding lead in relation to the competition, control

resources and supplies, and also create (or impose) standards that deter competitors from

entering the market.67

Latin America (LatAm) is still a relatively un-exploited and under-

developed location, which implies a vast potential for growth and expansion.

For the purpose of further explaining the motivations for executing the proposed business model

in Latin America, I will restate and expand to some extent what was pointed out in the

introduction of this paper.

As previously described, the fact that I was born and raised in this region gives me somewhat of

a better insight of the problems it faces and the challenges that need to be overcome. Due to the

complexity of operating in this region and its particular culture, a strong network of contacts is

usually imperative in the viability of any project that involves many parties.

Secondly, Latin America has passed from being a region of political and economic upheaval to a

region of consistent growth and relative stability. The region is making a strong effort in

attempting to transition from a commodity-exporting region to a emerging/consumer economy

that is more knowledge-intensive. A growing middle-class has allowed these economies to

evolve and expand their internal demands, further reducing their vulnerability to external shocks.

Latin America has also broadened its global partner-base to collaborate more closely with

countries like China and Russia, thus expanding the size of its client-base (market potential). The

majority of the economies in the region are growing at paces far superior to the rest of the

developing nations in the world.

With the exception of Brazil, the region has the great advantage of not only sharing the same

language, but also a similar cultural background going all the way from Mexico to Chile.

Nonetheless, Portuguese and Spanish share the common base: Latin, making mutual

comprehension easier. Similar background and language helps companies that want to replicate

their business models throughout the continent and create a strong regional presence under the

same flagship.

Furthermore, the region has ample renewable resource capacity based on its ideal geographical

location which exposes it for longer periods to the sun‟s rays, as well as its‟ topographical

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characteristics, which provides ideal locations for hydroelectric projects. Prohibitively expensive

grid-based systems have largely overlooked the energy needs of distant rural areas. The

installation of solar panels and other clean-technologies pose an interesting option for places that

do not even have access to electricity on a constant basis.

The region still has a vast potential for further growth, as its‟ economic and development

indicators are far below the levels of industrialized nations. Additionally, the socio-demographic

configurations of the countries are based on large, overcrowded urban areas that translate to one

thing: multiple opportunities to develop rural areas and reduce the incentive of urban migration.

This can be a great argument when approaching local governments for their support; by

proposing renewable energy projects in rural areas and laying-out the proper conditions for

economic progress, these villages can become future magnets for further development as they

can potentially turn into clusters. By enabling local cluster development, daring firms can

increase their internal productivity and expand their product-base to the growing needs of the

communities it serves. By creating a virtuous cycle, entrepreneurs can create new markets spaces

through the exploration of growing societal needs.

Many of these rural areas still lack basic services such as water, electricity, food, and even

housing. Firms that tackle these issues as part of their business strategy can position themselves

to grow together with their more prosperous client-base. As pointed out by C. K. Prahalad, half

of the world‟s population has been deprived from the benefits of economic growth. However,

this mass market portrays an enormous business opportunity for companies that dare to explore

these markets. Hart and Milstein (1999) refer to the „surviving‟ economy as a market with huge

potential based on current unmet needs and immeasurable latent needs. Latin America meets this

requirement and its rural areas pose minimal competition; presenting an “unprecedented business

opportunity for visionary firms.”68

Moreover, the fact this region has not been heavily industrialized, allows companies to

benchmark to the best „sustainability practices‟ and avoid having to „unlearn‟ environmentally

destructive business practices. As we saw up to now, being „green‟ is in accordance with the

self-interest of a firm. Companies have the great opportunity of promoting growth for this region

through a new lens that does not involve a trade-off between economic growth and

environmental and social wellbeing. In respect to what Hart (1995) expressed regarding

„sustainable development‟ and the negative externalities produced by the industrialization of the

„North‟, we believe that a project like the one we propose can gather enough support from local

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governments, international organizations, and also global multinationals to improve the

prospects of the business model and contribute in meeting our vision and objectives.

These global enterprises have been facing ever-increasing pressure from the media, the public,

and even their own shareholders to do something in respect to “the cycle of debt, poverty,

population growth, and resource depletion in the developing world that are a primary force

behind problems such as desertification, deforestation, loss of biodiversity, and social-political

disintegration” (Ehrlich & Ehrlich, 1991; Homer-Dixon et al. 1993; Kaplan, 1994). This point

will aid us in securing some of the necessary support for our endeavor.

On a final note, as one of the main objectives of the thesis is to create a business framework that

can enable economic growth to bring these rural communities out of poverty, we can use these

projects to incorporate them into the national scene and include them in the pool of benefits that

have resulted from the continued years of Latin American „bonanza‟.

Problems and Potential Hindrance in Latin America

Largely unexploited markets are not simple coincidence or negligence on behalf of business

leaders; they pose greater risks that deter many firms from entering. For example, access to

financing is more limited and/or more costly based on inherent and structural conditions. Some

of these issues are: corruption, complex system of interests, lack of proper education, lack of

infrastructure, unstable political systems, and criminality, among others. Additionally, Latin

America has particularly complicated cultural aspects that differ much with traditional „Western‟

business practices. These local traits require much lobbying and relationship-building for the

promotion and development of projects.

Dr. John Ross points out in “Doing Business in Latin America,”xlii

that business representatives

must invest much time in relationships and „customer maintenance‟. Likewise, Latin Americans

are not particularity known for their practicality; therefore, problems are solved through intense

discussing and agreeing, and not through legal departments. Latin people are very „family-

oriented‟, which much differs from Anglo-Saxon people that tend to separate their personal and

professional lives. Punctuality is highly uncommon in the region and it entails inefficiencies in

the system. Decisions are highly based on trust, emotion and intuition, rather than on

xlii

Extracted from Dr. John Ross – lecturer – “Doing Business in Latin America” - http://www.youtube.com/watch?v=Ou0_CQ9jOEw

- 65 -

straightforward numbers, which is why important efforts to gain and maintain the other party‟s

trust are imperative to doing business in the region. Dr. Ross concludes his presentation by

pointing out that business relationships are long-term oriented and companies can enjoy loyalty

from their clients if they fulfill their needs properly.

Latin America offers great potential for companies that enter with durable value propositions.

There will be many obstacles to overcome, but we believe that the potential highly overweighs

the hurdles.

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Presentation of Work and Methodology

Rural areas in Latin America have been plagued with poverty and lack of basic services such as

– education, proper nutrition, electricity, telecommunications, and essential infrastructure. This

could induce us to speculate or theorize as to the reasons why this is a persistent problem with no

concrete solutions in the near landscape. For example, we could assume that misaligned or lack

of political interest, inefficacy of social/NGO programs, absence of proper incentives for

businesses to enter these „markets‟, or even insufficient will and attitude from the communities

or the cooperatives themselves, could be among the potential and intertwined reasons. Therefore,

the purpose of my master degree final dissertation is precisely to propose a feasible plan that

addresses these concerns in a chronologically-staged, but holistic approach. Even though the

prose will be based around my project and business model, the takeaways and lessons can

hopefully be transposed to other scenarios. The first stage involves the deployment of small-

scale renewable energy projects. The latter stages involve an analysis of the specific context and

will depend on the progression of each community.

Based on the research performed for this essay and the concepts portrayed in the literature, a

business framework that operates under a for-profit model, but simultaneously includes many

objectives of a non-for-profit organization has been devised; resulting in a hybrid profit/non-

profit paragon. The purpose of a business model is to describe the guidelines of how an

organization or a business creates, captures, and delivers economic and social value. The engine

behind the design of a business model is the business strategy, which is used to represent the

central aspects of a company; including its objectives, the offerings, the basic structures, its

guiding principles, and its operational processes.

The core principle of our strategy is based on meeting social needs in a manner that allows the

project to be financially viable. Social and environmental issues will be directly addressed in the

business model and not treated as peripheral (a common practice in Corporate Social

Responsibility – CSR – programs). As Porter and Kramer illustrate in „Creating a Shared Value‟

(CSV), we need to cut through the vicious cycle between business and society and broaden the

scope of our economic model in a way that we are increasing the size of the pie and benefiting

all the parties involved. As the legitimacy of capitalism has fallen consistently in the last several

decades, we need to encompass all the stakeholders in the planning process and avoid the

framing of the typical foreign company that comes to exploit these communities. The plans and

operations of the business have to be absolutely transparent and should involve the local

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community, the cooperatives, and the governing bodies in the blueprints of the specific projects

to prove to them that we are embracing their objectives. For this, it will be imperative to have an

excellent communications plan right from the start and record the evolution of the business and

social activities in a very detailed and sequential manner. This will enable two things: in first

place, avoiding (at least to some extent) potential accusations regarding exploitation of these

communities. Secondly, it can be used it as a „track-record‟ in order to replicate the approach in

different areas throughout the region.

Politicians in this region understand that they depend to a great extent on private funding in order

to tackle the needs of the communities they serve. This will be a pivotal argument for gathering

their support, as the business model which will be presented in the next section offers a feasible

financial structure that does not depend on subsidies or donations. To improve our prospects of

garnering the necessary reinforcement from the local people and the government, we will

advocate on the logic that not all profits are the same and that lack of capital in these areas

induces or obliges us to create a long-term value proposition that delivers value to the company

and to society, without degrading the environment. We will need to demonstrate that our

objectives are not conflicting and show that we understand that “what‟s good for society is

actually good for business.”69

As a result, by addressing social and economical progress from the

“value” standpoint, we can hopefully homogenize both perspectives and combine them to tackle

problems under the same „umbrella‟.

The goal is to create a positive reinforcing cycle that can allow the business to grow and the

community to prosper. If we incorporate the dynamic context and consistently revise our strategy

to contemplate the evolving and growing needs of these areas, we should be able to constantly

update and upgrade our value proposition. By understanding the inherent constraints of these

villages (in reference to the issues of lack of education and infrastructure, etc.), we can work

with the local governmental bodies to enable local clusters for development. As pointed out in

the CSV article, “no company is self-contained and the success of every company is affected by

the supporting companies and infrastructure around it.” Deficiencies in the local conditions

create direct costs for companies; deficient educational systems impose productivity and human

capital constraints, poor infrastructure increases operability and logistics costs, and poverty

limits the potential demand of the products and services offered. If our business model can tackle

some of these issues and collaborate to tackle the rest, the prospects of the firm will improve

vastly. The development of local clusters and the improvement of local conditions will entice

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competitors to enter the market. Nevertheless, we understand that an assortment of agents and

organizations must engage in a wide array of activities that will further boost the virtuous cycle

that we intend to set in motion. However, as any business model requires a solid financial

situation, we expect that by the time other companies decide to enter the market, our multi-

stakeholder framework will not be directly affected, but will actually benefit from the entering of

other companies, as well as competitors. This will force us to continuously reexamine our

operations and strategies for delivering value to the firm and to the community.

Another strategy will be acting as a liaison with other companies that intend to reach out to these

markets. As we develop internal capabilities and specific knowhow for functioning in these

areas, we will be more capable of assisting other companies in entering these markets. Through

the establishment of „Specific Purpose Companies‟ (SPC‟s)xliii

we can collaborate more

adequately and avoid being subject to established corporate guidelines that may not be aligned

with the objectives of our organization and the communities we serve. As the theory has showed

us, the „survival‟ market segments require long-term commitments that can sometimes be

contradictory to management practices that are subject to shareholder blind requisites for

profitability and growth. By this we are in no way implying that our approach is altruistic, but it

does require a shared vision that contemplates the specific social needs. Furthermore, strategy

theory explains that a company should engage its market through a distinctive value proposition

that meets its specific needs. The fact that the local residents are not only the target segment, but

also participants and equity holders of the projects, will increase their own benefits as the

operating company itself improves its balance sheet.

In „Green and Competitive: Ending the Stalemate‟, we saw that public policy can contribute in

boosting innovation and supporting environmental control. In under-developed markets such as

the ones we are focusing in, it is common to find inefficient or lack of proper public policies.

According to this paper, regulations can contribute in the following areas: “create incentives that

motivate companies to innovate; improve environmental quality; alert and educate companies

and consumers; create demand for environmental improvement; and level the playing field

during the transition period.” Our approach will be to collaborate with local governments

and NGO‟s to promote regulations that can encourage upstream solutions. By being ahead

of the pack and earning a good reputation for our commitment to environmental and social issues

xliii A SPC or Specific Purpose Vehicle (SPV) or Specific Purpose Entity (SPE) is a legal entity in the form of Limited Liability Company or Limited Partnership created to target specific objectives, without compromising the partners or companies to financial liability.

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and also by participating in the building of regulations, we can make our own projects more

viable within their context. Furthermore, by encouraging the development of local clusters, we

can reduce the pressures of rural-urban migration and garner support from regional and national

governing bodies. Assuming that we can be in the forefront of compliance, we should be able to

discover additional business opportunities that further reinforce our viability and assist us in

reaching the goal of promoting economic and social progress for these communities.

Additionally, by partnering up with environmental and other social-purpose organizations,

we could find ways of collaborating in a mutually benefiting manner. Perhaps, we can offer a

percentage of revenues to promote education and training of local people and provide consulting

services to cooperatives. By including them in our stake-holder model, we can encourage these

groups to become sources of information regarding best practices. If we can accomplish this, we

can help these groups to better optimize their scarce resources and encourage them to focus on

disseminating research that addresses environmental and social concerns. Therefore, by

including their perspectives and goals in our business plans, we can shift from confrontation to

collaboration.

Another key aspect will be benchmarking to the best sustainability practices that as we saw

in the theory, will contribute to optimizing our cost structures and producing better

products and services. In this area, we aim to collaborate with other social programs that

promote education by teaching that being green can increase prospects for development. If we

can properly communicate that the concept of waste should not even be a part of our vocabulary,

then we can create a circular – Cradle to Cradle – system for the entire community. We can offer

to reward people for their recycling and use these inputs for other businesses, such as a „waste to

energy‟ conversion plant, composting of organic materials, or manufacturing of products derived

from used materials (i.e. – clothing, apparel, and other synthetic derived products).

“A Natural-Resource-Based View of The Firm” details the extensive negative impact and

deepening of the “poverty/debt cycle” that economic prosperity in the “North” has produced on

the “South.” Considering this aspect, Hart (1995) points out that “a sustainable development

strategy also dictates that effort be made to sever the negative links between environment and

economic activity in the developing countries of the „South‟.” Accordingly, we feel that this will

be a strong anchor for consolidating international support for our projects. We expect that this

backing could provide things like - soft-lending terms, consulting services, research

collaboration, or even endorsement of our projects that will catapult us into the

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international scene. Stockholder pressures have increasingly pressured multinational companies

to tackle social and environmental issues, either through their CSR departments or even through

their operations. Supposing we achieve some sort of endorsement from international organisms

and think tanks (i.e.: UN, World Bank, WWF, DEFRA, WRAPxliv

), we could leverage this

support to further fuel and stimulate our projects. We could also motivate international

companies to collaborate through technological cooperation that could further increase the

prospects of progress and development.

Hart (1995) points out that “a sustainable-development strategy is fostered by a strong sense of

social-environmental purpose, which provides the backdrop for the firm‟s corporate and

competitive strategies” (Stikker, 1992; Welford, 1995). “Proposition 3a from this article

proposes that shared vision is a „rare and firm-specific resource‟ that can empower a strong

social process” (Campbell & Yeung, 1991; Hart, 1992; Senge, 1990). As this proposition directly

aligns with our corporate strategy, we believe that our business model will be able to produce a

long-term vision that stimulates innovation and change that will confidently create a scenario for

sustainable development.

Business Model / Framework

The legal structure of the projects will be based on „Specific Purpose Entities or Vehicle‟ (SPE

or SPV or SPC) that could be formed under a „Limited Liability Company‟ structure. The

purpose of this is to create individual companies for each of the communities the firm engages

in. Through this form of partnership, we can incorporate multiple parties into the equity structure

of the projects undertaken (i.e.: opening the equity build-up to all stakeholders and to convert

them into a kind of stockholder). The idea is based on the two main benchmark cases which have

successfully included the habitants of a community into the pool of value created: Native

Corporations of Alaskaxlv and the Huaxi village in Chinaxlvi. The equity structure of the SPC‟s

xliv

UN – United Nations. WWF – World Wildlife Fund. DEFRA – Department for Environment, Foods, and Rural Affairs. WRAP – Waste and Resource Action Programme. xlv “Cook Inlet Region, Incorporated, also known as CIRI, is one of twelve land-based Alaska Native regional corporations created by the Alaska Native Claims Settlement Act of 1971 (ANCSA or the Act). The Act addressed the aboriginal claim to land by Alaska Native people by mandating the formation of for-profit corporations representing various regions of the state and by providing land and seed capital to those corporations. Each enrolled Alaska Native was subsequently issued 100 shares of restricted stock in the regional corporation to which he or she was enrolled. In this way, ANCSA provided the framework for the corporations to provide economic,

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will be based on three main divisions of equity holders. The first block of equity will be our

company, the second block of shares will be offered to local governments and/or private

businesses, and the third block will be assigned to the local community. The first two partners

involved will provide the capital to build the equity of the SPC. This capital (which shall

constitute somewhere between 50 to 70 per cent of the equity) can be used as collateral for a loan

(be it from a bank, an international organization, or an export-bank). The loan will be used to

provide the equity for the third group, which does not have the total amount of capital required to

back their stake in the SPC. Then, each of the individuals (or families) that will take part in the

SPC will commit a certain amount of their monthly income to pay for their equity stake in a

determined period of time. For example, if each individual receives 1,000 shares (worth $1,000),

then he or she commits $16.70 per month for a period of five years.xlvii With this model, we not

only aim to implicitly include the different stakeholders into the development of projects, but

also to bind them through a formal agreement. Through the inclusion of a governmental body in

the business plan (such as a Public-Private Partnership), we aim to align the interests of all the

parties involved and achieve strong relationships that might improve our chances of getting

necessary permits for operations or land concessions.

The basis of the projects will be the installation of renewable energy technologies that provide

electricity to homes, farms, and small businesses. The revenue streams will be based on the

commercialization of these technologies and the sale of electricity. An interesting model to

benchmark is based on WaterHealth International‟s business approach, which finances the

purchase and installation of systems and collects fees from the sale of clean drinking water

(electricity in the form of KWh in our case). Additionally, by training and hiring members of the

community it serves, it creates sources of employment. Furthermore, electricity can be sold to

adjacent villages, further increasing the pool of profit to the SPC and the community itself. As

energy is the basis for economic development, we expect that the demand for further installation

educational and social service and other cultural benefits to current and future generations of shareholders.” http://www.ciri.com/

xlvi

“Socialism and enterprise have turned a farming community into the richest village in China, writes

Edward Cody. They opted to retain village control, retire their plows and build more factories, embracing

urbanization instead of fighting it as millions of farmers with family plots have done in recent years. Annual

per capita income has grown to US$8,000, village leaders said, seven times the national average and 20

times the average for farmers. Many townspeople, although still classified as peasants, are now managers,

living in two- story houses on landscaped lots. The Huaxi government has made sure the entire population

of 30,000 has health insurance and pensions, things many of China's 750 million farmers only dream

about.” http://www.thestandard.com.hk

xlvii This example has been extracted from “Modelo de Inclusión Igualitaria”

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of clean-tech solutions will increase as the incomes of people increase. Their incomes will not

only increase based on the distribution of dividends, but also through the improvement of local

conditions that in turn improve the productivity yields of the local producers. Here is where we

find it essential to provide educational, training, and consulting services to the local farmers and

producers of other goods, because by improving their own prospects for business opportunities,

we simultaneously increase the demand for our products. The result is a virtuous cycle that is

holistically reinforced.

In regards to the commercialization of the technologies, extracting some ideas from the „Energy

Service Company‟ (ESCO) model could be appropriate. An ESCO is a business that provides

comprehensive energy solutions, ranging from the design of the projects to their implementation.

It is true that they charge based on the actual savings that they produce for their clients, in

contrast to our market which mainly lacks energy in the first place. However, new „Feed-in-

Tariff‟xlviii laws provide a great opportunity for selling electricity to the grid. For example, in

Ecuador solar electricity will be paid around $0.40 US dollars per KWxlix, making this option

very attractive. Nevertheless, we saw the case of the solar panels in Africa, where people are

willing to pay for the electricity. Therefore, at an appropriate price, we expect there to be a

strong demand for electricity in these rural areas as well.

Considering that we have been constantly arguing on behalf of Schumpeter‟s perspective of

analyzing businesses in their dynamic context, we cannot determine today the evolution of the

company and its projects. The idea is have an open mind to develop the multiple opportunities

that will appear as the projects develop and the communities grow.

One idea could be to build stores that sell a wide assortment of low-cost products to the

community and allow the equity holders of the SPC to purchase such products at discounted

values. We could partner up with global giants such as Wal-Mart or Carrefour to provide to these

mini-stores. As the local community grows stronger, entrepreneurs from the community could

buy merchandise from the SPC and open up additional mini-stores in other areas.

Contemplating that the Andean region is highly dependent on tourism, another idea could be

selling clean-tech solutions to eco-hotels in the region. If our company gains traction in the

xlviii

“A feed-in tariff (FiT, feed-in law, advanced renewable tariff[1] or renewable energy payments[2]) is a

policy mechanism designed to encourage the adoption of renewable energy sources and to help accelerate

the move toward grid parity. Feed-in tariffs are a type of Power Purchase Agreement that identify certain

technologies for higher rates.” - (Extracted from Wikipedia) xlix Extracted from - http://www.wind-works.org/FeedLaws/Ecuador/CONELEC%20004-11%20ERNC.pdf

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international scene, we could certify these eco-tourism spots and increase their willingness to

buy from us.

As we explained previously in the Daewoo example, sometimes when hard-cash is scarce, going

back to the principles of bartering could be a solution. This could enable a new business in the

form of a trading division of the SPC. This division could specialize itself in expanding the

markets for the local produce (be it agro-derived or arts and crafts). Through this strategy, the

local communities could insert themselves into the national, and even perhaps international,

markets. We saw that „green‟ and „sustainable‟ products can benefit from „eco-premium‟ pricing,

therefore, by partnering up with environmental groups we could teach the local communities

how to produce under clear sustainability guidelines and then assist them in exporting their

products. The Nestle case also showed us that by creating a shared value and assisting local

farmers, they can increase their incomes many times over. This service could generate further

income for the SPC in the form of consulting services charged (perhaps as a percentage of the

increased incomes for the farmer) or by the supply of necessary inputs that the same SPC could

provide (fertilizers, financing, etc.).

The idea of this paper is to lay the founding blocks of a business model that can be feasible in the

long-term and can contribute to the improvement of conditions in the markets we enter, thus

enabling local clusters that will benefit the growth of the SPC itself. The dynamic context

requires firms to have an open and embracing attitude towards creative solutions and

technological innovations that can generate new business opportunities such as the ones

portrayed and boost profits that will benefit all the stockholders and stakeholders.

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Conclusions

“What‟s good for society is actually good for business.” Treating the society and the

environment as core issues of strategic planning will be imperative for competing under the new

sustainability scenario. Overcoming the erroneous preconception of an inherent trade-off

between business and society will be vital to unleashing a new wave of innovations. Companies

that embrace regulations instead of resisting them will be in a better position to identify new

business opportunities. Competitive advantages will revolve around a firm‟s ability to reduce

waste, produce eco-friendly products, and collaborate technologically with emerging markets.

Innovators and entrepreneurs that guide their business practices through a sustainability

framework have “one of the biggest opportunities in the history of commerce.”70

In addition to the intent of contributing to knowledge, this paper aims to propose a framework

for achieving sustainable development in the Andean region through the implementation of

renewable energy technologies. Lack of energy in these areas impedes economic growth and

entrenches poverty. Therefore, by providing clean sources of energy and complementing the

business model with parallel services such as training and consulting, we aim to assist in the

enabling of local clusters for development. The idea is that the business model will create a

positive reinforcing cycle of development that tackles the needs of the local communities and

provides them additional sources of income, while respecting the local environment. Schumpeter

explained that economics and capitalism should be analyzed in a shifting and disruptive

context.71

Accordingly, the objective of this business model is to tackle various issues regarding

the development of the rural Andean region in a series of stages that evolve as these

communities advance and progress.

Sustainability is now conceived as a market-shifting megatrend. This has been greatly enabled

by the price volatility of fossil-based fuels, the lack of stability in the regions supplying most of

hydrocarbon resources, the growing political support for clean-technologies, and the general

public awareness of environmental issues. The latest report from the UN sponsored IPCCl states

that renewable energy can contribute to sustainable development by decoupling development

constraints and reducing toxic emissions.72

Furthermore, it points out that developing countries

have a very big stake in the future as most of the people living without access to electricity live

in these countries.73

l United Nations – Intergovernmental Panel for Climate Change

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This paper opens a wide array of possibilities of further exploring different approaches towards

assisting in the development of rural areas under different sustainability practices. The „shared

value‟ framework is adaptable to any kind of activity – business, governmental, or non-profit.

This research proposes a model that can align the interests of multiple stakeholders; therefore it

would be interesting to further analyze the compatibility of these interests and determine how

other vested or conflicting interests may directly interfere with its feasibility. Even though the

focus of this paper revolved around the rural areas of the Andean region, modifying it and

adapting it to other contexts could also be a possibility.

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Appendix

Annex 1

Extracted from Creating a Shared Value

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Annex 2

Extracted from Green and Competitive: Ending the Stalemate

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Annex 3

Extracted from Green and Competitive: Ending the Stalemate

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Annex 4

Extracted from Nidumolu, R., Prahalad C.K., & M.R. Rangaswami. 2009. “Why

Sustainability is now the key driver of innovation.”

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42 “The Millennium Development Goals Report” UN Report 2005 - http://unstats.un.org/unsd/mi/pdf/MDG%20Book.pdf 43 ENERGY FOR DEVELOPMENT: The Potential Role of Renewable Energy in Meeting the Millennium Development Goals – for REN21 by The Worldwatch Institute. Lead Authors - Christopher Flavin and Molly Hull Aeck – 2005 44 POWER FOR THE PEOPLE: RENEWABLE ENERGY IN DEVELOPING COUNTRIES. A Summary of Discussion at the Renewable Energy Forum, Canberra, 18 October 2000 - http://www.ausaid.gov.au/publications/pdf/renewable_energy.pdf 45 Alexey V. Yablokov; Vassily B. Nesterenko; Alexey V. Nesterenko (2009). Chernobyl: Consequences of the Catastrophe for People and the Environment (Annals of theNew York Academy of Sciences) (paperback ed.). Wiley-Blackwell. 46 http://www.bbc.co.uk/news/world-europe-13592208 - “Germany: Nuclear Power Plants to close by 2022” May 30th, 2011 47 Ahmadinejad: Israel must be wiped off the map", IRIB News, October 26, 2005. 48 United Nations Environment Programme Global Trends in Sustainable Energy Investment 2007: Analysis of Trends and Issues in the Financing of Renewable Energy and Energy Efficiency in OECD and Developing Countries 49 “Renewables major part of 2050 world energy mix: UN” (May, 2011) http://www.terradaily.com/afp/110507011733.vl6jtlue.html 50 Porter, Michael E., Kramer, Mark R. 2011. “The Big Idea: Creating Shared Value.” Harvard Business Review, Jan-Feb: pg. 1-18 51 GREEN BRANDING: ARE YOU READY? – 2010 - http://www.wipro.com/greenit/pdfs/green-branding-case-study.pdf 52 Kammen, The Rise of Renewable Energy, 2006 (Scientific American, p83-93. - http://rael.berkeley.edu/sites/default/files/old-site-files/2006/Kammen-SciAm-Renewables-9-06.pdf 53 Seen on BBC 54 Extracted from - http://www.renewableenergyworld.com/rea/blog/post/2011/05/how-the-poor-may-boost-clean-tech 55 Extracted from – “Talukdar, Shuman, Horn, Michael B., Alton, Rich and Christensen, Clayton M., Winning and Losing Bets on GreenTechnologies (April 28, 2010). Available at SSRN: http://ssrn.com/abstract=1597315 56 http://cleantech.com/news/4068/astonfield-proceeds-4b-india-energy-investment-plan 57 Sustainability as the Key Driver of Innovation (Nidumolu, Prahalad, Rangaswami; 2009) 58 Sustainability as the Key Driver of Innovation (Nidumolu, Prahalad, Rangaswami; 2009) 59 Hart 1995 - (Gladwin, 1992; Hart 1994; Schmidheiny, 1992). 60 The Big Idea: The Sustainability Imperative (Lubin and Esty; 2010) 61 Global Sustainability and the Creative Destruction of Industries (Hart and Milstein; 1999) 62 Global Sustainability and the Creative Destruction of Industries (Hart and Milstein; 1999) 63 Global Sustainability and the Creative Destruction of Industries (Hart and Milstein; 1999) 64 . (The 30-page "summary for policy makers" -- boiled down from 1,500 pages -- is being vetted at a May 5-13 meeting of the 194-nation Intergovernmental Panel for Climate Change (IPCC) in Abu Dhabi, and will be unveiled on Monday.) 65 UN IPCC report (2011) – extracted from: http://www.guardian.co.uk/environment/2011/may/09/ipcc-renewable-energy-power-world 66 ENERGY FOR DEVELOPMENT: The Potential Role of Renewable Energy in Meeting the Millennium Development Goals – for REN21 by The Worldwatch Institute. Lead Authors - Christopher Flavin and Molly Hull Aeck – 2005 67 Lieberman, M. and D. Montgomery, ‘First-mover advantages’, Strategic Management Journal, Volume 9, Summer 1988 68 Hart and Milstein, 1999 69 Porter, Michael E., Kramer, Mark R. 2011. “The Big Idea: Creating Shared Value.” Harvard Business Review, Jan-Feb: pg. 1-18 70 Global Sustainability and the Creative Destruction of Industries (Hart and Milstein; 1999) 71 Joseph Schumpeter and Dynamic Economic Change: Capitalism as "Creative Destruction" 72 . (The 30-page "summary for policy makers" -- boiled down from 1,500 pages -- is being vetted at a May 5-13 meeting of the 194-nation Intergovernmental Panel for Climate Change (IPCC) in Abu Dhabi, and will be unveiled on Monday.) 73 UN IPCC report (2011) – extracted from: http://www.guardian.co.uk/environment/2011/may/09/ipcc-renewable-energy-power-world

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