Monday, September 21, 2009

The Success of Development

Countries in every region of the world, from the poorest to richest...have all seen improvements in average levels of health and education over the past century.
That is from a forthcoming book by Charles Kenny.  Based on Kenny's own summary, The Success of Development is a book that you will want to pre-order.  If the book delivers, it will help get us out of the rut we are currently in - namely the "there is no evidence that development aid works" rut.

According to Kenny, there is good news and bad news. The bad news is that the divergence in incomes between the rich and poor countries has grown sharply since 1960.  Worse, we really don't understand how to increase economic growth rates in any country. But there is also really good news.  First, contrary to Malthus and Paul Ehrlich's expectations, there is not widespread starvation in the poor countries.  Even better, there have been dramatic improvements in health, education, and even political rights in most poor countries. 

The key insight of this book is that income appears to be a poor proxy for quality of life.  Fortunately, as Kenny says, many of "the best things in life are cheap....The last century has seen a dramatic decline in the cost of living."  The technologies and practices that reduce infant mortality, improve overall health, and increase literacy are relatively cheap. 

So the challenge for the development field is to create and environment that stimulate innovation and the spread of ideas that drive changes that improve the basic quality of life in different countries.   Unlike economic growth, which we have not had much luck stimulating, we have had some success in helping generate and spread these types of ideas, so there is grounds, Kenny says, for "realistic optimism."

Thursday, September 17, 2009

Pioneers of Contagion

Recently I did a post called Could Prosperity be Contagious? Judging from a recent event I went to in Jamaica, the answer is yes.

An initiative called Pioneers for Prosperity was holding its finals competition for the Caribbean. Its goal is to celebrate some of the most dynamic entrepreneurs in the developing world and to help them become role models for their peers and the next generation.

I found the enthusiasm, skill, and grit of these finalists to be highly contagious, and I came back to Washington all charged up about my own work. The Pioneers for Prosperity group has made excellent videos of each finalist that will be showed on TV in their home countries. This type of initiative is very important to change mindsets about what is possible, which is key to making progress in any country.

You can read more here.

Wednesday, September 16, 2009

Could prosperity be contagious?

“I wouldn’t call it a competition, I’d call it a collective,” Josh Potocki, the chef and owner of 158 Pickett St. CafĂ© in South Portland, said of the city’s food scene. “We are all trying to raise the level of food in Portland to insanely high.”
There has been much written about "social contagion" over the past few years. The latest NY Times Magazine has a long article describing the social dynamics of things such as smoking, drinking, and obesity.

I have been thinking a lot about whether the dynamics of contagion could be applied to economic development.

A powerful example of contagion that I have seen (or tasted, actually) is the restaurant scene in Portland, Maine. Even though Portland is a small city, it has evolved some of the best restaurants in the US. Mari and I recently ate at a restaurant called Bresca there, and the food was spectacular - on par with anything I have had in Washington, New York, San Francisco or London.

What is the key to this? No one knows exactly how it got started, but one or two really great chefs moved to town, and others followed. The dynamics are part competition and part collective. Each chef both emulates and tries to outdo the others, but each chef also knows that the success of the others bolsters the overall market. The NY Times article about Portland is here.

(Thanks to Eli and Scott Stefanski for the pointers to the restaurant and article!)

Making solar simple (and and affordable)

The challenge for SunRun is to take the incredibly complicated business of solar and make it really simple to the consumer.
That is from a nice post about residential solar power by Marc Gunther. I highly recommend Marc's blog if you are interested in the intersection of environment and business. No one writes better about this than he does, and there are some very encouraging developments in the sector. The pace of innovation gives me some hope.

Tuesday, September 15, 2009

Making complexity simple (and cheap, too)

It was refreshing to see this blog post by Ken McHugh, a software architect at Cognitive Edge. Ken describes upgrading the operating system on his computer. Based on past experience, he expected the worst.

Instead, he was delighted. Even though the new system was a significant upgrade, it was cheap, installed quickly, did not crash, and even took up less space on his hard disk. The title of his post, Why Did It Work?, which speaks volumes about our expectations, and also about the value of delighting ones' users.

Feature creep on things like cameras, remote controls, software, and web sites makes many products less rather than more useful to normal users. Trying to navigate all the dials, buttons, and menus is sometimes a nightmare, when all you want to do is take a picture or write a quick note. This is starting to produce a backlash, as described by Wired in a recent article titled The Good Enough Revolution: When Cheap and Simple is Just Fine.

Ken's experience shows that adding features and complexity can be made simple - and cheap, too - if the company behind it is focused on what users really care about.

Saturday, September 12, 2009

When at First You Don't Succeed...

It takes an average of 58 new product ideas to deliver a single successful new product. That is the core message of Getting to Plan B, a new book by John Mullins and Randy Komisar.

Since Plan A almost never works, it is critical to quickly learn from failure and move on to a successful Plan B (or C or D or E…). This book provides an exceptionally helpful framework for how to do this. Its power lies in its analytical framework combined with vivid examples from companies - including both for-profit and non-profit.

The first order of business for the authors is to dethrone the business plan. Many entrepreneurs and inexperienced investors obsess over the initial business plan. But the quality of the initial business plan is far less important than the ability of the entrepreneurs to form and test hypotheses rapidly - discarding the leaps of faith that don't pan out and doubling down on those that do.

Contrary to popular perception, most successful businesses did not strike it rich from the beginning. A company like eBay, profitable from day one, is the exception that proves the rule (and Pierre Omidyar has said that he realizes how lucky he was). Even eBay has struggled to figure out how to make money from new business lines such as Skype. Google would not be the behemoth it is today - and might even be out of business -- if it had not discovered its own Plan B, paid Adwords. Amazon burned through hundreds of millions of dollars before it hit upon the right business model that made it profitable. Today, the jury is out on whether Twitter and even Facebook will find profitable Plan Bs that sustain their early growth.

What matters most is not the quality of the initial business plan, but instead the ability of the team to iterate successive business plans as a means to finding what works. Merely flailing about from Plan A to B to C increases the chance you will run out of cash before finding the right Plan. So the trick is to experiment quickly but intelligently, and with discipline.

The authors urge entrepreneurs to assemble several analogs (features of other companies they want to emulate) and antilogs (features they want to avoid). Based on these, entrepreneurs then form a hypothesis about a product or service - essentially a leap of faith that customers will buy it at a price and quantity that generate revenues in excess of cost.

The next step is to develop a dashboard to monitor whether the hypothesis is correct. Can you get the product to market with the amount of investment you have been able to attract? Are enough customers buying? Are they willing to pay the price needed? Is the cost of production such that the company can become profitable at the appropriate scale?

The answer to one or more of the above questions is likely to be "no" for Plan A. So the next step is to repeat the process - develop new analogs and antilogs and another hypothesis or leap of faith based on those. Try it, and monitor with a dashboard. Repeat again.

The key is to pick the simplest possible dashboard that includes only the key drivers to your success. To help the reader determine these, the book provides helpful examples using real companies relating to several dimensions - the revenue, gross margin, operating cost, working capital, and investment models.

Anyone who is thinking about starting a new business should read this book. Given the pace of change in the world, even established business leaders should read it, since the constant threat of new competition often requires even existing companies to develop new Plan Bs.

More provocatively, this book helps explain why some economies grow faster than others. An economy whose institutions and other structures facilitate rapid-cycle experimentation is going to produce more successful companies and products. By contrast, economies that discourage experimentation and punish failure are going to find fewer of those one in 56 new ideas that work.

One implication of this is the need for a fundamental change in the DNA of development aid agencies. The existing aid agencies are based primarily on the idea that if a problem is studied in enough depth, then a select group of experts will be able to design a solution. As a result, a huge amount of resources go into Plan A, which results in projects with a typical life span of three to five years. And to make it worse, agencies such as the World Bank aim for a project success rate of 85% - far above the 1:56 chance of the first idea being a successful project.

For official aid projects, thorough reviews are done after several years have passed. In theory, the lessons learned are incorporated into the next project, which launches a couple of years down the road Though small course corrections are possible, it is difficult to significantly modify a project once it is underway. As part of this mentality, failure is seen as very bad - as evidence that not enough analysis and planning were done or (worse) that the experts involved were incompetent. Agencies go to great lengths to sweep failures under the rug instead of quickly embracing the lessons of failure and acting on them.

Aid agencies instead must mirror the way that successful economies operate- they must encourage rapid-cycle experimentation. They must acknowledge that even the best experts rarely get it right the first time - or even the second or third time. As counter-intuitive as it sounds, the key is to fail quickly and then move on to test new hypotheses until they find one that works, just like leaders of the most successful private companies.

I do have one major complaint with this book. As a leader of one of the organizations featured in the book, I was fortunate enough to have the counsel of Randy Komisar along the way. But it would have saved me a lot of headaches if Komisar and Mullins had written this entire book some nine years ago. When I co-founded GlobalGiving, I spent a lot of time on our initial business plan, and I was highly confident our Plan A was going to work. When Plan A failed, I spent a lot of time licking my wounds and wondering what went wrong. This book would have helped me understand that early failure is par for the course, and it would have given me a framework for getting to Plan B much earlier.

Update: Here is another review from the Financial Times.