Aspen InstituteBusiness and Society ProgramBusiness Education SymposiumMarket Failure and the Regulatory EnvironmentRyan Cabinte -- October 16, 2014

Two social enterprises

Destroys CFCs for carbon credits Insects as food

Two social enterprises

FUNDEDNOT FUNDED

(YET)

Destroys CFCs for carbon credits Insects as food

Insects as food

The Farm Bill is a headwind

Chirp flour is not cost competitive

The substitutes are too heavily subsidized

Destroys CFCs for carbon credits

Wrote their own special interest legislation

Piggy-backed on AB32 for verification protocol for CFC destruction

Niche created and protected by regulation

Learning outcomes:

Understand the interdependent relationship between markets and regulation.

Understand market failure and regulatory intervention as frameworks for synthesizing and evaluating potential solutions to sustainability problems.

Apply the above understandings to synthesize and evaluate new solutions to sustainability problems that reach across sectors (business, government, and civil society).

Learning outcomes (Cliff Notes):

Every time you see a business, see the policy necessary to scale it.

Every time you see a policy, see the businesses that are created.

When public problems are intractable, look to the business-policy relationship for new options for action.

Why an intersectoral approach for MBAs?

• It’s an application of systems thinking• Social enterprises often gravitate to highly regulated industries

Firms jumping sectoral boundaries–Innovation in corporate forms

• Benefit corporations, Flexible Purpose Companies, L3Cs–CSR as firm-level attempt to measure public interest impact–Investment innovation: Social Impact bonds, SRI, Impact investing

• Lobbying as scaling strategy – Bloom, Paul. (June 18, 2012) How to Take a Social Venture To Scale. Harvard Business Review. – Bannick and Goldman. (Sept. 25, 2012) Priming the Pump for Impact Investing. Stanford Social Innovation Review.

• Sustainability orgs getting stuck by regulatory infrastructure• Large, mainstream corporations take an intersectoral approach

9

Shareholders

Managers

The Corporation

Shareholders

Managers

Competitors

Customers

The 3 Cs (Kenichi Ohmae, UCLA/McKinsey)

Shareholders

Managers

Competitors

Customers

Suppliers

Substitutes

Pot. Entrants

Porter’s 5 Forces(Michael Porter)

Shareholders

Managers

Competitors

Customers

Suppliers

Substitutes

Pot. Entrants

Blue Ocean

Porter’s 5 Forces(Michael Porter)

+

Blue Ocean Strategy(Kim & Mauborgne)

Shareholders

Managers

Competitors

Customers

Suppliers

Substitutes

Pot. Entrants

EmployeesLocal CommunitiesSocial Needs

NGOs

Media Blue Ocean

Creating Shared Value(Michael Porter and Mark Kramer)

Shareholders

Managers

Competitors

Customers

Suppliers

Substitutes

Pot. Entrants

EmployeesLocal CommunitiesSocial Needs

NGOs

Media Blue Ocean

Creating Shared Value(Michael Porter and Mark Kramer)

Managing for Stakeholders(R. Edward Freeman, Darden/UVA)

Complementors(Brandenberger & Nalebuff, Yale)

Ecosystem services

Shareholders

Managers

Customers

Suppliers

Pot. Entrants

EmployeesLocal CommunitiesSocial Needs

NGOs

Blue Ocean

Sustainable Business

Competitors

Media

Substitutes

Hofstadter, Douglas. Godel, Escher Bach

Ecosystem services

Shareholders

Managers

Customers

Suppliers

Pot. Entrants

EmployeesLocal CommunitiesSocial Needs

NGOs

Blue Ocean

Sustainable Business

Competitors

Media

Substitutes

Ecosystem services

Shareholders

Managers

Customers

Suppliers

Pot. Entrants

EmployeesLocal CommunitiesSocial Needs

NGOs

Blue Ocean

Competitors

Media

Substitutes

Regulation

Ecosystem services

Shareholders

Managers

Customers

Suppliers

Pot. Entrants

EmployeesLocal CommunitiesSocial Needs

NGOs

Blue Ocean

Competitors

Media

Substitutes

Regulation

Hofstadter, Douglas. Godel, Escher Bach

So how to deal with complexity?

Hofstadter, Douglas. Godel, Escher Bach

So how to deal with complexity?

Provide a model

Perfect Market

Market Failure

Government Intervention

Government Failure

Intractable public problems

Perfect Market

Market Failure

Government Intervention

Government Failure

Intractable public problems

Perfect Market

Perfect InformationNo barriers to entry/exitEqual access to technologyNo market powerUndifferentiated ProductsPeople and firms maximize utility

Market FailureEconomic (Pareto Optimal)•Imperfect information•Insufficient competition•Externalities

•Public Goods•Public, toll, common pool goods

•Principal/Agent problems•Transaction Costs

Social/Political•“Non-market“ system breakdown

• e.g, ecological, family, social•Moral objection•Socially important goods•Procedural Fairness•Distributive Justice

Government InterventionTaxRegulate Subsidize/GrantProvide ServiceBudgetEnable information flowEstablish/Modify RightsModify economic activityEducate/ConsultFinance/Set ContractsPolitical/Bureaucratic Reform

ContractsProperty (IP)EnvironmentalCorporate FormationCapital MarketsMarriage EqualityGun ControlClimate

Government FailurePublic Choice•Voting Paradoxes•Logrolling•Rent Seeking•Bureaucracy•Tax “Avoison”•Federalism

Regulatory CaptureLobbyingOverreach/OverrestrictionInsufficient FundingUnderfundingCompliance/Enforcement

How do you get MBA students to work with these concepts?

Term Assignment• Step 1. Pick and articulate an intractable public problem statement• Step 2. Research, then develop at least:

– 3 business solutions, – 3 policy solutions,* and – 3 NGO solutions

• Step 3. Develop common criteria for evaluation and pick a winner in each sector– Evaluate the winners according to their sector-specific criteria

• Step 4. Articulate an intersectoral strategy

*Use Bardach’s Eightfold Path

Example: Problem statement“Over six million tons of valuable organic materials are

wasted in Southern California's landfills every year.

These materials break down anaerobically, and emit the equivalent of 3.4 million tons of carbon dioxide - a harmful

global warming gas - into the atmosphere.”

Context• Organic waste is currently a cost – Private: Hauling and landfill tipping fees– Public: GHG emissions

• Organic waste can be profit– Energy feedstock and soil amendment

• Technology exists• Currently not commercial• Currently infrastructure inadequate

Context• 80% of organic waste goes to landfill• Battling regs (AB 939):– 50% of all organic waste must be diverted – Exception: organic waste can be used as alternative daily

cover (ADC) in landfills • Thus, landfills accept organic waste at no charge

Context• If exception lifted, diverted organic waste would overwhelm

existing processing infrastructure– 6.4M ton capacity vs. 10M tons in new supply under 50%

mandate

Context• State permitting regs for anaerobic digestion facilities

onerous• Air Quality regs create uncertainty in cost of compost facilities• Competing synthetic fertilizers subsidized– Positive externalities of organic waste soil amendment not

internalizable

Step 2: Solutions

Step 2. Solutions

Step 2. Solutions

Step 3: Criteria

Public Sector Solution Evaluation: Mitigation credits for organics infrastructure

Private Sector Solution Evaluation:Develop an Anaerobic Digestion Facility

Financial Analysis…

Non-Profit Sector Solution Evaluation:Multi-sector organics diversion lobbying group

5 Forces +1…

Preferred Solution

Must increase….

A final note

Dueling problem statements

1. Organic waste diversion technology exists and is not commercial

2. Organic waste diversion technology exists and is commercial, but has not scaled

Aspen InstituteBusiness and Society ProgramBusiness Education SymposiumMarket Failure and the Regulatory EnvironmentRyan Cabinte -- October 16, 2014