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Is Making an Impact the Path to Profit?

According to Prof. Henrietta Onwuegbuzie of Lagos Business School, entrepreneurs focused on solving problems and ongoing innovation grow their businesses faster, make more money—and have a bigger impact than any government or nonprofit.

impact

Impact-driven businesses are trendy, offering both social good and profit. But according to Professor Henrietta Onwuegbuzie of Lagos Business School, the approach isn’t new; rather, it’s a revival of a traditional model. “Business, initially, was created to meet the needs of society, but capitalism derailed that understanding,” Onwuegbuzie says. “We now believe that you set up a business to make money.”

Onwuegbuzie argues that enterprises that set out to solve a societal problem are built to deliver value: “Being purpose-driven helps companies grow faster and make more money.”

Academia can play a role in creating impact-driven business by preparing students to approach the world with an entrepreneurial mindset—always looking to innovate, improve, and solve problems—whether they apply it to starting a business or within an existing organization. 

Onwuegbuzie, a visiting senior lecturer at Yale SOM, talked with Yale Insights about how businesses that prioritize impact, purpose, and value can drive economic development and social transformation, in her native Nigeria or any other country.


Q: You are a strong proponent of impact-driven businesses. Why is that?

Business, initially, was created to meet the needs of society, but capitalism derailed that understanding. We now believe that you set up a business to make money while nonprofits, charities, and government are meant to concern themselves with impacting lives. However, business can be a tool for social transformation, while remaining profitable, and we’re losing sight of this.  

I can’t think of any nonprofit, charity, or foundation that has influenced or transformed the world as much as businesses like Microsoft, Amazon, or Facebook, for example. There’s no country in the world where you can’t find the Microsoft logo. It’s not because Bill Gates is a brilliant marketer, but because Microsoft’s solutions are globally relevant, and so are in high demand. This is what made Bill Gates the wealthiest man in the world for 18 years.

Microsoft made computers easy to use and less expensive to own, and so allowed more people to work more efficiently around the world. That’s the power of business. It can make money, while making a difference. As Jack Ma said, “If you want to remain small, solve small problems. If you want to be big, solve big problems.”

The wealthiest people in the world understand the positive relationship between impact and profit. They understand that impact drives profitability. But most people have been taught to see impact and profit as dichotomous: you’re either a capitalist shark, solely profit-driven or an altruistic Mother Theresa heart, who solely wants to make an impact, with no financial plan to ensure sustainability. 

This dichotomy between impact and profit has led to a world where businesses that could contribute to transforming the world don’t think about impact because they believe it will lead to below-market returns. On the other hand, those who are solely impact-driven and without a financial model tend to be unsustainable or vulnerable because they are donor dependent and their reach and impact are limited by donor funding. 

Impact-driven businesses make money while making a difference because they impact lives. They therefore bridge the gap between economic growth and social development, by creating shared prosperity and consequently a better, safer world.

Q: Are there tradeoffs between economic returns and social impact?

Not if properly structured. Rather than a tradeoff, impact can actually lead to accelerated profits. I had an MBA student who didn’t believe anything I was saying about impact-driven businesses and profitability. He said, “Look. I’m in business for the money and that’s it.” His slogan was, “Show me the money.” I said to him, “You know what? I choose to be impact-driven and ethical, because value drives profits and ethics drives sustainability.”

We kept going back and forth about this until he finally decided to try the idea of being value- or impact-driven. He already owned a business that sold educational toys, luxury toys, everything you could imagine, including dolls. The dolls were, however, all white, with blue eyes and blond hair, and did not resemble black girls. It therefore occurred to him that he could produce black dolls that would not only make the black girl-child proud of her brown skin and curly hair but would also help her learn about her culture.

He produced three dolls that represented the three main ethnic groups in Nigeria: Igbo, Hausa, and Yoruba. The dolls were dressed in traditional attire of each tribe, and each one came in a box with a little booklet that presented the culture of each tribe. A portion of the revenues from the dolls was also intended to be used to promote education. With the help of some street boys, the student in question identified a dilapidated school in a low-income neighborhood, which he decided to renovate with some of the proceeds from the doll sales. He required the workers he engaged in the renovations to hire local people in the area and train them as they renovated the school. This arrangement helped build skills in the area.

By the time the project was completed, he was listed for a state government award. Both the novelty of African dolls with Nigerian names and the good works the entrepreneur was carrying out in the community drew attention to him. He has since been interviewed by every single national newspaper, in addition to globally known media like CNN, Forbes, CNBC, and BBC Africa. He told me, “For 10 years, I was making money, but not even the most rickety local newspaper cared to hear my voice. Today, I’ve got a global voice because of these dolls. They have brought me more money and fame than all my other toys.” 

I said to him, “There you go. Now you’ve seen for yourself that value drives profits.”

Q: It’s more than coming up with a compelling product? Being purpose-driven matters?

Being purpose-driven helps companies grow faster and make more money. Let’s take Toms shoes in the U.S. as an example. Their business model is that when you buy a pair of Toms shoes, another similar pair is given to the poor. This model makes people prefer to buy Toms, because they resonate with the social mission of Toms and want to be a part of something good. This model has made the brand quite popular.

The difference between an impact-driven business and corporate social responsibility (CSR) approach is that, in the case of an impact-driven business, the problem you wish to solve is the purpose of the business and a profitable business model is built around the solution to ensure it can solve the problem in a sustainable way. However, with CSR, the business is not necessarily impact-driven, but simply gives a percentage of profits back to society. The former has a stronger and more transformative impact on society than the latter.

With profitable purpose-driven businesses, profit ensures business sustainability and extends the reach of their impact. While most social enterprises tend to be nonprofits, it is important to build sustainability into the business. We’ve got to be creative about designing sustainable business models aimed at transforming society. Similarly, the world needs a new educational system so that we can have shared prosperity and more peace. 

Q: Could you explain what you mean by a new educational system?

The curriculum of business schools tends to be more oriented towards improving job eligibility or creating a mind-set of job-seeking, rather than developing job creators, which is what today’s society is in dire need of, in most parts of the world. 

I recall that when I was finishing my PhD in the UK, I saw many graduates begging to be accepted to work for free in organizations because there were no jobs, and they were afraid of sitting at home doing nothing and getting depressed. This high unemployment situation is common in many countries, and so students are being graduated into frustration.
 
Society has changed and now significantly requires more job creators than job seekers. However, you get into business school, and you’re promised career fairs to get you the best jobs, you’re trained to write a CV, perform at interviews, etc. When students are listening to a finance or accounting class, it’s usually from the perspective how it should be done within a big organization, not from the perspective of how it could be done in a startup or growing business. All this programs students with a job-seeking orientation.

It is time for academia to reverse things by making the curriculum focus more on entrepreneurship, which develops people with an orientation to be solution providers and consequently, job creators. This is what today’s society needs. Even if these students get jobs, they will perform better if they have been trained to have an entrepreneurial mindset, which is one of continuous improvement.

I think business schools have a major role to play in transforming society by educating students and business leaders to be impact driven. They have to be imbued with the idea that business can be a tool for social transformation, aimed at providing solutions to problems. This is also a competitive strategy, as the greater the impact and reach of the solution, the more money the business makes, because the more relevant it is, the higher will be the demand for it.

In Nigeria, small businesses employ 86% of the population. Government, banks, and multinationals provide a small fraction of total employment. We therefore need to develop people who can start and grow sustainable businesses and therefore create stable jobs for others. These businesses can be started while they are still in school so they can get guidance and by the time they graduate, the businesses are on sound footing. Business school graduates should be game changers in society, because they solve problems, create jobs, and consequently create wealth and shared prosperity. A couple of schools around the world are already doing this and more need to join in.

Q: Who goes into entrepreneurship in Nigeria?

Anybody and everybody, but usually not MBAs, as they are usually focused on getting the best-paying jobs. Often, less-educated people, who have learned through apprenticeship, are better able to survive in entrepreneurship than people who are more educated. This is an anomaly that academia needs to correct.

Once students get an MBA, they want the security of a high salary. Even though with entrepreneurship they might end up making much more, they don’t see the incentive for delayed gratification, because business requires that you sow a lot of effort for some time before you begin to reap the rewards, while you continue to sow.  

One of the things that often marvels me when I’m teaching entrepreneurs who come to our executive programs at Lagos Business School is how these participants have grown multi-million-dollar businesses before coming to business school to learn structure and move to the next level. They end up learning how to make their businesses more sustainable with the tools and structures we teach, but it’s amazing what they’ve been able to achieve on their own. It’s funny that most MBA startups cannot achieve this same feat.

Q: How can African entrepreneurs balance the tools of business with common sense?

I taught a course titled, “Contemporary Principles of African Indigenous Entrepreneurship” at the Yale School of Management.  One of the things this course tried to do is show how many of the so-called contemporary principles of entrepreneurship have always existed in indigenous African tradition and have been practiced by African entrepreneurs for centuries. 

For example, crowdfunding has always existed as Esusu in Nigeria. It is a traditional structure for capital formation. People put themselves in clusters, with everyone making an agreed, on-going, weekly or monthly contribution to a pool of funds. The total comes to something quite significant, and each one gets a turn to take the total sum at the end of each month. Each person can then plan to make high-ticket purchases or other investments when they know it will be their turn to collect the total. This contribution is done at different income levels and total can be quite a high amount, when those in the contributing cluster are each putting in a significant sum.

Impact investing is another contemporary terminology, but the concept has always existed in African traditional settings, where every business is purpose-driven and aimed to provide a solution to a problem, while earning a living for the solution-provider. Nobody sold things just to take peoples’ money. They always offered a solution. You were either the farmer, the fisherman, the carpenter, or the canoe maker. Every business had a mission that was of use to the society.

Yet another example is franchising. This can be found embedded in traditional apprenticeship models, where the apprentice learns from an expert and replicates everything he has learnt when he completes his apprenticeship tenure and starts his own business. Franchising is therefore the modern-day name of a traditional model.

Buzzwords have their place but bringing in a little common sense and familiarity with longstanding common practices is a way to move past the hype. In many ways I think businesses need to keep it simple.

I also believe it is important to distinguish between being a business owner and an entrepreneur. Business owners simply tend to replicate whatever is working in business. Entrepreneurship is more about providing solutions, commercializing, and continuous improvement. As Mark Zuckerberg puts it, “Entrepreneurship is about creating change.” It’s also a better way to remain sustainable and profitable in business. Otherwise, you become one more Xerox, Blackberry, or Polaroid. You’ve got to continuously improve and continuously innovate to remain in business.

Q: What are the hurdles to entrepreneurship? How can government or policy intervention make a difference?

When people start businesses, anywhere in the world, they face hurdles. Let’s not romanticize entrepreneurship. We tend to think that some places are different, but the good, the bad, and the ugly exist everywhere. There are challenges everywhere. Entrepreneurs must therefore be resilient and strategic to succeed.

Government can do well to keep improving the entrepreneurial ecosystem—for example, by funding more incubators, accelerators, and entrepreneurship training centers. However, we should still be prepared to use what we have to get what we want, while working towards a better or an ideal situation. 

Most government interventions to support entrepreneurship typically tend to be in the form of funding. This is, however, not the best solution as statistics have shown that 90% of venture-backed businesses fail within the first three years. Funding is important, but it’s not the first or only thing entrepreneurs need. The most important thing required by entrepreneurs is training and mentoring as they grow. If entrepreneurs get funding before training, they are not likely to use the funds well or achieve the desired results. 
 
I shared a video in class of a leather manufacturing cluster in a semi-rural part of Nigeria, called Aba. The most amazing shoes, bags, and belts are produced in this cluster, though they have few machines and use mainly manual processes, while generating their own electricity. I showed this video to illustrate that while things are not perfect, we can use what we have to get what we want. For those of us who have more education and more means, there’s no excuse. When there are issues with the usual suspects—government policies, infrastructure, or lack of funding—there are ways to get around it. 

These gaps are also a business opportunity that the private sector can take advantage of. Any business that provides the equipment required to scale production in such clusters can make a lot of money from leasing the machines to these manufacturers. 

Humble financial beginnings or lean start-up are good for learning the market. You learn what to do and what not to do. You’re bound to make mistakes when you start something new; the good thing about bootstrapping or lean startup is that mistakes made are inexpensive and therefore can be overcome. You have a chance to survive and continue. Mistakes are just a learning experience. On the other hand, when you have a lot of money, and little or no experience in the business, the mistakes tend to be very expensive and difficult to overcome and survive. 

Too often, businesses that fail aren’t lacking funds. They have a lot of money for something they have no experience in, and so make expensive mistakes that knock-out the business completely. 
For decades, the failure rate for new businesses has been as high as 75%–80% and has risen to 90% in recent times. There’s obviously something wrong with the way people are going about creating businesses today, yet we keep on repeating the beaten path that leads to high-failure rates. It’s not the only way; it’s a way that is not working. 

The traditional entrepreneurs in Nigeria start as apprentices for about three to six years, depending on the trade or skill being learned. When they go into business, they know what they’re doing and when they get funding, they know what to do with it. We should think about incorporating apprenticeship opportunities into mainstream academic curricula.

This article was originally published in Yale Insights.