With a triple dip recession looming in the UK, it is increasingly clear that there is a need for fundamental reform of the UK economy. But there is little consensus about how to make this happen. The form of capitalism adopted by much of the West is predominantly based on the achievement of short term growth, with the banking crisis and the UK’s depressed economic performance arguably the result of short-term profit seeking with little regard for the longer term consequences. In the banking sector, retail banks have resorted to unsustainable tactics to make money from their customers, while the extreme financial incentives to increase profit in investment banking have led to dishonest dealings and collapsed markets. Likewise, on the high street, short term market incentives prompt grocers to squeeze their suppliers on cost while driving their customers to over-consume through carefully devised offers and by prompting impulse buying.
How can an economic recovery take place in the context of such unsustainable market forces? The policy response has not proved very helpful. When these sustainability problems arise, the usual government response is to reach for new policy levers, regulation or sanctions. Sometimes industry captains get together to try to find an answer. In conference after conference, people discuss the change that needs to be seen, usually to little effect.
One of the problems is that incumbent players in an industry cannot alter their ‘basis for competition’ and no amount of top down pressure can change this. Professor Clayton Christensen of Harvard Business School explains in his research that innovation within an industry normally takes place to achieve incremental change rather than transformation. So transforming a market is extremely difficult. As a result, unsustainable factors which are inherent to industry models actually grow with the market themselves to become larger and larger challenges to society as a whole.
This is not just a private sector problem. In the UK, demand for healthcare has grown by four per cent every year since the inception of the NHS. Between 1997 and 2007, the NHS budget grew from £44bn to £96bn. This is 225 per cent more growth than the FTSE 100 index and 170 per cent more than GDP growth over the same period. The reason is that it is in hospitals’ interest to supply more services, even though they are a publically funded good. Yet this level of inflation in healthcare costs is definitely not sustainable, and represents a global challenge in the coming years. The incentives are backwards.
However, an anomaly to this is the technology sector. Unlike many other sectors, this industry consistently transforms itself, altering not only its own business models but also transforming how society functions. Why is this? Let’s consider some of the factors:
- The sector takes its inspiration from visionaries who have developed globally transformative solutions, starting from their garage. As Steve Jobs put it, it is the ones who are crazy enough to think they can change the world who usually do.
- Technology communities are well connected, allowing knowledge and communications to travel quickly, and enabling ideas to develop into solutions.
- The tech industry has enjoyed a disproportionate share of the global venture capital spend.
- Platforms such as Windows, Apple, and Google Android are making it easier for many people to develop applications for a mass market.
- Governments and organisations have set up technology hubs for entrepreneurs to test and grow their solutions.
For these reasons and many others, it has been possible for new people to enter the market and transform it from the bottom up. Better solutions and new business models have been able to displace those that don’t work as well. Yet if any link in this chain were removed, barriers would prevent this process. For instance, if VC finance were scarce in technology, then it would be harder for solutions to scale to the next level of development and incumbent players would maintain more control.
What has happened naturally in the tech markets is that the “right thing has been the easiest thing”. This has created a truly transformative, adaptive market. There are fewer barriers preventing someone from setting up an innovative global tech business than an innovative healthcare solution or a bank. Yet the sector has not collaborated at corporate levels, they have not looked to Davos for solutions and it has not been organised top down.
How can we apply this learning to other sectors? There are already some examples where markets have been rebalanced without the use of regulation. The Fairtrade movement has inspired innovation and sustainability in coffee, cocoa and many other supply markets where natural short term market forces were leading to unsustainability. Unsustainable supply is bad for growers, manufacturers, retailers and consumers; so the Fairtrade system has effectively a more balanced and prosperous outcome for all.
The same approach could be used in large corporations to solve endemic problems which conventional strategy fails to address. I have been working with The Fairbanking Foundation, an organisation that works with banks to create and certify new financial products that improve the financial wellbeing of their consumers. Some products make it easier for customers to make and reach savings goals; others help customers to better manage income and expenditure. Both improve market sustainability. And this type of innovation requires no regulation. It just uses the market.
Likewise, in healthcare, we are looking at the barriers that prevent ‘the right thing’ from happening. On this basis we are designing and implementing solutions to overcome these blockers. First, one of the most serious problems in healthcare is that health organisations are not assessed on the basis of the value they deliver to patients – that is, on the basis of positive patient outcomes for every pound spent. So we are developing a value based measure to make this easier. Second, healthcare organisations are unable to transform their service models to satisfy today’s needs. So we’re setting up public sector vehicles to test and scale new service models with the potential to better serve the needs of a target group. These come from healthcare practitioners, social carers or members of the community.
If market forces are causing a sustainability failure, then we must find solutions which alter the market dynamics in order to drive sustainability. The logic applies equally to private and state controlled markets, or to problems internal to corporations. All that is required is thinking differently about the problem. Instead of creating more regulation, what is needed is a strategy for taking away barriers for the market to correct itself. In other words, we need to find ways to make the right thing the easiest thing.