Understanding Context & Trust - Video 6
Summary
TLDRIn this insightful discussion, the focus is on addressing institutional voids in emerging markets. The common thread among successful entrepreneurs globally is the prioritization of trust cultivation within their ecosystems. The example of Jack Ma and Alibaba is highlighted, illustrating how trust is central to entrepreneurial success, especially in developing countries. Ma's innovative approach to building trust through escrow mechanisms and mimicking traditional bargaining practices online showcases the importance of trust in creating thriving businesses, even in challenging environments.
Takeaways
- 🌏 The speaker discusses the importance of addressing 'institutional voids' in emerging markets, emphasizing the need for entrepreneurs to build trust and mechanisms for problem-solving in the absence of established systems.
- 🛫 The speaker's intellectual journey has involved traveling to various countries, studying how different entrepreneurs have tackled institutional voids, with a focus on cultivating trust as a common thread among successful efforts.
- 💡 The defining characteristic of an emerging market is the lack of established mechanisms for information flow, problem-solving, and credible recourse, which entrepreneurs must build themselves.
- 🌱 Trust is identified as the central activity and organizing principle for entrepreneurship in emerging markets, with the speaker's book titled 'Trust: The Creating Foundation for Entrepreneurship' highlighting its importance.
- 📚 Historical references are made to the significance of trust in commerce, dating back to the works of Adam Smith and even earlier, showing that trust networks have been crucial for trade and societal interactions.
- 📈 The example of Jack Ma and Alibaba is highlighted to illustrate how trust was cultivated in e-commerce, with the creation of an escrow mechanism to ensure transactions were secure and trustworthy.
- 🛍 The importance of mimicking traditional bargaining practices online to instill trust in buyers is discussed, showing how Alibaba adapted to cultural practices to build trust in their platform.
- 🔄 The script mentions the iterative process of Alibaba's attempts to develop in rural China, emphasizing the difficulty and the need for continuous experimentation and learning.
- 🚫 The challenges faced by Alibaba in rural China, despite their success in urban areas, underscore that building trust and filling institutional voids is an ongoing and complex process.
- 💡 The speaker suggests that the cultivation of trust should be an explicit objective for entrepreneurs working collectively to address institutional voids, as it can smooth the process of entrepreneurship in emerging contexts.
- 🌟 The success of Alibaba, transforming from a startup into a trillion-dollar company, is attributed to the central thesis of prioritizing trust, demonstrating the power of a simple yet profound idea.
Q & A
What is the common thread among individuals who successfully solve institutional voids in various contexts?
-The common thread among individuals who successfully address institutional voids is the prioritization of trust cultivation across the entire ecosystem.
What does the term 'emerging market' signify in the context of institutional voids?
-An emerging market signifies a market that is in the process of developing, where mechanisms for problem-solving, information flows, and credible recourse for adjudication are either absent or underdeveloped.
How does the concept of trust relate to entrepreneurship in emerging markets?
-Trust is central to entrepreneurship in emerging markets as it forms the foundation for creating institutions that fill voids, allowing entrepreneurs to operate effectively in the absence of established mechanisms.
What role did trust play in the success of Alibaba's e-commerce platform?
-Trust played a crucial role in Alibaba's success by enabling the creation of an escrow mechanism that reassured both buyers and sellers, facilitating transactions in an environment where trust was initially lacking.
How did Jack Ma's background as an English teacher influence his approach to entrepreneurship?
-Jack Ma's background as an English teacher exposed him to the emerging internet opportunities, which he then leveraged to create Alibaba, emphasizing the importance of trust in e-commerce as a core aspect of his business strategy.
What is the significance of the escrow mechanism in building trust for online transactions?
-The escrow mechanism is significant in building trust for online transactions as it ensures that the seller does not receive payment until the buyer confirms receipt of the goods, thus mitigating the risk of fraud.
How did Alibaba mimic traditional bargaining practices to build trust with customers?
-Alibaba allowed for negotiation in the online buying process, mimicking the traditional bargaining practices found in wet markets, which reassured customers and made the online shopping experience more familiar and trustworthy.
What is the historical context of the escrow mechanism used by Alibaba?
-The escrow mechanism has historical roots dating back to the Italians over 1500 years ago. Alibaba modernized this concept to suit the context of China, creating a system that facilitated trust in online transactions.
How did Alibaba's escrow mechanism inadvertently lead to the creation of one of the world's biggest mutual funds?
-The escrow mechanism led to the creation of one of the world's biggest mutual funds because a large amount of money was held in escrow, which was then utilized to generate further financial opportunities.
What challenges did Alibaba face when trying to develop its platform in rural China?
-Alibaba faced significant challenges in rural China, including multiple iterations and experiments to adapt to the local market and foster trust among rural consumers, highlighting the difficulty of replicating success in different environments.
What lesson can be learned from Alibaba's attempts to develop in rural China?
-The lesson from Alibaba's attempts in rural China is that building trust and filling institutional voids is not easy and requires continuous effort, experimentation, and learning from each attempt.
Outlines
🌏 Global Entrepreneurship and Institutional Voids
The speaker discusses the common thread among individuals who successfully navigate and solve institutional voids in various global contexts. The central theme is the cultivation of trust across ecosystems as a key to entrepreneurial success. The speaker highlights the importance of trust in emerging markets, where traditional mechanisms for problem-solving and information flow are often absent, and emphasizes the need for entrepreneurs to build trust within their ventures. Examples from Chile, India, China, and Africa are mentioned, showcasing the universality of this principle.
🛍️ Trust as the Bedrock of E-commerce: The Alibaba Story
This paragraph delves into the story of Jack Ma, an English teacher turned entrepreneur, who founded Alibaba. It underscores the critical role of trust in e-commerce, especially in developing countries where skepticism towards online transactions is high. Ma's insight was that trust is the most important factor for e-commerce, and everything else is secondary. The creation of an escrow mechanism by Alibaba to ensure trust between buyers and sellers is highlighted as a significant innovation. The paragraph also touches on the cultural aspect of trust-building, such as mimicking the bargaining process found in traditional markets to reassure customers online.
🚧 The Challenges of Scaling Trust in Rural China
The speaker elaborates on the challenges Alibaba faced in scaling its trust-based model to rural China. Despite the company's success in urban areas, the rural market presented unique difficulties. The speaker discusses the iterative process Alibaba underwent to establish trust in these areas, emphasizing the need for continuous experimentation and learning. The paragraph illustrates that building trust is an ongoing process, even for established companies, and that success is not guaranteed but requires persistent effort and adaptation.
Mindmap
Keywords
💡Institutional Voids
💡Trust
💡Entrepreneurial Journey
💡Emerging Markets
💡E-commerce
💡Escrow
💡Cultivation of Trust
💡Rural China
💡Experimentation
💡Alibaba
💡Trust Networks
Highlights
The common thread among people solving institutional voids is prioritizing the cultivation of trust across the ecosystem.
Defining characteristic of an emerging market is the absence of mechanisms for problem-solving, information flows, and credible recourse.
Entrepreneurs in developing countries must build the necessary fabric for their ventures while addressing institutional voids.
Trust is a central activity and the organizing principle for entrepreneurship, as highlighted in the book 'Trust: The Creating Foundation for Entrepreneurship'.
Adam Smith emphasized that markets cannot exist without fairness, altruism, and trust in his book 'The Theory of Moral Sentiments'.
Trust networks implemented by Buddhist monks facilitated commerce between India and China in the 12th and 14th centuries.
Religious traditions often have trust at their core, facilitating social interaction.
Jack Ma, the founder of Alibaba, emphasized that trust is the most important aspect of e-commerce, with everything else being a detail.
In developing countries, e-commerce is not just an extra but the primary means of commerce, making trust even more critical.
Alibaba created an escrow mechanism to build trust between buyers and sellers, a modern adaptation of an ancient concept.
The escrow mechanism became a significant mutual fund due to the large amount of money held in it, leading to the creation of Ant Financial.
Alibaba mimicked the traditional bargaining process of wet markets in China to build trust in their online platform.
Verification through trusted third parties was used to enhance credibility for businesses on Alibaba's platform.
The importance of treating business experiments as learning opportunities, with many attempts leading to failure before success.
Alibaba's efforts in rural China demonstrate the ongoing challenges and iterations required to foster trust and fill institutional voids.
The central thesis of prioritizing trust has led to the creation of a trillion-dollar company in just 20 years.
The simplicity of the idea that trust is central to entrepreneurship, as exemplified by the success of Alibaba.
Transcripts
the U one major part of your
intellectual Journey has been to sort of
talk about contacts and institutional
voids um and you've studied examples
from around the world remarkable
examples from around the world thanks to
HBS yeah exactly we were such a
fortunate place for you to be able to
Jet around the whole world from Chile to
India to China to Africa everywhere they
should stop paying us yeah yeah exactly
we should pay them
um and and the the so the question I
have for you is like what's the common
thread that people that solve
institutional voids in all these vared
contexts in all these varied settings in
all these vared ways of s of s them
what's the common threat among all of
them so I think that's a awesome
question and a tough question to answer
so I've been pondering this
obviously um over the last several years
just trying to think what's what's
what's common across let's let's define
it of course you know people go about
the entrepreneurial Journeys and most
people don't make it Beyond a certain
point and they have good efforts but
they're not enormously impactful let's
just stay as a class of efforts from
which we can learn the most those who
really scale their efforts to
affecting tens of millions of people I
would say the my candidate um um uh item
for what all those people have made
explicit in their uh in their Journeys
as change agents is to prioritize the
cultivation of trust mhm across the
whole ecosystem okay so remember the the
defining characteristic for me for an
Emerging Market is a market that is
emerging it hasn't emerged yes and what
that means is that the mechanisms needed
for solving problems the information
flows and the credible recourse for
adjudication and so on are missing yeah
and the central idea is that the wouldbe
entrepreneur the DTI the cola Masha um
have to build that yes that entire
fabric while they want to be an
agricultural entrepreneur or a heart
surgeon yes and at one level you would
say well that's kind of unfair you're
making it really tough on the and my
response is I'm not making it tough it
is what the reality is it is that is why
these are developing countries
developing context
uh but it's better than not doing
anything it's better than waiting for
the government to solve your problem
which is going to take a lot longer if
ever um but what these uh entrepreneurs
have realized is that um if we make it
explicit in our objective function that
people who are working with me in
collectively addressing these
institutional
voids um that they trust each other and
they trust me yes then the whole
exercise is so much smoother and what I
thought we could do is go through a few
examples that illustrate how this has
been built up different ways in which
that people get a visceral sense for it
yeah so trust to you is the core Central
activity uh and the organizing principle
so a book that I wrote has the title
trust the creating the foundation for
entrepreneurship got it in some ways I
think the title says it great says it
all so trust is as old as the hills what
does that mean old as the hills I've
never heard of that term older older
than even you okay older than even you
uh with your bald head I some hair Baler
than mine so it must be said so okay so
Adam Smith very famously in theory of
the moral sentiment So Adam Smith you
know is known as quote unquote father of
modern economics he also a philosopher
moral philosopher and in his book in
1759 he writes the centerpiece of the
book is that markets cannot exist
without fairness altruism and Trust yeah
so it's a starting point and one of our
colleagues who a really uh amazing
historian sofas reinard yes has gone
beyond Adam Smith and written about uh
Italian moral philosophers and people
even predating that and another friend
of mine Tans sen who is a pressed NYU
has written about how uh the thing that
really made commerce between India and
China uh tend 12 14 centuries ago
happened was trust networks that were
implemented by the Buddhist monks as
they took uh Buddhist scriptures from
India to China got it so it's old older
than you older than me yeah but in fact
you know as you're talking about that I
mean I mean Many religious Traditions
have trust at the court right like it's
the way yeah exactly and that's that's
the way in which uh people can socially
interact yeah so this is an old idea
some at some level I'm just revising and
recovering and incrementally
contextualizing it if you will so the
first example uh even though he's fallen
out of favor with the with the Chinese
party lately yes is the iconic teacher
turned entrepreneur Jack ma Jack ma back
going back to the point that you made
earlier these guys when they start their
entrepreneurial Journeys like K Masha
doing agriculture or
DTI uh you know doing heart surgery they
don't really know most of the stuff that
they need to know to solve the problem
so Jack English teacher you know
famously speaking in English to tourists
in hjo yes and uh realizing that wow you
know uh there's all all this stuff
there's something called online that's
emerging over there the internet the
internet and how do I get you know
Chinese people to appreciate the
opportunities and as I recall vaguely
the the state own Enterprises are not
interested in this at all and so he goes
and creates along with 15 or 16 other
people uh who are have the status as the
founding team of Alibaba yeah creates
this this company that becomes an online
Behemoth but what I wanted to focus on
was some things that uh Jack famously
said so I attended I used to attend
these World economic Forum meetings in
Davos and at one of the meetings I
remember he was there and the thing that
he said that I quoted in my book was for
e-commerce the most important thing is
trust everything else is a detail so
everything that you do every concrete
thing that you do is about cultivation
of trust so that in his mind the the
skeptical chines buyer yes for whom
putting money into the internet and
waiting for something to show up is an
Act of Faith yes right and Faith was not
something that you had in a rural
developing country quite so easily where
scam artists are running around uh all
over the place right so another quote
that I'd like to say is uh in the US
e-commerce is what I call the dessert
it's mhm it's a it's an extra over what
you do but in developing countries I
China e-commerce is the only thing
that's going on there right so trust is
really Central to all this but let's
talk a little bit about how
he very tangible Monday morning reality
details of how do you actually persuade
a skeptical would be buyer of something
online to transact through Alibaba
platform in fact the problem is on both
sides right the buyer the buyer buyer
doesn't trust the seller that the seller
is actually going to give me the goods
or in fact we'll have good Goods the
seller is like am I going to get paid if
I ship the goods or am I going to get
paid so trust is at the core right y
that's exactly right so one of the and
and in fact on that issue the Insight
which seems to us to be second nature
now because we have so many blockchain
type solutions for all these things at
Noam but in those days which is you know
less than two decades ago um the idea
was an escro mechanism does it which is
I buy something from you you ship the
goods but you don't get the money uh
until I receive them and you are sure
that I pay you because I put the money
in escrow to a third party to a third
party which is Alibaba so Alibaba had to
create the escrow mechanism to reassure
the buy and the sell size to transaction
and escro was invented by the Italians
you know 1500 years ago right and so so
they took something very
old modernize it to the context of China
absolutely right absolutely right and
since then of course has been
implemented in so many different so many
different ways different places that es
that escro mechanism by the way became
one of the world's biggest mutual funds
in and off itself because there was so
much money sitting in it uh and that's
the that's the basis for ant Financial
which then ended up uh trying to go
public and getting shot down and now
again we'll we'll
talker so one mechanism that he created
but the point that I want us to focus on
K for a second is that the core was Ma's
insight and his team's insight that
there's no trust
yes then the question is okay there's no
point lamenting the absence of trust
what do we do to create trust yes answer
is you can do things you do this right
yes uh another thing that they did was
they went to the local market you were
talking about fish markets in Karachi
it's not that different from wet markets
in China you go to the wet markets and
you see and the Chinese famously buy
live uh live food um and it's in a wet
Market it's wet all the time and the way
you buy it is similar the way you buy it
in India or the Arab world is you go and
you have this theater of bargaining
right you you say I want that and the
person says it's worth this much and you
threaten you pretend to walk away and
then you come back and there's this
haggling that goes on and then you
settle on a price yes and these guys had
the had the really interesting uh
Insight was the act of doing that
haggling reassures them I pushed back on
the scam artist and I got him or her to
lower the price yes and so they mimic
that in the uh in in the online buying
process there was allow negotiation to
have negotiation back and forth and so
on and that seemed to reassure people um
and you could go on and on you know if
you could you could if you wanted to
have as as a platform evolved if you
wanted to have a storefront on on
Alibaba yes you could go to another
trusted third party and
then get some uh cred like a credibility
enance verification somebody would come
and show up and you're a real Enterprise
something like that and you would get a
trespass yes right and there many other
things that it did but really the basic
point is pretty straightforward is that
the entrepreneur realizes that trust is
Central that trust is what allows you to
create these institutions that are
filling the voids that allows us to go
aside and it's the Primacy of trust that
I that I would focus on yeah yeah and we
know what's cool is that I mean that
Central thesis creates this trillion
dollar giant I mean in 20 years I mean
just unbelievable that's right unbel at
the end of the day it's all very simple
right so d shar's uh you know has saved
more lives than any individual I know on
the face of the Earth and it comes from
a simple idea uh it comes from
compassion and scale economies and
that's it and the rest is just putting
into place amazing it's all easy yeah
what are you guys waiting
for okay um Let me let me just elaborate
this alibab example a little bit um uh
working with some of our Junior faculty
uh in in your in your area technology
and operations management uh we spent
some time in rural China right looking
at uh Tau which is one of the Alibaba
sites um rural taba in particular and
the point I wanted to make here is that
um uh we'll Show a slide showing uh
alibaba's various attempts to develop
rural Tabo compared to some of the
competitors become a very competitive
market as you know with pindo and JD and
many more after that um and really the
spirit of this is that in rural China
even though they had such great
success fostering trust and creating the
ecosystem and filling the institutional
voids so to speak uh to be successful
entrepreneurs their ability to to make
this work in Dr China has been extremely
difficult yeah right to this day I think
they've gone through three four or five
depending on how you count iterations of
this and every one of
them you know they they're varying
things that they're learning from each
experiment uh and I think it's still
work in progress as best as I can tell
so the the the the lesson that I take
away from that is it's not easy yes and
all the examples we've factiously been
saying or I've been saying fous this is
easy this is easy we should be able to
do it that's easier said than done and
as a lot of effort required to lot of
experimentation n out of 10 things will
fail and you've got to treat each as an
experiment from which you learn
something and then apply to the next one
yeah um so that's the first example of
Alibaba and uh successful company trying
to make it work
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