THE ROLE OF REGULATIONS IN IMPACT ENTREPRENEURSHIP

If you are used to thinking of regulations as being pro-business or pro-consumer, think again.  Regulations do not really sacrifice business for the benefit of the consumer.  They do, however, put some businesses at a competitive advantage against others.  This is especially important for impact entrepreneurs to understand.

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If you are doing well in the marketplace, it is because regulations have created favorable market conditions for you.  Your product is in demand because regulations support you.  If you are not doing as well as you think you should, it is likely that regulations are not favorable to you.

If you are an innovative and emerging company—especially in the impact space—know that regulations usually either reinforce the status quo or open new market opportunities. Regulations—past, present, and future—affect your business, how easy or difficult it will be for you to gain customers, and your likelihood of market success.

Regulations usually either reinforce the status quo or open market opportunities for startups.

Take the example of a high-volume seller of beef in the US.  It is legal for them to sell beef, transport it across state lines in a chilled or frozen state, and distribute it to final consumers.  It is further legal for them to crowd their cattle, feed them antibiotics, hormones, and GMO feed, and take other efficiency actions that lower their manufacturing costs and increase their profit.  There are no regulatory costs associated with this conduct, although plenty of externalities—such as widespread antibiotic resistance, etc.  

A seller of local beef in contrast, may raise their cattle humanely without the use of antibiotics, hormones, GMO feed, and other quality shortcuts.  As a result, their production costs will likely be much higher than the national high-volume distributor who is raising their cattle inhumanely. 

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There are no regulatory or economic incentives for the local beef seller to be environmentally responsible.  And they are at a regulatory disadvantage compared to the national distributor.  They will have to pass their higher costs of doing business on to the consumer.  As a result, they may be struggling to gain enough customers at the higher price.

The national distributor does not face the costs of raising their cattle inhumanely—these behaviors are sanctioned by the state.  Thus, the national distributor and their behavior is part of the status quo.  And they will fight to protect regulations that create favorable conditions for them and reinforce their market position.

If the national high-volume distributor had to pay a fine for the health, safety and environmental impacts of their actions, or could not practice some of their quality-cutting measures, their manufacturing costs would increase.  And suddenly there would be a much more level playing field between the local beef seller and national distributor.  And this leveling would occur as a result of regulations.

Regulations create incentives, burdens, opportunities, and constraints.  And these are not distributed equally.  If regulations require certain action, economies will form around making that action take place.  If they sanction a given behavior, that behavior will proliferate.

If regulations require action, economies will form around making that action take place. 

Disposable plastic packaging is a great example.  Disposable plastics are pervasive, contain hormone-disrupting chemicals, and they pollute our oceans and beaches.  Despite their lack of desirability from a health and safety perspective, they are in high demand in the marketplace. 

Conversely, demand for alternatives to disposable plastic is relatively marginal in the status quo of our world. Plastics alternatives are flailing because the status quo creates little actual incentive for anyone to invest in alternatives to disposable plastic packaging.  Specifically, our regulations are favorable of a disposable plastics economy.  An intricate network of regulatory processes and incentives shepherds them successfully throughout the supply chain to the ultimate consumer’s door.

If new regulations came out today banning disposable plastic packaging in the US, things would be much different.  But there would be no economic calamity; rather, new industries would proliferate while old ones would be decommissioned.  The net effect would be economic growth as everyone increased economic activity for purposes of compliance.

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There would initially be difficulty for all of the companies vested in conventional plastic packaging, however.  Their technology, business model, and corporate processes would suddenly become obsolete.  They would need to invest time and resources into catching up with the new regulations. Since most of the status quo are large established companies with billion dollar revenues, this would not be an insurmountable hardship for them. But it would level the playing field between them and emerging companies.

There would be a boom to all of the emerging (and existing) companies who have worked on alternative technologies, business models, and corporate processes.  Demand for alternatives would skyrocket.  Production of alternatives would boom, while the conventional plastics sector would shrink.  (Indeed, this may begin to happen because Europe has taken regulatory steps toward banning disposable plastics.)  

What’s Your Story?

How would a change in regulations affect you? How do existing regulations affect you? Known that regulations can spur innovation that supports environmental and human health.  But they can also reinforce the status quo, proliferate paperwork and create loopholes for irresponsible corporate behavior.

I recommend that you create an audit of the existing regulations and the status quo around you.  If they are a hindrance, figure out what type of regulatory and economic conditions would give you the opportunity to build your product and grow your market.  Then create a strategy to seed those conditions.  If you need help, get in touch.