#FLinnovation: C J Walker, Pyramid Pioneer

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The second week of the Loughborough University MOOC on Enterprise and Innovation focuses on the recognition of the opportunities for entrepreneurship. This includes a return to Stelios (is Loughborough University getting cheap air tickets for all this product placement?) and Steve Jobs/Apple. The description of the founding of Apple on the MOOC is non-critical and rather perfunctory, covering the entire history of Apple in 619 words. The Jobs story is fascinating, and the biography of Jobs by Walter Isaacson is a good place to start. The story is almost Arthurian: young knights form a company, are successful, but fight a lot; the leading knight is expelled from the magic kingdom; the magic kingdom declines; ten years later the young knight comes back, but now he is nicer; everything he does turns to gold and the enemies of the kingdom are vanquished; but at the height of this success the knight dies. F Scott Fitzgerald was clearly wrong when he said that there are no second acts in American lives. Sadly little of this unique, ungeneralisable strangeness of the Jobs’ story survives the Loughborough pruning.

However the third case cited in the MOOC is much more interesting: C J Walker, born in 1867, who became the first American female self-made millionaire. According to the Loughborough account she saw an unmet need amongst black women for beauty products, which she then started manufacturing products to meet. Actually she was a much more innovative entrepreneur than that account suggests, developing a completely new business model to meet that need, and make herself a lot of money. Seeing that need she could have developed her products and tried to sell them to retailers or she could have opened her own shop. Instead she developed a direct marketing model, recruiting sales agents to sell product in their local communities. She is described by Keep and Vanernat as being a pioneer of multi-level marketing. A problem in direct sales is the need to recruit a large number of sales agents. In multi-level marketing, by giving each agent a percentage of the sales of anyone they recruit and a percentage of the the sales of everyone they in turn recruit (ad infinitum), the agents are incentivised to enrol new agents. The sales network takes on a pyramid structure, with those near the apex generating large incomes and those near the bottom smaller incomes. Multi-level marketing becomes ethically dodgy if it is set up so that agents have to buy into the scheme, usually by buying a set of samples, and then direct all their efforts to recruitment over sales; this model will eventually run out of people to recruit, with no one using the products. Well-known current multi-level marketing companies, such as Amway and Herbalife, adopt remuneration structures with a balance between selling and recruiting, but still generate adverse comments that they overestimate the potential earnings of new joiners or are essentially a massive scam. For example, the FT recently reported that Herbalife is being investigated in the US by the FBI and by the FTC. According to Keep and Vanernat it is not clear how the incentives to Walker’s salesforce split between expanding the network and selling the product, but it is apparent that her greatest innovation was not in seeing a need for hair products, but rather was in seeing a way to grow her business very rapidly with minimal investment while generating enormous incomes. Her paradigm innovation has gone on to be copied repeatedly during the following century.

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